Small businesses are too important for banks to leave them behind

If you’re a local entrepreneur today you are part of a group of people that largely don’t exist in the eyes of large financial institutions. Small businesses contribute more than 40% of America’s annual GDP. Banks with more than $10 billion in assets, however, held only 3.6% of their assets in small-business loans. To put that in perspective, Square lends more capital to small businesses than JPMorgan.

While the definition of what counts as a small business can run as high as 500 people, almost 80% of small businesses employ fewer than 10, according to data from Pew. Although they are essential to our economy and account for nearly half of private sector employment, small businesses are taken for granted and overlooked when it comes to access to essential financial services.

They’re not just an economic backbone of our country, they’re also essential to the cultural fabric of our towns and neighborhoods. They provide community and character and are a social service as much as they are an economic good. And right now, they’re at risk. The only certainty in 2025 is uncertainty. We’re seeing consumer spending fall away. And while we’ve yet to see this hit small businesses directly, these businesses aren’t sitting on big rainy-day funds. According to JPMorganChase research, the average small business only has 27 days of cash reserves on hand.

Small businesses are incredibly resilient, but today they find themselves up against higher costs, supply chain disruptions and decreased consumer spending, all with less margin and bargaining power than big corporations. We saw a similar scenario play out during the COVID-19 pandemic. Companies like Walmart and Amazon made gains in their online sales, while many small- and medium-size businesses, or SMBs, lacked the infrastructure to do so. Many were too small to accommodate customers in person while still adhering to social distancing guidelines. Ignoring the needs of SMBs in the face of tariffs, shifting international sentiment and slower consumer spending could be a similarly extinction-level event for many Main Street businesses. That’s why it’s so crucial that we support them at both the policy level and with the financial resources and tools they need to thrive, which should be a major focus for both the fintech industry and the broader financial services space.

Access to working capital is a powerful tool for small businesses when finances are unpredictable. But when most of these entrepreneurs need it, traditional financing is a mismatch. Large banks use centralized underwriting and rigid lending criteria that aren’t written to take into account how these small businesses operate.

The typical application requires multiple years of business tax returns, months of bank statements, a profit and loss analysis, detailed personal information and good personal credit. It can take weeks to access the cash and often requires a personal guarantee, putting personal assets at risk. It’s an impossible bar to clear if you’re keeping your receipts in a shoebox, and it’s not much help if you’ve only got 27 days of cash on hand.

As a result, you see one of a few undesirable things happening. The most likely outcome is that a small business doesn’t even think that a bank can help them. And they probably shouldn’t. Or if they need capital badly, they may get a payday loan or a high-cost merchant cash advance through an old school ISO broker. Both are terrible and expensive experiences. Or the cost goes on their personal card, and they probably pay APRs of well over 30%.

Granted, this mismatch in how small businesses are served by banks is due in part to misaligned goals. Underwriting and servicing a small loan costs as much as underwriting and servicing a large one. Regulatory pressure around capital requirements and documentation needs weigh heavily on small businesses. And banks have a set, standardized way of assessing risk that just doesn’t really fit the fluid, fledgling way a small business operates.

Getting this right is hard, but leaving 40% of the U.S. economy to its own devices is a dangerous solution. A lot of the answers are here in some form already; it’s just a matter of how we broadly deploy them and how much we prioritize them. We can tap into more real-time data to be able to understand a small business’ health. Alternative financing models can have a big impact, giving SMBs access to capital that’s built to suit their needs, fitting how they need to borrow and how capital is repaid. There’s also a broad need for payments modernization in the U.S., so small businesses are able to get paid faster for money they’re owed.

Fixing this problem for small businesses is about more than just equity. The economic benefit would be significant. Think about what small businesses contribute to America already, despite all the hurdles they face. Now think about what they could do on a more level financial ground.