Biz2Credit’s Small Business Earnings Report from earlier in December offers a detailed look at the financial health of small businesses from January 2022 through November 2024. The report highlights the lingering effects of inflation, rising operational costs, and shrinking earnings—key factors that directly influence lending decisions and fintech strategies. Here’s a summary of the report’s key findings and an analysis tailored to stakeholders in business lending, fintech, and commercial finance.
Inflation’s Persistent Impact
Inflation peaked at 6.4% in January 2023 before declining steadily to an average of 2.96% in 2024, closer to the Federal Reserve’s target of 2%. However, the report underscores that even as inflation has moderated, its effects remain profound. Small businesses are grappling with higher costs across the board—ranging from fixed expenses like rent and insurance to variable costs such as labor and materials.
Despite initial revenue increases, small businesses saw profits eroded due to escalating expenses. By March 2024, average earnings had plunged to $35,000, down from $213,200 just six months earlier. This downward trend continued into November 2024, where earnings stood at $44,500, one of the lowest points in two years.
Revenue and Expense Trends
The widening gap between revenues and expenses remains a critical concern:
Revenues: Peaked at $689,800 in July 2024 but could not sustain growth in subsequent months.
Expenses: Hit a high of $575,300 in April 2024 and remained elevated, despite modest declines in later months.
Earnings: Averaged $86,809 for the first 11 months of 2024, reflecting the continued squeeze on small business profitability.
For lenders and fintech companies, these trends underscore the need to carefully assess the financial health of prospective borrowers. While revenue might appear stable or even rising, the underlying expense dynamics can drastically alter creditworthiness and repayment capacity.
Labor Costs and Fixed Expenses Pose Challenges
Labor costs, particularly minimum wage hikes, have become a major factor for small businesses. California’s $20 per hour minimum wage for fast food workers is a harbinger of nationwide trends, with states like Rhode Island, Illinois, and Delaware set to implement $15 minimum wages in 2025. This trend significantly impacts labor-intensive sectors such as retail, food service, and personal care, where automation is not a viable option.
Fixed costs are also climbing. Rising commercial rents in urban areas, coupled with increasing insurance and healthcare costs, are creating additional financial strain. For lenders, understanding how these fixed and variable expenses impact cash flow is critical when evaluating risk.
Implications for Business Lending
The Biz2Credit report highlights a complex environment for lenders and fintech platforms:
Higher Risk Profiles: Many small businesses are operating with razor-thin margins. Lending decisions need to account for not just revenue trends but the full cost structure of applicants.
Increased Demand for Working Capital: With expenses outpacing revenues, more businesses are likely to seek financing to cover operational shortfalls. Short-term working capital loans may see heightened demand, particularly in industries with higher labor costs.
Shift Toward Alternative Financing: Traditional underwriting models may struggle to account for the rapidly changing financial dynamics highlighted in the report. Fintech companies leveraging AI and machine learning to assess real-time financial health may have a competitive edge in providing more accurate risk assessments.
Potential Growth in Equipment Financing: Rising labor costs may drive some businesses to invest in technology and equipment to improve efficiency. Equipment financing could present an opportunity for lenders, particularly in industries like manufacturing and logistics.
Opportunities for Fintech Companies
The report’s findings offer several actionable insights for fintech platforms:
Data-Driven Solutions: Offering tools that help small businesses track expenses and manage cash flow can enhance customer loyalty while improving lending outcomes.
Customized Loan Products: Developing financing options tailored to sectors most affected by rising costs—such as labor-intensive industries—can help fintech companies meet market demand more effectively.
Embedded Finance: Integrating lending solutions directly into platforms small businesses already use for operations, such as payroll or point-of-sale systems, can streamline access to credit while reducing friction for borrowers.
Commercial Finance Trends for 2025
As we head into 2025, several broader economic trends will shape the commercial finance landscape:
Sticky Inflation: While inflation is declining, it remains above the Federal Reserve’s target, keeping pressure on interest rates. Lenders should prepare for continued tight monetary conditions.
Evolving Borrower Needs: Small businesses will likely seek more flexible financing solutions, including revenue-based financing or merchant cash advances, as traditional credit options become harder to secure.
Focus on Technology Investments: Automation and efficiency improvements will drive demand for equipment financing and technology loans, particularly as businesses look to offset rising labor costs.
Final Analysis
The Biz2Credit Small Business Earnings Report highlights significant challenges for small businesses, but it also offers a roadmap for lenders and fintech platforms to adapt and thrive. The first half of 2025 will likely see heightened demand for working capital and innovative financing products as businesses navigate economic uncertainty.
For lenders, the ability to evaluate nuanced financial health metrics—beyond surface-level revenue figures—will be essential. For fintech companies, leveraging technology to streamline lending processes and offer real-time insights to borrowers will be a competitive differentiator.
While the economic pressures of inflation and rising costs will persist, businesses that successfully adapt their strategies and technologies will be better positioned for growth. For lenders and fintech stakeholders, aligning their offerings with these evolving needs will be key to capturing market share and supporting small businesses in a challenging year ahead.
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