Canada’s SMBs Deserve Better Banking. Lessons from US Fintechs

SMB Banking | Nov 4, 2024

Image: Freepik/wavebreakmedia micro

Survey Reveals Need for Flexible Banking Solutions to Support Canadian SMBs

Canada’s small and medium-sized businesses (SMBs) are a backbone of the economy.  Canada ISED publication shows that small businesses (<500 employees) employed 52.12% of the work force creating 9.29 million jobs in the country.  Even the smallest businesses with <100 employees hire 38.71% of all employed.  These businesses nurture innovation, create jobs and growth, and strengthen communities but a recent survey of 700 Canadian SMBs by Canadian fintech, Float, highlights that high expenses and fees, tough access to credit, and outdated financial systems make it very challenging for SMBs to be productive and thrive.

Simply put, many of these businesses aren’t getting the support they need from traditional banks because Canada's financial system isn't designed for SMBs.  Instead, it’s set up to support big banks and large corporations that have steady cash flows, solid credit histories, and plenty of resources. Traditional banking products work well for these bigger players because they focus on stability, low risk, and lengthy, careful approval processes.

Snapshot of SMB Challenges from Survey Responses

While it's not meant to be easy running a small business, below are select data points based on survey responses that point to the lack of financial infrastructure challenges for SMBs specifically.

See:  Open Banking: Revolutionizing Financial Data Sharing

1. Financial Barriers (many SMBs experience serious financial obstacles)

• Approx 40% of business owners report that rising operating costs are their biggest concern, making it difficult to manage expenses and maintain profitability.
• Almost 30% of SMBs struggle to secure loans or credit due to strict lending requirements from banks. This lack of access limits their ability manage cash flows or invest in growth.
• Many participants are concerned that increasing interest rates and fees are making borrowing more expensive, which adds to the financial strain.

2. Inefficient Processes

• Many SMB owners report spending up to 40 hours a month managing payments and handling paperwork, diverting their attention from growing their businesses.
• More than half of SMBs feel that traditional banks do not understand their business or its unique needs. They express dissatisfaction with an outdated banking system:
  • Inadequate customer service
  • Low yields on cash balances
  • Unsatisfactory interest rates on business savings accounts
  • Lack of attractive cashback or rewards programs

Image: Float Financial (SMB Survey Results)

U.S. Banking Products that Canada Could Adopt to Better Serve SMBs

Given that Canadian SMBs feel underserved and supported.  Let's take a closer look at just a few popular products available in the US and how similar solutions could benefit Canadian SMBs, assuming banks or fintechs could step in/up with similar support.

See:  The Case for Better Banking Options for Canadian SMEs

1. Revenue-based financing (RBF) is a flexible funding model available to SMBs in the U.S. that allows them to repay loans as a percentage of their future revenue. This approach is a great fit for early-stage companies with variable cash flow since it matches and scales repayments with revenue generated.  Canadian fintech, Clearbanc (now Clearco), originally popularized RBF in both Canada and the U.S..  Canadian banks largely offer traditional standard loans with fixed repayments making it more difficult for SMBs to manage cash flow during slower months.

2. Business Credit Cards Without Personal Guarantees Companies like Brex and Divvy in the U.S. provide business credit cards that don’t require a personal guarantee or personal credit check, therefore helping entrepreneurs build business credit independently of their personal credit.  These business cards often include expense management software and other credit building tools.  Most Canadian banks still require a personal guarantee on business credit cards which can deter new business owners or hurt those with limited personal credit history.

3. Invoice Factoring allows businesses to receive early payment on outstanding invoices to be collected which is incredibly useful for managing cash flow without accumulating debt.  Fundbox provides this for SMBs in the U.S..  In Canada, there are a number of fintechs offering invoice factoring services like FundThrough but traditional banks don't generally provide this option leaving SMBs with limited cash flow solutions other than debt.

See:  The Role of Digital Banking in Supporting SMEs and Startups

4. Quick Access to Capital can help SMB capital solutions when they need it most.  In the U.S. digital lenders such as BlueVine offer quick access to business lines of credit by using real time bank transaction data instead of traditional credit scores or collateral.  While in Canada, banks typically have longer approval processes making it more difficult for SMBs to access cash quickly.

Looking Ahead

It’s time for Canada’s financial institutions and policymakers to move faster on Open Banking in Canada and other policies to provide better financial infrastructure for small businesses, or risk further decline in productivity.

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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