The National Federation of Independent Business (NFIB) Small Business Optimism Index rose 2.2 points last month to 93.7, the highest reading since February 2022, according to a Tuesday (Aug. 13) press release.

Still, this is the 31st month in a row that the index has been below the 50-year average of 98, with small business owners continuing to feel pressured by inflation, the release said. One-quarter of business owners called it their biggest problem, up four points since June.

“Despite this increase in optimism, the road ahead remains tough for the nation’s small business owners,” NFIB Chief Economist Bill Dunkelberg said in the release. “Cost pressures, especially labor costs, continue to plague small business operations, impacting their bottom line. Owners are heading towards unpredictable months ahead, not knowing how future economic conditions or government policies will impact them.”

Thirty-three percent of business owners (seasonally adjusted) raised compensation in July, down five points from June and the lowest reading in more than three years, per the release.

In addition, the net percent of owners anticipating higher real sales volumes climbed four points in July to a net negative 9% (seasonally adjusted), the highest reading of this year, the release said. The net percentage of owners raising average selling prices dropped five points from June to a seasonally adjusted net 22%.

As PYMNTS wrote last month — following the release of another pessimistic NFIB report for June — the challenges facing small businesses have led to the emergence of new working capital products and financial services.

These offerings can provide “more innovative and flexible solutions designed to help insulate businesses from ongoing economic fluctuations such as inflation, interest rate changes and even currency volatility,” the report said

These innovations include products such as virtual and commercial cards, supply chain finance, invoice finance and asset-based lending, giving businesses faster access to funds, better cash flow management and the ability to invest in growth opportunities without having to take on traditional debt.

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Ewing, who has led COE — a family-owned office furnishings wholesaler based in Fayette County, Pennsylvania — from its modest beginnings to the largest office furniture distributor in the United States, described the severe economic strain caused by skyrocketing shipping expenses.

Ewing detailed how supply chain disruptions have led to an increase in shipping costs. The cost of transporting a container from Asia to the U.S. West Coast has surged from $2,500 in April to more than $8,000, with projections suggesting it could exceed $10,000 as peak shipping season approaches. These skyrocketing costs are intensified by renewed congestion at major ports and disruptions in key maritime routes, such as the Red Sea and the Suez Canal.

In an interview with PYMNTS, Ewing explained how re-emerging supply chain issues have negatively impacted his business in three ways.

“Increased transit times, which wreak havoc on our inventory availability and forecasting,” he said. “Capacity constraints, which further increase lead times on products, put more pressure on our inventory availability and forecasting. Increased costs for ocean freight, which decreases gross margin and bottom-line performance.”

For small businesses like COE Distributing, these rising shipping costs are particularly challenging. Unlike larger firms with greater liquidity and economies of scale, small businesses struggle to absorb or pass on these expenses, which can erode margins and impact competitiveness. Ewing warned that this shipping crisis could soon ripple through the entire economy, driving up prices for manufacturers, distributors and consumers alike.

COE Distributing has operated since 1947, when Ewing’s grandmother started the business in the basement of a tavern. Ewing is a third-generation owner of COE Distributing after taking over the business in 1989 when he was 19. At that time, he was COE’s sole employee and managed multiple roles, including sales, driving trucks, loading products, collecting money, paying bills and learning each position inside and out.

“Most major home furnishings retailers have already instituted surcharges on goods sourced in Asia, which has a direct and immediate impact on the American consumer,” Ewing said. “If the current environment continues, surcharges and/or price increases will be seen on any/all products imported across Asia,” including electronics, clothing, some food products and building materials.

Combatting Supply Chain Challenges

Ewing also touched on additional pressures, including potential tax hikes for pass-through entities and regulatory compliance. He stressed that the immediate and severe impact of increased shipping costs threatens small business viability and calls for urgent policy attention to address these supply chain challenges.

So, what needs to be done to reduce costs and what can the U.S. government do to help small businesses like COE Distributing?

“First, this issue is an ‘all business size’ problem, but small businesses feel greater impact,” Ewing explained. “I believe removing the terror threat in the Red Sea, eliminate the Houthis’ (or any terror group) ability to strike any maritime carrier will allow the Suez Canal to be used for passage, thus reducing transit time, capacity constraints and ocean freight costs.”

The next steps for Ewing include talking more about his testimony and following up with the House Small Business Committee.

“Best case scenario is to eliminate/neutralize the terror threat in the Red Sea region, thus allowing the Suez Canal to be fully utilized by ocean carriers,” Ewing said. “Worst case scenario is to do nothing. Without the Suez Canal reopening, ocean freight will continue to be volatile in availability, timing and pricing.”

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And, generally speaking, demand is robust.

The demand comes as the PYMNTS Intelligence report “Main Street Small Business Growth Exceeds GDP for First Time in Two Years” found that Main Street small- to medium-sized business (SMB) growth has exceeded gross domestic product (GDP) growth for the first time in two years. That expansion would feed into plans to tap working capital to keep expanding.

Block, parent company of Square, noted in its earnings presentation this week that there is a $17 billion “gross profit” opportunity for Square Loans, its business lending offering.

In its shareholder letter, the company said Square Loans facilitated approximately 142,000 loans totaling $1.45 billion in originations, up 32% year over year in the quarter. The company’s Form 10-Q with the Securities and Exchange Commission (SEC) noted that the commercial loans held for sale — which include Square Loans — stood at $435 million, down from $478 million at the end of last year. The year-ago filings detailed that commercial loans held for sale were $319 million in the June 2023 quarter.

An Untapped Opportunity

PayPal CEO Alex Chriss noted on an earnings conference call with analysts that small businesses represent an “untapped opportunity” for the company. With the launch of the company’s Complete Payments Platform, he said, “you get access to our working capital,” among other offerings such as payouts.

The company’s Form 10-K with the SEC indicated that its PayPal Working Capital and PayPal Business Loan products — collectively referred to as merchant finance offerings — were tied to the purchasing of approximately $774 million in the latest quarter through the first six months of the year.

“As of June 30, 2024, and December 31, 2023, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $1.2 billion,” the company said in the filing.

In terms of the mechanics of the working capital products, PayPal said in the filing that merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance based on the overall credit assessment of the merchant.

The company’s metrics in the filing showed an improvement in credit quality, where, for example, roughly 90% of the merchant loans and advances were current, with 4.5% of the book 30 to 59 days past due, compared to 87% and 4.9% in the fourth quarter.

Separately, the PYMNTS Intelligence report “Embedded Lending: From the Lender’s Perspective,” commissioned by Visa, found that 37% of SMBs said they are highly interested in switching to providers that offer embedded lending options. Additionally, across the six markets surveyed, 83% of lenders offer embedded lending products to customers, compared to 55% that serve SMBs.

But there may be a bit of catch-up in the cards. Two-thirds of lenders that offer no embedded lending are interested in rolling out these products to SMBs in the next two years.

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Small businesses are inherently risky — and many end up being short-lived operations. And while the demand for innovative lending solutions tailored for small and-medium-sized businesses (SMBs) continues to grow, traditional lenders, particularly large banks, frequently view SMB lending as resource-intensive and unprofitable, and as a result shy away from the space.

But with the news from the U.S. Census Bureau that almost 5.5 million new U.S. business applications were filed in 2023, breaking the 2021 record of 5.4 million, capturing the opportunity this represents for smaller banks and community lenders like credit unions is top of mind for those financial institutions’ executives.

After all, SMB lending is a multifaceted puzzle, not a commodifiable offering — which is why community financial institutions are uniquely positioned to capture the small business lending market. With an inherent understanding of their local economies and a personal touch that larger banks often lack, these lenders can find themselves with a competitive edge in their local markets.

And when it comes to the specialized needs of SMBs, taking a specialized — rather than generalized — approach to lending can be the strategy that ultimately pays off.

Read more: The $150B Question: Can Community FIs Capture the SMB Digital Banking Opportunity?

The Importance of Embracing Digital Innovation

To fully seize the SMB lending opportunity, alternative lenders must themselves embrace digital transformation.

As technology continues to evolve and industries become more specialized, the ability to understand and meet the unique needs of small businesses will be a key differentiator. Small businesses, especially startups, often lack the robust financial histories and credit profiles that lenders rely on to assess risk. The absence of substantial collateral and established cash flows makes it difficult for lenders to confidently gauge the likelihood of repayment. This perceived risk is exacerbated by economic downturns, which can disproportionately impact smaller enterprises.

As recent PYMNTS Intelligence noted, 71% of SMBs are experiencing cash shortfalls.

Unlike large corporations, small businesses exhibit diverse needs and business models. This diversity means that a one-size-fits-all approach to lending is inadequate. Each business may require tailored financial products, such as lines of credit, term loans, or equipment financing, each with different risk profiles and return potential.

Only about 8.5% of SMBs have found working capital loans from banks to be readily available, according to “What’s Next in Credit: Why SMBs Prefer Corporate Credit Cards for Short-Term Financing,” a PYMNTS Intelligence and Cross River collaboration.

Many small businesses do not have sophisticated financial systems or the ability to provide detailed, accurate financial statements. This creates information asymmetry, where lenders cannot accurately assess the health and potential of a business. This challenge is particularly acute for non-traditional or niche businesses that do not fit into standard industry categories.

The PYMNTS Intelligence report, “The $150B Question: Can Community FIs Capture the SMB Digital Banking Opportunity?,” done in collaboration with NCR Voyix, provides insights into the evolving financial landscape for SMBs and finds that many SMBs are ready to switch to institutions that offer modern digital tools.

See also: How Businesses Leverage Working Capital Solutions to Drive Growth

The cost of underwriting and processing loans for small businesses is relatively high compared to the loan amounts. For traditional banks, this means lower profitability per loan, disincentivizing them from focusing on the small business segment.

But embracing a specialist approach allows lenders to offer SMBs customized financial products that meet their specific needs. This might include flexible repayment terms, working capital loans that align with seasonal cash flows or financing options that take into account the growth trajectory of a startup. Such tailored solutions can significantly improve the likelihood of a business succeeding and repaying its loan.

Jennifer Marriner, EVP, GlobalAcceptance Solutions at Mastercard, told PYMNTS that SMBs are a significant focus within the embedded finance landscape. She noted that SMBs are particularly attracted to embedded finance as it offers a straightforward way to access financial services through the platforms that they already use for other business operations, such as accounting and inventory management.

The difficulties associated with small business lending are well-documented, but they are not insurmountable. A specialist approach, characterized by industry expertise, advanced data analytics, customized solutions and strong relationships, offers a viable path forward. And by focusing on the needs of small business owners and leveraging technology, lenders can not only expand their portfolios but also contribute to the broader economic environment.

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These issues disrupt cash flow and hinder growth, exacerbated by inefficient manual accounting practices and reliance on paper payments. As inflation pressures margins and payment delays become more frequent, SMBs are under intense pressure to modernize their financial operations.

In response, SMBs are seeking banking partners that offer digital solutions to meet their evolving needs. Frustrated with traditional banks and credit unions that fail to provide sophisticated digital tools, many small business owners are prepared to switch to institutions that offer better financial management solutions.

Community banks and credit unions have a prime opportunity to step in by providing digital services and partnering with FinTechs to enhance their offerings. Those that can adapt and deliver these digital solutions will be well-positioned to secure and retain SMB clients.

A recent PYMNTS Intelligence report, The $150B Question: Can Community FIs Capture the SMB Digital Banking Opportunity?, in collaboration with NCR Voyix, provides insights into the evolving financial landscape for SMBs. 

Financial Shortfalls Plague SMBs

SMBs are experiencing financial strain from late payments, inflation, and antiquated payment systems — delayed payments average 29.1 days, exacerbating cash flow issues.

With 76% of SMBs under $10 million in revenue facing inflationary pressures and 71% experiencing cash shortfalls, many resort to personal savings or loans to survive. Outdated manual processes, including paper payments, further complicate financial management and hinder efficiency, underscoring the need for digital solutions.

SMBs Seek Digital Remedies for Cash Flow Pain

Frustrated with their current banking relationships, many SMBs are ready to switch to institutions that offer modern digital tools. Over 70% of SMBs are interested in comprehensive cash management services, and 90% demand seamless digital payment options.

As dissatisfaction with traditional banking increases, community banks and credit unions face pressure to provide digital solutions to retain clients and capture a larger share of the $150 billion SMB banking market.

From Traditional Banks to Trusted Advisers

To meet SMBs’ evolving needs, community banks and credit unions must embrace digital transformation and forge partnerships with FinTech firms. By collaborating with technology providers, smaller financial institutions can enhance their offerings, accelerate innovation, and improve customer experiences.

This strategic shift enables community banks to transform from basic service providers into financial partners, addressing the specific needs of SMBs and securing long-term client loyalty.

Looking ahead, community banks and credit unions face a pivotal moment: the chance to redefine their role to indispensable digital partner for SMBs. 

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Havana’s decision comes at a time when the country is having its worst economic crisis since the collapse of the Soviet Union and is dealing with inflation that hit 31% last year, Bloomberg reported Friday (July 26).

Cuba aims to keep dollars within the country, according to the report.

Now, the government says all payments to international suppliers must be made through local banks, Bloomberg reported

This move is part of the Cuban government’s larger crackdown on the private sector, per the report.

Cuba began allowing the establishment of small- to medium-sized businesses (SMBs) in 2021, and more than 11,000 such businesses have been formed since then, according to the report.

Entrepreneurs interviewed by Bloomberg said that many small businesses need offshore accounts because they’re unable to get hard currency in the local market, and that some believe the government wants to drive them out of business.

The Biden administration announced the new regulations allowing entrepreneurs in Cuba to open bank accounts in the United States in May, aiming to support the country’s growing private sector, the New York Times reported at the time.

That marked the first time Cuban entrepreneurs were allowed to open U.S. bank accounts amid the long-standing embargo the U.S. has imposed on the country, according to the report.

When announcing the amended regulations in May, the Treasury Department said in a press release: “These regulatory amendments update and clarify authorizations in support of internet-based services to promote internet freedom in Cuba, support independent Cuban private sector entrepreneurs, and expand access to certain financial services for the Cuban people.”

In an earlier attempt to address effects of Cuba’s economic crisis, the Cuban Central Bank issued regulations in August that put a limit of 5,000 pesos on cash transactions between state and private businesses and banned those organizations from using ATMs.

These measures aimed to encourage the use of an electronic form of payment, targeting runaway inflation and a large off-the-books economy that has developed amid the country’s economic crisis.

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Stripe’s financial infrastructure platform for businesses will be integrated into Sage’s solutions for SMBs, providing Sage customers with more ways to pay and get paid, the companies said in a Thursday (July 25) press release.

The integration is currently available through Sage Accounting, Sage 50, Sage 100, Sage 200 and Sage Connect, though the availability varies by country, according to the release.

“We are committed to harnessing the power of technology to drive innovation, enhance efficiency and pave the way for growth,” Sage Chief Product Officer Walid Abu-Hadba said in the release.

One of the benefits of this partnership is that SMBs will be able to make it easier for their customers to review their accounts and pay by using Sage Connect’s customer account portal and Stripe Checkout, according to the release.

SMBs will also be able to accept multiple payment methods from customers, including digital wallets, cards and bank transfers, the release said.

They will also be able to collect payments online and in person without terminal hardware, provide a safe and secure payment experience that leverages Stripe’s security protocols and compliance with global financial regulations, and streamline the payment and reconciliation process with bank transfers, per the release.

“Sage understands the importance of innovating for its customers, and we’re thrilled to be part of its journey,” Eileen O’Mara, chief revenue officer at Stripe, said in the release. “Stripe is building a suite of software-defined financial services to enable leading platforms like Sage to provide integrated features that make their customers’ lives easier.”

In another collaboration, Sage teamed up with Amazon Web Services (AWS) in February to help SMBs optimize their operations with generative artificial intelligence (AI). In that partnership, Sage will use Amazon Bedrock and Amazon Lex to develop a domain-specific large language model (LLM) for accounting and compliance purposes.

In September, Sage partnered with Swoop, a FinTech company specializing in funding solutions, to provide business funding and cost-savings solutions. Together, the companies aim to provide SMBs and their trusted advisors with easy access to a wide range of funding activities.

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Embedded lending promises users convenient, streamlined access to financing for specific expenses from within merchant, business and other platforms.

PYMNTS Intelligence finds that embedded lending isn’t fully living up to the promise yet. Nonetheless, many individuals, microbusinesses and small businesses (MSBs) use it. In fact, using this type of lending in the past correlates with a strong interest in switching providers to access these options.

This interest persists even though many users encounter friction applying for and using these products. What factors keep users coming back?

“The Embedded Lending Opportunity: U.S. Edition,” a PYMNTS Intelligence’s latest report commissioned by Visa, explores the state of play for embedded lending for both the consumer and MSB segments in the U.S. It draws on a 360-degree study of lenders and end users, conducted between Jan. 13 and March 15, 2024.

This report contains crucial information that providers need to leverage embedded lending’s opportunities and mitigate its challenges.

Inside “The Embedded Lending Opportunity: U.S. Edition”

• What embedded lending is and how does it differ from other types of credit
• An exploration of its appeal to U.S. consumers and MSBs
• The role cash flow plays in driving consumer and MSB interest in this type of lending
• Why lenders need to offer compelling products to differentiate themselves in this expanding market
• An overview of frictions consumers and MSBs encounter when applying for and using this type of lending
• How friction rates compare to those of other types of lending
• Demographic information about which consumers and MSBs are willing to switch providers to access these lending options

Consumers and MSBs that have used these products are likely to keep using them. In fact, despite frictions, many say they would switch providers to be able to access them. Download the report to learn more about how providers that address these frictions and concerns stand to profit.

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And with the news that the Small Business Administration (SBA) has started soliciting insights on a new pilot program within the 7(a) Loan Program designed to support small and medium-sized businesses (SMBs), putting working capital to work is top of mind for SMBs.

The Working Capital Pilot Program (WCP), as detailed by the SBA, aims to address the need for accessible and flexible working capital among SMBs by providing short-term loans. These loans may be approved up to $5 million and used to back both international and domestic transactions.

Under the WCP, lenders may authorize a loan term of up to 60 months and must pay a guarantee fee to SBA for each loan made. The guidelines note that 7(a) lenders making WCP loans of $150,000 or less will have an 85% SBA guaranty, and WCP loans greater than $150,000 will have a 75% SBA guaranty.

“As small businesses grow, they require access to working capital. Working capital is most economically delivered through a line of credit and allows businesses to take on new opportunities in a way that a term loan cannot,” said Isabella Casillas Guzman, SBA administrator, in a statement.

The SBA has said it expects to approve around 270 WCP loans, with a total value of about $337 million, during 2025. The program itself is set to take effect Aug. 1 and expire by the end of July 2027.

The launch comes as U.S. merchants’ optimism is low, which means that effective management of working capital is more important than ever for businesses that hope to grow.

Read more: How Businesses Leverage Working Capital Solutions to Drive Growth

Making Working Capital Have Impact

The SBA’s WCP program is designed to be more attractive to both lenders and borrowers than the agency’s existing products. The SBA first announced the pilot program in June, and comments on the program are due by Aug. 14.

Unlike traditional loan structures, the WCP Program offers a deferred payment option, allowing businesses to postpone their first loan payment. This feature is designed to provide SMBs with the breathing room they need to stabilize their operations before tackling repayment obligations.

After all, stabilizing operations can include things like covering costs such as payroll, inventory and other day-to-day expenditures that are crucial for maintaining and growing a business, as well as making strategic long-term investments into newer technologies and digital solutions.

In addition to other uses, loan proceeds under the program may be used to provide a temporary advance against state and federal tax credits or rebates, the SBA noted.

The SBA isn’t alone in its SMB focused initiatives. The British Business Bank, the U.K. government’s economic development bank, has itself launched a program July 8 designed to support access to finance for smaller U.K. businesses.

The British Business Bank has accredited 41 lenders for the program and will accredit more in the coming weeks. Twenty of these lenders are now open for applications, while the remainder are putting in place the operations they need to start lending under the program.

Read more: Embedded Lending Puts SMBs at Center of Financial Services Landscape

SMBs Need Better Financing Products

Still, improving SMB access to working capital solutions that fit their needs represents a puzzle that banks and other lenders have long struggled to solve.

Only about 8.5% of SMBs have found working capital loans from banks to be readily available, according to “What’s Next in Credit: Why SMBs Prefer Corporate Credit Cards for Short-Term Financing,” a PYMNTS Intelligence and Cross River collaboration.

“The number one pain point for small businesses is access to capital,” Luke Voiles, CEO at Pipe, told PYMNTS in June. “It’s a powerful thing to give someone that has never had access to capital, but has an amazing small business. … It can be a huge multiplier.”

But the opportunity to crack the SMB lending space remains a big one, and the SBA offerings will also face competition from the private sector. Just Tuesday (July 16), FIS launched a solution designed to help banks source, underwrite and fund loans to SMBs. The new SMB Digital Lending solution was created in partnership with small business financial solutions technology platform Lendio.

For all PYMNTS B2B coverage, subscribe to the daily B2B Newsletter.

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The new Cashflow product is designed for integration within financial organizations’ digital platforms and is now available to financial institutions and FinTech firms globally, the company said in a Tuesday (July 16) press release.

“The financial landscape is evolving, necessitating tools that harness open banking data to drive strategic insight,” Kevin Phalen, executive chairman of 9Spokes, said in the release. “Our Cashflow product empowers SMBs and financial organizations with the automated, data-driven capabilities needed to navigate and thrive in this changing environment.”

This solution is designed to simplify tasks for the 70% of SMBs that operate with less than four months of cash reserves and the 60% that spend five hours weekly managing multiple cash flow tools, according to the release.

By leveraging open banking and open data, Cashflow provides SMBs with a comprehensive view of their financial standings that includes multiple bank accounts and various providers, the release said.

The product also uses machine-learning algorithms to automatically pull historical cash balance data; aggregate cash balance history, forecasts and other data from multiple sources; and provide SMBs with a complete view of their current and future cashflow, the release said.

With this white-labelled solution, financial organizations can offer this tool under their own brand, per the release. Cashflow is pre-built and configurable to meet the needs of financial organizations and their SMBs.

In another recent development in this space, Mimo said in April that it raised 15.5 million pounds (about $19.4 million) to launch its financial management platform for SMBs and accountants. This platform is designed to help users pay invoices, make or chase international payments and manage cash flow, without having to use multiple apps and spreadsheets.

In February, Xero said it would enhance the accounts payable (AP) capabilities of its global small business platform for its U.S. customers through a partnership with BILL, a financial operations platform for SMBs. This partnership brings a bill pay solution from BILL directly into the Xero platform, helping SMBs overcome the challenges they face in paying bills and managing cash flow efficiently.

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