Some 45 percent of Main Street small and medium-sized businesses (SMBs) expect revenues to increase this year, according to PYMNTS data from earlier this summer, with 60 percent saying the vaccination will be “very” or “extremely” helpful in boosting growth this year.
Optimism aside, the data also demonstrate that SMBs that have faced massive challenges over the 18-month pandemic period understand the benefits of modernizing their operations to meet changing needs. In fact, 88 percent of SMBs surveyed reported they had implemented innovation strategies, such as expanding their online and third-party marketplace presences, employing contactless payments technologies and broadening their social media usage.
But in some cases, these same challenges have hit small businesses and individual proprietorships hard, according to data recently released by the Federal Reserve Bank of Cleveland, with small firms seeing their profitability slip between 2019 and 2020. At the same time, the number of firms carrying debt increased, as did the number of firms with a debt load of more than $100,000 as well as business owners using personal funds to keep their companies afloat.
On the borrowing front, newer businesses without a long established or less than perfect credit history naturally faced a tougher time getting loans. Firms with lower credit scores turned to online lenders roughly a third of the time (35 percent) and to non-bank finance companies 23 percent of the time, versus their more established credit counterparts that sought such options 11 percent of the time, according to the Cleveland Fed data.
The data demonstrates how much harder it has become for SMBs to attain the cash flow relief they need at the same moment they’re being pressed to digitally update their businesses.
Relieving A Long-Felt Crush
When PYMNTS started investigating the cash flow pain point pre-pandemic, the data showed similar trends — larger, more established firm had a lot of options when it came to paying and getting paid and a lot more control over their cash flow, smaller firms had fewer options and were far more (52.6 percent) frequently plagued with shortfalls, and especially true for less profitable and younger businesses, as 65.5 percent of early stage, low-margin ones report frequent or routine cash flow problems.
In depth: SMBs Receivables Gap Playbook
Moreover, the data noted, firms that suffer routine cash gaps do not often avail themselves of immediate payment platforms, and a disproportionate share have never heard of them.
According to pre-pandemic data, immediate payment platforms were barely denting the widespread cash shortfall problem among SMBs, and just a fraction of the firms that most often experience these issues are using these payment services with any regularity. Moreover, though it’s not a service SMBs were often seeing, interest was already peaking in a pre-pandemic world — stark contrast to SMBs’ interest in immediate payment platforms, and the benefits they expect such solutions to deliver extend beyond the simple avoidance of cash crunches was already climbing.
Businesses’ interest in seeking out new streams of funding as they seek to overcome the crunch is reflected in PYMNTS and Federal Reserve data. And that, in turn, Fundbox CEO Prashant Fuloria, told Karen Webster in an earlier conversation, has pressed FinTechs looking to step into the gap to raise the level of their underwriting game.
“It’s relatively easy to grow a lending business if you are undisciplined about managing risk, but you will pay the price when the economy hits a downturn,” Fuloria said.
The challenges are very real. The data from all sources involved indicate that, as business owners are continually pressed to do more even as their cash flow has been increasingly constrained. But the will to invest is there — both from the entrepreneurs avidly pushing ahead, and the rising option of non-banks options injecting options for cash flow management that aren’t entrepreneurs’ personal checking accounts.