Imagine your small business is fresh off a successful raise of 1.6 million dollars, but when you ask your bank for a corporate credit card, you’re swiftly denied. That’s exactly what happened to Caary co-founders Steve Apostolopoulos and Jason Sawyer, and it’s happening to many of Canada’s small and medium-sized business (SME) owners.
This inspired the team at Caary, along with our partners at Xero and the Canadian Lenders Association, to commission new Léger research looking at the realities of accessing credit and other financial tools as an SME in Canada. I wasn’t surprised to see that the data supports what small business owners have been saying for years – the segment is critically underserved in the financial services space.
The study finds that 70% of SMEs are having to put their personal and family finances at risk to fund their business by either continuing to rely on a personal credit card for business expenses or providing a personal guarantee to access corporate credit.
The consequences of this are significant. It puts business owners’ personal assets – such as the family home – at risk. It ties up their personal credit and prevents them from building business credit. And it creates inefficiencies around reconciling end-of-month expenses.
This comes at a time when Canada’s small business community is already struggling to stay afloat, with 57% of SMEs facing cash flow management challenges – significantly more than 41% pre-pandemic.
Why can’t SMEs access the credit they so desperately need and deserve?
At the root of the issue, of course, are the outdated risk assessment practices used by traditional financial institutions. Most Canadian banks look at business credit history to assess credit worthiness, which many SMEs don’t have. This leaves one-third (36%) of SMEs experiencing delays securing corporate credit and almost half (46%) having to provide a personal guarantee.
It also stifles innovation from young entrepreneurs who are even less likely to have the necessary credit history. This demographic is also less likely to own a home, which makes it difficult to provide a personal guarantee that the banks can lend against. The Léger data backs this up: SME owners aged 34 or younger are significantly more likely to find it difficult to access both business credit (46%) and key financial products and services (40%).
Fintechs are turning the tides for SMEs – but open banking needs to meet us halfway
The Léger research validates why fintechs like Caary are entering the scene: to disrupt Canada’s financial ecosystem and provide SMEs with access to the credit and financial tools essential for success.
But for fintechs to keep changing the game for underserved SMEs, they need a proper open banking regime, which – despite some progress – remains elusive in Canada.
Open banking is about putting the power back in the hands of consumers or small business owners. When a small business owner can choose who to share their financial data with, they can choose which financial products and services are most valuable to them. This allows SMEs to tap into tailored financial services, from better accounting integrations to sophisticated spend insights and business intelligence.
The benefits of open banking also extend to credit and lending. At Caary, when a business shares their data with us through a secure, open banking connection, we can assess their credit worthiness based on cash flow and assets rather than credit history. The result? We can extend corporate credit to SMEs with no personal guarantees required, allowing Canadian entrepreneurs to build business credit while leaving their personal credit untouched.
What’s the status of open banking in Canada?
In progressive economies, including the UK, Australia, and the European Union, open banking is alive and well and supported by a regulatory regime. Canada is a bit behind, but I’m pleased to see the early signs of adoption. The federal government recently appointed Abraham Tachjian to develop a made-in-Canada approach to open banking.
The Léger data shows us that SME owners are ready for open banking in Canada. 54% would consider a provider that used open banking if it meant easier access to corporate credit, and nearly half (47%) would exchange more of their data for better access to superior financial products and services.
It’s clear that a shift in policy is needed to ensure open banking can progress in Canada and more products and services can emerge to support the small business sector. SMEs have been underserved by the financial sector for too long. It’s about time we compete for their business.