U.S. small business lenders increased requirements to qualify for financing in the first half of 2024, but are cautiously optimistic the market will improve, according to the Q1 2024 SMB Lending Index released by Lendio.

Lendio's SMB lending index measures how accessible business financing is to small business owners with a higher score indicating greater accessibility. The score is based on the business profile of the 18k+ small businesses offered financing in Lendio's marketplace in a quarter.

The Midwest came in with the highest average index score at 66. Scores in the South varied widely but the region came in at a close second with an average score of 65.7. Industries with the greatest decline in financing accessibility included automotive, manufacturing, and utilities. Industries with the greatest increase in financing accessibility included education, legal services, and wholesale.

After surveying 25 small business lenders, Lendio found that lenders' market perceptions are relatively split. Lenders with a less positive perception of the market cite poor macroeconomic conditions and high interest rates.

"Many lenders are tightening their credit boxes, including banks. We're in less than ideal macroeconomic conditions and there's a higher cost of capital right now," said Minyang Jiang, Chief Strategy / Revenue Officer at Credibly.

Conversely, lenders with a more positive view of the market cite an expanding market with a growing number of alternative lenders, technology improvements, and diverse financing options.

While the majority of small and medium businesses (SMBs) state their access to capital meets or exceeds market averages, some small business owners' perceptions skew much more negatively than lenders.

In a separate report, Lendio found that despite growing options, U.S. SMBs are still underserved. 65% of SMBs stated that loan terms and amounts funded did not meet or fell below their expectations. SMBs also feel detached from current loan options with 67% of small businesses having no preference for a specific lender type and 50% not knowing what financing solutions their banks offer.

"The current system wasn't built for the small business owner, so there is a huge market need just waiting to be tapped," said Brock Blake, CEO of Lendio. "The solution isn't to pit banks against alternative lenders or make a full shift to banking-as-a-service. Every one of these providers has a contribution to make to an ecosystem that fully supports small business owners whether it's through the bank they currently deposit with or the vendor that sells them supplies."

Read the full report here.