The Critical Nature of Small Business Financing – And How Technology Opens Doors

Small businesses create jobs, support local neighborhoods, and build wealth in disadvantaged communities. They’re vital to the economy, but they face serious challenges in accessing the capital they need to grow. According to a new report published by PayPal, alternative and non-traditional ways of financing small businesses may address those challenges and enable them to grow and succeed.

Big Red's Hot Sauce
Paul and Tasia Ford of Big Red's Hot Sauce used
PayPal Business Loan to help hire new employees.

Traditionally, there have been many barriers preventing entrepreneurs from securing loans for their small businesses, from lack of collateral, limited credit history, or in the case of racial minority groups in the U.S., higher rates of rejection. The sharp rise in inflation and recent turmoil in the banking sector have worsened many of these factors.

“When you look at how the odds are stacked against small business owners, and then think about everything that they do to empower their communities, you realize that something needs to change,” said Bernardo Martinez, PayPal’s Vice President of Microbusiness.

The challenges and limitations of traditional financing

Financing is the lifeblood of small businesses. Take someone with a passion for baking who wants to open a small neighborhood bakery. A place like this would give neighbors a place to gather and connect, offer jobs and training in food service and retail, and even become an attractive destination for others across the city to visit, bringing foot traffic that could benefit other nearby businesses.

However, few entrepreneurs have the cash on hand to pay rent and utilities, buy or lease professional-grade kitchen equipment, offer competitive salaries to hire other bakers, advertise on social media, and more. These are daunting expenses, so aside from a lavish gift from a rich relative or beating one-in-a-million lottery odds, financing is often necessary.

But then come the many different stumbling blocks:

  • In a recent survey, nearly half of the Black-owned small- and medium-sized businesses that applied for financing reported receiving no funding.
  • A report found that 9% of all bank branches in the U.S. closed between 2017 and 2021, and one out of three of those closures were in low- and moderate-income neighborhoods.
  • In February 2021, big banks approved about half the number of small business loans they had the year before the pandemic.

A recent report found that small business loan approval percentages at big banks dropped to 14.6% in November 2022. Recent economic challenges and historic barriers may force many entrepreneurs to give up on their dream before they even begin. These challenges can be discouraging; one survey found that of people who did not apply for financing, 44% felt that they would not qualify or would be denied.

Report cover
Download the report.

New approaches and new solutions

“This is where alternative, innovative sources of financing come into play,” said Bernardo. “By utilizing technology to look at new data points and providing different eligibility criteria than traditional banks, alternative lenders can reach entrepreneurs that traditional banks have left behind.”

An internal examination that analyzes PayPal Working Capital and PayPal Business Loan1, reveals some striking data:

  • More than half of the total value of PayPal-serviced small business loans were in zip codes where 10 or more bank branches closed between 2017 to 2022.
  • Nearly 70% of the total number of small business loans serviced by PayPal in 2022 went to low- and middle-income census tracts.
  • One-third of the total value of PayPal-serviced small business loans were made in census tracts where more than half of the population belongs to a minority group.

“The trend is clear; alternative financing offers entrepreneurs and small business owners the solutions and opportunities that they can’t find elsewhere,” said Bernardo. “Working together with the public sector, we can better reach these underserved communities and help them achieve their full potential.”


Read and download the full report: Digital Financing: Filling a Gap for Entrepreneurs Across the Country 


1 The lender for PayPal Working Capital and PayPal Business Loan is WebBank 

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