We recently attended a conference session with Karen Mills, former head of the US Small Business Administration, and during her presentation, she spoke of the challenges lenders face when trying to decide which small businesses get approved for loans. To paraphrase her — Small businesses come in many different sizes, industries, etc., and a lot of times it’s hard to see how much money they are making. So, ultimately businesses owners are led down a long process that eventually ends with the owner having to give personal guarantees to secure debt. She stated this process is one of the biggest challenges to small business growth.
Recent data from our Local Pulse Report™ shows similar results. When we asked business owners what the most significant challenges to growth were, 30% stated— the lack adequate funding or ability to acquire it was the top hindrance. But it doesn’t stop there. Other challenges include managing payroll, accounting, payments, and other financial related activities.
Mills went on to talk about how start-ups leveraging technology were disrupting the traditional finance marketplace and who she thought would ultimately win out. She feels traditional banks will win out in the end for several reasons that we are not going to go into in this post. However, not everyone agreed. Many believed the start-ups had the best chance to win.
Since 2016, there has been $4.1 billion invested in US Fintech companies working in the small business space. Sixty-three percent of the investment has come in the past two years. The top areas where investments are going are 40% to Payments & Payroll, 22% to Accounting, and Invoicing, and 19% to Lending. In the graphic below, we show some of the hottest Fintech companies by category.
This isn’t an all-inclusive list, and not all of these businesses will succeed, but we have to think some will survive.