Report on Financing Challenges and Opportunities for Micro-Businesses in Relation to Sustainable Development Goals (SDGs)

Introduction
Micro-businesses, defined as independently owned enterprises with fewer than 10 employees and typically operating from brick-and-mortar storefronts, play a crucial role in private-sector entrepreneurship. These businesses significantly contribute to local and national economies. Examples include solo dental practices in small towns, mom-and-pop Italian restaurants in large cities, and unique hair salons. However, despite their importance, micro-businesses face significant barriers in accessing financing necessary for survival, growth, and thriving in competitive markets.
Financing Barriers and Data Challenges
According to a forthcoming PYMNTS Intelligence report in collaboration with Markaaz, nearly 30% of micro-business credit applications in the United States and the United Kingdom are rejected due to lenders’ inability to verify basic business data. This rejection rate is five times higher than that for larger enterprises. The core issue lies in lenders’ difficulties in validating the legitimacy of micro-businesses’ corporate and financial information, regardless of whether the lender is a national bank, a smaller financial institution, or a local credit union.
Impact on Sustainable Development Goals (SDGs)
Addressing the financing challenges of micro-businesses aligns with several SDGs, including:
- SDG 8: Decent Work and Economic Growth – Supporting micro-enterprises promotes sustained economic growth and productive employment.
- SDG 9: Industry, Innovation, and Infrastructure – Enhancing access to financial services fosters innovation and infrastructure development in small businesses.
- SDG 1: No Poverty – Facilitating micro-business success contributes to poverty reduction by creating jobs and income opportunities.
Additional Challenges Faced by Micro-Businesses
- High interest rates on loans
- Changing consumer trends
- Supply chain disruptions exacerbated by global tariffs
- Difficulty in accurately gauging market demand
These challenges contribute to the short lifespan of many micro-businesses. Data from the U.S. Small Business Administration indicates that only 25% of small businesses remain operational after 15 years, and nearly 50% fail within five years. Similarly, in the U.K., where 95% of businesses are micro-enterprises employing 30% of the workforce, 20% fail within the first year and 60% within three years.
Addressing the Financial Blind Spot
Understanding the Financial Blind Spot
Micro-businesses often fall into a financial “blind spot” because they are too small for cost-effective manual credit reviews yet too opaque for automated scoring systems. This results in creditworthy businesses being rejected or subjected to higher risk pricing. This issue highlights the need for improved data verification methods to support sustainable economic development.
Proposed Solutions and Benefits
The forthcoming report emphasizes the value of utilizing independent third-party data sources such as credit bureaus and auditors to verify micro-business financials and identities. This approach mitigates the risk of relying solely on self-reported data and improves lender confidence.
- Robust credit assessment for micro-businesses can double lender profitability.
- Comprehensive underwriting correlates with an 84% profitability rate in small and medium-sized business lending, compared to less than 50% with less thorough assessments.
- Improved data validation reduces rejection rates and enhances approval rates for micro-business loans.
Data Insights from Survey
The report is based on a survey conducted from March 4 to April 2, involving 350 banking executives across the U.S. and U.K., including representatives from credit unions, community banks, regional banks, national banks, and digital-only institutions serving small businesses.
Risk and Delinquency Considerations
- Delinquency rates are higher for micro-businesses (2.6%) compared to larger enterprises (0.6%).
- This may reflect data deficiencies and inadequate risk assessment rather than intrinsic business risk.
- Third-party data solutions can help differentiate actual risk from data-related uncertainties.
Key Takeaways
- The high rejection rate (27%) for micro-business credit applications is primarily due to data quality issues, including missing, unclear, or unvalidated information, rather than lack of creditworthiness.
- Banks prioritize access to trusted, real-time, third-party verified data such as audited financials and debt repayment history to improve underwriting confidence, profitability, and approval rates.
- Technological solutions enabling scalable, real-time data access are essential to support informed financial decisions for micro-enterprises, advancing inclusive economic growth consistent with SDGs.
Further Reading
For more information, see the full report: Main Street Businesses are Struggling
1. Which SDGs are addressed or connected to the issues highlighted in the article?
- SDG 8: Decent Work and Economic Growth – The article focuses on micro-businesses, their financing challenges, and the impact on economic growth and entrepreneurship.
- SDG 9: Industry, Innovation, and Infrastructure – The discussion on technological solutions for scalable, real-time data access to improve lending decisions relates to innovation and infrastructure development.
- SDG 1: No Poverty – Supporting micro-enterprises through better financing can reduce poverty by promoting economic inclusion and sustainable livelihoods.
- SDG 10: Reduced Inequalities – The article highlights the financial exclusion of micro-businesses due to data challenges, which relates to reducing inequalities in access to financial services.
2. What specific targets under those SDGs can be identified based on the article’s content?
- SDG 8 Targets:
- 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises.
- 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
- SDG 9 Targets:
- 9.3: Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets.
- SDG 1 Targets:
- 1.4: Ensure that all men and women, in particular the poor and vulnerable, have equal rights to economic resources, as well as access to basic services and financial services.
- SDG 10 Targets:
- 10.2: Empower and promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status.
3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?
- Loan approval rates for micro-businesses: The article mentions a 27% rejection rate for micro-business credit applications, which can serve as an indicator of access to financial services.
- Profitability rates of banks with comprehensive underwriting: Banks with robust micro-business credit assessment report 84% profitability, indicating improved financial inclusion and support.
- Delinquency rates for micro-business loans: The article cites delinquency rates (2.6% for micro-businesses vs. 0.6% for enterprises), which can measure credit risk management and financial stability.
- Business survival rates: Data on micro-business lifespan (e.g., 1 in 4 survive 15 years, nearly half fail after 5 years) reflect economic sustainability and entrepreneurship success.
- Access to third-party verified data: The extent of use of independent data sources for credit assessment can be an indicator of innovation and improved infrastructure in financial services.
4. Table: SDGs, Targets and Indicators
SDGs | Targets | Indicators |
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SDG 8: Decent Work and Economic Growth |
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SDG 9: Industry, Innovation, and Infrastructure |
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SDG 1: No Poverty |
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SDG 10: Reduced Inequalities |
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Source: pymnts.com