What Does Underbanked Mean Anyway? Here’s How It Impacts Small Business

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underbanked impact small businessNo one wants to be underbanked, especially small business owners. Looking for a financial service at the most needed hour is one of the toughest problems a business owner can face. According to Federal Deposit Insurance Corp., 51 million Americans are underbanked, which means they don’t have access to adequate financial services.

Breaking down the term underbanked, a business organization or an individual is considered underbanked if they do not qualify for mainstream financial services like business loans or credit cards.

Revenue based loans, merchant cash advance, micro lenders, non-profit micro finance institutions, and private investors are some of the non-traditional channels an underbanked business relies on. When a small business is underbanked and relies excessively on such channels it can adversely affect revenue and growth.

Dealing with High-Interest Rates

  • Acquiring quick access to capital with high interest is a lifeline that comes with a huge stake.
  • Despite the fact that these short-term funds plug cash shortfalls, when the interest rate rises, the fluctuating change will definitely have its impact on the financial health of your business. When you are already running your small business with limited cash flow, the high-interest rates can limit the sales or even reduce the value of your assets.

Investors & Lenders will be less Interested in your Business

  • Investors are the backbone of entrepreneurs. A start-up business or small business to function efficiently should have a good support from investors. And as an investor, it is common to expect some good financial return on the investment made.
  • The problem is, nobody wants to be on a sinking ship. So a small business running on insufficient working capital is not something that investors would appreciate to be a part of.
  • Once you make a practice of running on short-term funds, you will by default be paying high-interest rates, which obviously makes it difficult to earn some decent profit.
  • Since investors look at your efficiency in earning profits, your business may fail to have their support.

Managing Day-to-day Operations will be Difficult

  • With positive working capital, small business owners can desire and plan better futures for their ventures, but without one, it becomes impossible to even envision. The consequence of inadequate funds is pretty clear-cut.
  • Financing day-to-day expenses, rent, payroll, and even paying for utilities will become a challenge. These scenarios push a small business to eventually go out of business.

Chances of getting Bankrupt is High

  • One of the common reasons small businesses fail is due to insufficient flow of funds, lack of capital, and low profits. If your small business is suffering from deficient cash flow, it would start disturbing the complete operating cycle.
  • Credit rating will go down, interest rates will rise, making monthly payments difficult, and in the process, excellent growth opportunities are missed.
  • Insufficient funds cause a ripple effect, which is enough to push a business to bankruptcy.

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