U.S. Small Business Funding Demand Reaches Fever Pitch in 2025

Executive Summary: The 2025 Small Business Capital Paradox

The American small business sector in 2025 is defined by a powerful and paradoxical surge in the demand for business funding. While entrepreneurial activity and the need for capital are at near-record highs, this intense demand is colliding with a progressively tightening credit environment, creating a significant “access-to-capital gap”.¹ This dynamic is fundamentally reshaping how small businesses seek and secure the financing essential for survival and growth. This report on the state of the economy analyzes the key drivers, industry-level trends, and structural market shifts that characterize this challenging landscape, providing a comprehensive overview of the US business funding demand through the end of Q3 2025.

The analysis reveals several critical findings. First, the demand for capital is sustained and multifaceted, fueled by a combination of defensive needs and offensive strategies. Businesses are borrowing to combat persistent inflation and cover rising operating costs while simultaneously seeking funds to pursue expansion and capitalize on new opportunities.³ Second, this demand is not uniform across the economy. Service-based industries are leading the charge in seeking capital, whereas goods-producing sectors like Manufacturing face considerable headwinds.⁴ Finally, this environment has triggered a pronounced pivot in where businesses seek funding. Faced with declining approval rates at large banks, small businesses are increasingly turning to a burgeoning ecosystem of non-bank online and fintech lenders who prioritize speed and accessibility.³

“When I founded Cardiff in 2004, the mission was simple: democratize access to capital for all small businesses, regardless of their industry, time in business, or even a less-than-perfect credit profile,” says William Stern, founder and CEO of Cardiff. “We saw a system where banks viewed entrepreneurs as liabilities, not partners. Since 2008, they’ve largely moved away from financing small businesses altogether. Why? Because banks want to finance land—it’s a simple, valuable asset. They aren’t in the business of repossessing a walk-in refrigerator if a loan defaults; it’s just not their model. We knew there had to be a better way to fund the backbone of the American economy.”

“We saw a system where banks viewed entrepreneurs as liabilities, not partners. (…) We knew there had to be a better way to fund the backbone of the American economy.”

The structural misalignment between what small businesses urgently need—fast, accessible capital—and what many traditional lenders are willing to provide has created a bifurcated market. This dislocation presents a formidable challenge for America’s entrepreneurs but also a significant opportunity for agile capital providers. Cardiff’s role in bridging this gap was recently recognized by Working-Capital.com, which named Cardiff “America’s Favorite Small Business Lender” for the second consecutive year.⁷ The award highlights the critical importance of delivering rapid, reliable funding solutions in a complex economic environment.

An Urgent Complication: The October 2025 Government Shutdown

Compounding the existing market pressures is the federal government shutdown that began on October 1, 2025, after Congress failed to pass appropriations legislation.⁸ This political standstill has had an immediate and severe impact on the small business community by effectively freezing the U.S. Small Business Administration’s (SBA) primary lending programs.

During the shutdown, the SBA has ceased processing and approving new 7(a) and 504 loans, two of the most critical sources of government-backed capital for entrepreneurs.¹⁰ The SBA itself estimates that every day the shutdown continues, it stops approximately 320 small businesses from accessing $170 million in vital funding.¹² Even lenders with delegated authority are unable to issue new loans, bringing a key segment of the market to a halt.¹⁰

This abrupt closure of a major funding channel creates a critical void for businesses that had been counting on SBA-backed loans for expansion, equipment purchases, or working capital. With project deadlines, payroll, and growth opportunities unable to wait for a political resolution, small businesses are forced to seek immediate alternatives.¹⁴ This is precisely the gap that agile, private capital providers like Cardiff are built to fill. While the SBA spigot is temporarily turned off, the need for fast, reliable funding has only intensified, highlighting the essential role of fintech lenders in providing a lifeline when traditional and government-backed channels are unavailable.¹²

Anatomy of the Demand Spike: A Quantitative Look at US Business Funding Demand

The surge in demand for small business financing does not exist in a vacuum. It is a direct and rational response to a complex macroeconomic environment in 2025, one characterized by persistent inflation, elevated interest rates, and significant uncertainty surrounding tariffs and international trade policy.¹⁵ These powerful economic forces directly increase the costs of goods, services, and labor, eroding profit margins and making external financing essential for maintaining day-to-day operations and funding future growth.

Measuring the Surge

Quantitative measures confirm the intensity of this demand. The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) and the Kansas City Fed’s Small Business Lending Survey both document a sustained increase in loan demand through the first half of 2025.² Data from Q2 2025 shows that new small business lending increased by a significant 7.5% compared to both the previous quarter and the same period in 2024.¹⁸ This is corroborated by activity in the U.S. Small Business Administration’s (SBA) flagship 7(a) loan program. Approval volumes have reached near-record levels, with Q1, Q2, and Q3 of fiscal year 2025 representing the most sustained period of high lending volume in the program’s history, excluding the anomalous pandemic-era relief period. In Q2 FY2025 alone, the SBA approved over $10 billion in 7(a) loans, a figure that rivals what the program once approved in an entire year.¹

“At Cardiff, we’re seeing this demand firsthand,” notes Dean Lyulkin, CEO of Cardiff. “Our application volume has surged, particularly for working capital. It’s a clear signal from Main Street: businesses are fighting to manage today’s costs while simultaneously refusing to give up on tomorrow’s growth. They need capital that is not only accessible but fast, and that’s where online lenders are stepping in to fill a critical gap left by traditional institutions.”

“(…)It’s a clear signal from Main Street: businesses are fighting to manage today’s costs while simultaneously refusing to give up on tomorrow’s growth. They need capital that is not only accessible but fast (…)”

The Dual Drivers of Demand

Analysis of borrower motivations reveals a dual-driver phenomenon pushing this demand.

• Defensive Needs (Working Capital): Data from the Federal Reserve’s 2024 Small Business Credit Survey (SBCS), with findings published throughout 2025, identifies “meeting operating expenses” as the most common reason for seeking financing, cited by 56% of firms.³ This is a direct reaction to the top financial challenge facing businesses: rising costs of goods, services, and wages, an issue cited by an overwhelming 75% of firms.³
• Offensive Strategies (Growth Capital): Despite these significant economic headwinds, entrepreneurial optimism remains a powerful force. “Pursuing an expansion or new opportunity” was the second-most-cited reason for seeking funds, at 46%.³ This strong showing indicates that a substantial portion of small businesses are looking past short-term challenges to make strategic investments in their future growth.

A key characteristic of the current demand is the surge in smaller-dollar loans. In early fiscal year 2025, more than half of all SBA 7(a) loans were for amounts under $150,000.1 This trend suggests that many firms are not seeking massive capital outlays for major projects but rather require more modest sums for incremental upgrades, inventory management, and bridging cash flow gaps, further highlighting the intense pressure on working capital.

Sector Spotlight: An Industry-by-Industry Breakdown of Capital Needs

The national trend of high demand for small business funding masks significant variation at the industry level. An analysis of sector-specific data reveals a clear divergence in capital needs, access to funding, and overall financial health, creating a landscape of distinct winners and losers in the 2025 funding environment.

High-Growth, High-Demand Sectors

Certain service-oriented industries are at the forefront of the demand surge, driven by strong growth prospects and the need for flexible capital.

• Accommodation & Food Services: This sector exhibits the highest growth expectations, with 34% of owners anticipating significant growth in the coming year.⁶ To fuel this expansion and manage volatile cash flows, these businesses are aggressively seeking flexible financing, demonstrated by a sharp rise in the use of fintech loans and alternative payment methods. The industry is a leader in both the volume of SBA 7(a) loan approvals and the average size of those loans in fiscal year 2025.⁴
• Health Care & Social Assistance: This essential sector has experienced remarkable growth in its borrowing activity. By the end of Q3 FY2025, it had already surpassed its total SBA loan approval count and average loan size from the entirety of FY2024.⁴ Broader market data confirms this trend, showing a 5% year-over-year increase in lending to the sector as of February 2025.⁵
• Professional, Scientific, & Technical Services: Mirroring the trend in Health Care, this knowledge-based sector has also exceeded its FY2024 SBA loan totals well before the end of the fiscal year, indicating strong, sustained demand to finance innovation, talent acquisition, and service expansion.⁴
• Wholesale and Retail Trade: These industries are at the sharp end of supply chain pressures and inventory management challenges. As a result, they are showing the most significant increase in the use of fintech loan inflows, signaling a critical need for rapid access to working capital.⁶ The funding environment for these sectors is mixed; while Wholesale saw increased access to capital in Q1 2025, the Retail sector experienced a decline.²⁰

Sectors Facing Headwinds and Decreased Access

In contrast, several goods-producing and logistics-focused industries are grappling with more challenging conditions.

• Construction: This sector is a focal point of concern, citing high levels of anxiety over cash flow, with 37% of firms identifying it as a primary challenge.⁶ Despite being one of the top three industries for SBA loan approvals by volume, it faced tightening credit standards and decreased overall access to capital in Q1 2025, suggesting a growing unmet need for financing.⁴
• Manufacturing: The manufacturing sector is showing signs of a slowdown. New business applications in this industry have declined from their 2023 peak, and lending volume saw a year-over-year drop of 8% as of February 2025.⁵ This downturn may be partially addressed by a recently announced SBA initiative to waive most loan fees for small manufacturers in fiscal year 2026, a policy designed to incentivize borrowing and investment in the sector.²¹
• Transportation & Warehousing: This industry is highly exposed to fuel costs and broader inflationary pressures, with 48% of firms reporting high concern over inflation.⁶ This has translated into a difficult lending environment, with the sector experiencing an 8% year-over-year decline in lending as of February 2025.⁵

The Great Divide: The Widening Gap Between Demand and Access to Capital

The intense surge in demand for capital is being met with a wall of lender caution, creating a widening chasm between what small businesses need and what they can obtain. For thirteen consecutive quarters through 2025, a net majority of banks have reported tightening their credit standards for small business loans.² This supply-side squeeze manifests in stricter collateral requirements, smaller approved credit lines, shorter loan maturities, and higher risk premiums, making it demonstrably harder for businesses to qualify for funding.¹

Diverging Approval Rates by Lender Type

This tightening is not uniform across the lending landscape, leading to starkly different outcomes for borrowers depending on where they apply.

• Large Banks: Institutions with over $10 billion in assets have become the most difficult source of funding. Approval rates at large banks for any amount of financing hovered at 44% in the 2024 SBCS, with some Q2 2025 reports showing full approval rates as low as 13%.22 As a result, savvy small businesses are voting with their feet; applications to large banks fell from 44% of all applications in 2023 to just 39% in 2024 as businesses actively seek more viable alternatives.³
• Small Banks: Community banks and other small lenders represent a crucial bright spot. They boast a full approval rate of 52%, the highest among all lender types.²³ Their willingness to engage in relationship-based lending makes them more likely to approve applicants than any other source, solidifying their role as a cornerstone of small business finance.³
• Online/Fintech Lenders: This rapidly growing segment is capturing significant market share by competing on speed and convenience.⁶ While their full approval rate of 31% is considerably lower than that of small banks, they serve a critical function for businesses that may not meet the stringent criteria of traditional lenders or those that require immediate access to capital.²³ This accessibility, however, comes at a price. Online lenders consistently receive the lowest net satisfaction scores from borrowers, who frequently cite high interest rates and unfavorable repayment terms as major drawbacks.³

This environment forces small business owners into a difficult dilemma, a trade-off between the higher likelihood of approval and better terms at a small bank versus the unparalleled speed and ease of an online lender. The urgency of the capital need often dictates the choice. The data reveals a clear behavioral shift: an estimated 72% of small businesses now go directly to non-bank lenders for credit, bypassing the traditional banking system altogether.⁶

Cardiff’s Small Business Funding Solutions for 2025

In a market defined by a gap between urgent needs and traditional offerings, having access to the right type of capital is paramount. As Dean Lyulkin, CEO of Cardiff, explained to Investopedia, the modern funding landscape is increasingly defined by private debt, which he describes as “simply lending that happens outside public markets”.²⁴ Cardiff provides a suite of these specialized funding products designed to address the specific challenges and opportunities that American small businesses face today.

Working Capital and Revenue-Based Financing

For businesses needing to manage day-to-day expenses, bridge cash flow gaps, or invest in short-term growth, working capital financing is essential.³ A key innovation in this space is Revenue-Based Financing (RBF), where a business receives upfront capital and repays it with a small percentage of its future revenue.²⁶ This model is surging in popularity, with the global RBF market projected to grow from $5.77 billion in 2024 to $9.77 billion in 2025—a staggering 69.5% increase.²⁷ The growth is fueled by the rise of startups and subscription-based businesses whose recurring revenue models are a perfect fit.²⁸ This non-dilutive option allows founders to retain full equity and control, offering a fast and flexible alternative to rigid bank loans, which explains why 72% of small businesses now seek working capital from non-bank lenders.²⁵

Term Loans

Term loans are the cornerstone of strategic business investment, providing a lump sum of capital that is repaid over a fixed period. This structure is ideal for planned, long-term projects that drive substantial growth. Demand for these loans remains robust; in the second quarter of 2025, new small business term loans increased by 9.2% year-over-year, signaling that entrepreneurs are actively pursuing major investments.¹⁸ Common uses for term loans include:

• Business Expansion: Acquiring another company or opening new locations.³
• Fixed Asset Purchases: Investing in major assets like commercial real estate and essential machinery.³⁰
• Debt Refinancing: Consolidating existing, higher-interest debt to improve cash flow.³⁰
• Long-Term Working Capital: Securing a stable capital base for sustained operational needs.³⁰

Equipment Financing

Equipment financing is a specialized loan or lease used to acquire essential business equipment, with the equipment itself serving as collateral.³² This structure allows businesses to preserve precious working capital for other priorities.³³ According to industry data from sources like The Monitor Daily and the Equipment Leasing & Finance Foundation (ELFF), the market is poised for significant growth, with a projected 4.7% expansion in equipment and software investment for 2025.³⁴ Key drivers of this demand include:

• Technological Advancement: Businesses are aggressively investing in automation and AI to enhance productivity, which in turn fuels demand for the underlying infrastructure like servers and data centers.³⁵
• Flexible Acquisition Models: To avoid large upfront costs and the risk of obsolescence, companies are increasingly favoring flexible options like Equipment-as-a-Service (EaaS) and leasing.³⁵
• Industry-Specific Needs: Sectors such as IT, healthcare, construction, and manufacturing are leading the charge in equipment acquisition to modernize operations and meet growing demand.³⁸

A Look Inside Cardiff: Internal Report on 2025 Lending Trends

Cardiff’s internal data reflects and amplifies the national trends. Our platform has experienced a conservative but significant surge in demand, confirming the market’s intense need for capital. Year-over-year, loan applications from businesses with less than two years in business surged by 28%, while applications from established businesses (more than two years old) increased by a strong 19%. This surge in demand was met with a 22% increase in total loan approvals and a 25% rise in originations, demonstrating our capacity to meet the market’s needs.

More importantly, the quality of applicants is rising. The average FICO score of our approved applicants has improved from 630 to 665 year-over-year, and the average daily bank balance of applicants has risen from $328,000 to $378,000. These metrics point to a clear trend: not only are more businesses seeking funding, but the applicants themselves are financially stronger and better capitalized. This improved financial health enables them to take on capital to overtake competitors, stock up on inventory, hire and train new employees, and purchase critical equipment.

Reflecting this increased quality and confidence, Cardiff’s average approval amount has also grown, increasing from $49,000 to $65,000 year-over-year. This isn’t just about lending more; it’s about empowering healthier businesses to make more significant strategic investments.

A Counterintuitive Trend: Declining Default Rates Amidst Economic Pressure

Despite the challenging economic environment and tightening credit standards from traditional banks, a surprising trend has emerged in 2025: stabilizing and, in some cases, declining default rates. While some indicators show default risk remains elevated compared to historic lows, data from the first half of 2025 points toward a resilient small business sector.⁴⁰

The Equifax Small Business Default Index, for instance, showed a slight month-over-month decrease in April 2025, with defaults decreasing in 42 out of 50 states compared to the prior month.⁴¹ This followed a period in January 2025 where both delinquency and default rates were trending down.⁴² Furthermore, broader data on all commercial banks shows that the overall delinquency rate on business loans has remained remarkably stable, hovering in a narrow band between 1.14% and 1.29% from Q2 2024 through Q2 2025.⁴³

“Today’s entrepreneurs are more data-savvy and resilient than ever (…) combined with more sophisticated, technology-driven underwriting on our end, is creating a more stable credit environment (…)”

“The data on defaults is surprising to many, but it aligns with what we’re seeing in our own portfolio,” says Dean Lyulkin, CEO of Cardiff. “Today’s entrepreneurs are more data-savvy and resilient than ever. They are managing their finances with incredible discipline. This, combined with more sophisticated, technology-driven underwriting on our end, is creating a more stable credit environment than the macroeconomic indicators might suggest.” This resilience suggests that businesses are adapting to the ‘new normal’ of higher operating costs and are managing their debt obligations effectively. It also points to a potential flight to quality, where more viable businesses are the ones successfully securing funding in a tougher market.

The AI Catalyst: A Boon for Startups and a Revolution in Small Business Lending

A driving force behind both the creation of new businesses and the improved efficiency of lenders is the rapid adoption of Artificial Intelligence. Far from a futuristic concept, AI has become a practical and accessible tool that is lowering barriers to entry for entrepreneurs and revolutionizing how lenders assess risk.⁴⁴ In 2025, nearly 60% of small businesses report using AI for their operations—more than double the rate in 2023—and 80% believe it will help their business in the future.⁴⁶

For startups, AI tools are democratizing capabilities once reserved for large corporations. AI-powered platforms can now handle everything from generating marketing content and managing customer service with 24/7 chatbots to optimizing inventory and providing data-driven market insights.⁴⁴ This allows founders to automate routine tasks, reduce operational costs, and focus on high-value activities that drive growth.⁴⁵

“The advent of the smartphone was the catalyst. It allowed fintech companies like Cardiff to re-imagine the entire business borrowing process from the ground up,” states William Stern, founder and CEO of Cardiff. “We built something nimble, fully online, and end-to-end. Today, by leveraging technology and AI-driven underwriting, we can look beyond a simple credit score and understand a business’s real-time health. This is how we can approve an application in minutes and get a business funded the same day—a speed and accessibility that no traditional bank can match. We’re not just making lending faster; we’re making it fairer.”

Perhaps most critically, AI is transforming the lending process itself. Research shows that banks with greater AI usage lend significantly more to distant borrowers, charge them lower interest rates, and experience lower default rates.⁴⁸ By leveraging AI to analyze vast and alternative datasets, lenders can reduce information asymmetry and more accurately assess the creditworthiness of startups and other businesses that lack extensive credit histories, thereby expanding access to capital for underserved entrepreneurs.⁴⁸

Outlook: Navigating the New Small Business Lending Landscape

The market forces shaping the small business funding environment in 2025 are not fleeting. The confluence of factors—including economic instability, a trend of laid-off or disaffected workers turning to entrepreneurship, and the continued availability of government-backed loan programs—suggests that the high demand for small business loans is poised to continue, and likely surge, through 2026.⁴⁹ Economic forecasts support this outlook, predicting moderate but slowing GDP growth (1.6% in 2026 versus 1.7% in 2025) and stubbornly persistent inflation.¹⁷ These conditions will continue to exert pressure on business finances, fueling an ongoing, acute need for working capital.

The intense market dynamics of 2025 are catalyzing an evolution in the role of the lender. The institutions best positioned for success will be those that adapt to the new realities of borrower needs. This requires a strategic shift away from legacy processes and toward models that prioritize efficiency and customer experience. Key investments in digital solutions, such as AI-powered underwriting and automated loan origination platforms, will be critical for processing applications at scale and speed.¹⁵ The emphasis is moving from a purely risk-based assessment to a more holistic, technology-driven approach that recognizes and values speed and convenience as core components of the product offering.¹⁵

For small businesses, navigating this new lending landscape requires a more sophisticated and proactive approach to securing capital. The following strategies are recommended:

• Diversify Funding Applications: Business owners should no longer rely on a single application to their primary large bank. A multi-pronged strategy that includes simultaneous applications to small community banks, local credit unions, and reputable online lenders is essential to maximize the probability of securing funding.
• Prepare for Stricter Scrutiny: With lenders tightening standards, meticulous preparation is paramount. Businesses must be prepared to provide more detailed and timely financial documentation, including month-over-month financial statements for the trailing 12 months, real-time cash flow analyses, and well-defined contingency plans to demonstrate resilience in an uncertain economic environment.⁴⁹
• Understand the True Cost of Capital: When evaluating offers, particularly from online lenders where speed is a key selling point, it is crucial to look beyond the headline interest rate. Business owners must conduct a thorough analysis of the total cost of borrowing, accounting for all origination fees, prepayment penalties, and the structure of repayment terms. The fastest money is often the most expensive, and a clear understanding of this trade-off is vital for long-term financial health.

In conclusion, the spike in demand for small business funding in 2025 is more than a temporary market fluctuation; it is a symptom of a fundamental restructuring of the small business economy and its relationship with capital providers. America’s entrepreneurs are demonstrating remarkable resilience and a persistent desire for growth, but their ultimate success hinges on their ability to navigate an increasingly fragmented, complex, and challenging lending landscape. For capital providers, the path forward is clear: success lies in closing the access-to-capital gap with innovative, fast, and flexible funding solutions that are explicitly tailored to the urgent and evolving needs of the modern small business.