Access to capital consistently ranks as the number one challenge for small business owners. How can these owners find the capital they need, and what can enterprise leaders do to help?
To discuss this crucial topic, Ginger Siegel, North America small business lead at Mastercard International, Ashraf Hebela, head of startup banking, analytics, and sales ops for Silicon Valley Bank, and Hello Alice Co-Founder and President Elizabeth Gore gathered to offer their perspectives as financial leaders.
“We have more businesses being registered than we have in the last three years combined,” Gore said. “What we haven’t seen yet is this crawling toward growth.”
Here are some takeaways for enterprise leaders looking to advance capital access necessary to fuel growth for small businesses everywhere.
1) A wave of new businesses needs capital to grow and ultimately survive.
The pandemic unexpectedly unleashed a startup boom. Data from the U.S. Census Bureau recorded a 53% increase in new businesses during 2021 compared to pre-pandemic levels, with the trend continuing into the first half of 2022. However, there are signs that these early-stage businesses are struggling to find the capital they need.
According to Hello Alice survey data, more than half of small business owners have pursued some type of financing to fuel growth, counteract inflation, or overcome supply chain challenges.
“That’s massively high,” Gore said, adding that 41% of owners reported these financing applications were not approved. Capital outcomes are also unequal, with 49% of Black owners rejected compared to 28% of white owners.
In the venture world, entrepreneurs are having greater difficulty securing investment funds, too. Hebela noted a slowdown in the pace of funds closing deals but cautioned that any slowdown must be considered in context. For example, 2021 was a record-setting year for venture capital. A relative decline from that peak still leaves plenty of VC funding to go around.
“In perspective, last year was the best year VC had,” Hebela said. “To come in silver medal is not so bad. You can’t have the best year every year.”
2) Eliminating the digital divide will go a long way toward improving cash flow and relieving the need for outside capital.
In the early days of the coronavirus, digitally savvy businesses were most likely to beat the pandemic odds. According to Siegel, e-commerce sales increased 200% during COVID. That shift presents a huge problem for the roughly one-third of small businesses that have no digital presence. Businesses left on the wrong end of the so-called “digital divide” became functionally invisible.
Additionally, Siegel noted that the majority of small business owners have been slow to adopt digital solutions for bookkeeping, accounting, and other critical administrative tasks. In particular, she noted that as much as 75% of businesses still use conventional invoicing, which can lead to months-long delays in payment that can severely limit cash flow.
“I hear so much talk about access to capital and everyone’s mind goes to borrowing. However, if you look at a small business, we can help them get their own money in quicker through digital payments, digital invoicing,” Siegel explained, pointing to Mastercard’s Money Connect Solutions as one step toward a solution.
Real-time invoicing and payments will help small business owners increase cash flow and reduce the need for financing altogether, she added.
3) Institutions need to look inward and outward to determine effective, long-term solutions to capital access.
According to Siegel, many small business owners lack the tools and knowledge necessary to secure available capital. In fact, more than half of owners get less or none of the capital they ask for, often because they don’t harness the necessary data to tell a compelling story about their business. “Data can really democratize access,” she said.
This problem reflects a skills gap. Most entrepreneurs are everyday people who start with a good idea and figure out the rest from there. Gore explained that only about 3% of New Majority owners have a business degree, making it difficult to know their options for capital and navigate complicated systems.
Part of the solution involves sustained mentorship and knowledge sharing to help new entrepreneurs build the skills and network to grow their businesses. That said, institutions must also do the work to eliminate biases and build diversity across their own organizations. After all, people like to do business with people who share their values and backgrounds.
At Silicon Valley Bank, Hebela, a first-generation Egyptian American immigrant himself, recognizes the importance of intentional diversity initiatives. He said it’s important to make diverse hires, support diverse entrepreneurs, and work hand-in-hand with new business owners to harness the necessary data and connections required to tell a compelling story to lenders and investors.
There will be no easy solutions to these thorny, human problems, however.
“I believe in the laws of physics,” Hebela said. “Complicated and long duration problems require complicated and long duration strategies.”
To hear the full discussion and discover more insights surrounding capital access, be sure to check out the complete recording. Watch It Now!