January 30, 2019
Small businesses can often find themselves in a catch-22 situation where the very reason they apply for a loan could be the reason they’re not approved. As an example, many businesses apply for loans to improve their cash flow but their poor cash flow could, in fact, get them rejected.
According to the Biz2Credit Small Business Lending Index, from November 2018, banks rejected 73.1% of small-business loan applications and alternative lenders rejected 43.3% of SMBs that applied. In my experience of working in the lending industry, the most common reasons for rejection include low cash flow, insufficient time in business, bad credit score, minimal assets, low monthly revenue, and, sometimes, application errors.
Sadly, as I’ve seen time and time again, these criteria for rejection don’t reflect the true financial state of a business. An SMB could *appear *to have bad cash flow or asset limitations but really this is because their cash is tied up in a string of unpaid invoices. Low monthly revenue could be a result of customer payment limitations and not a lack of sales.
According to a 2016 study by Fundbox, the value of small-business unpaid invoices in the US is $825 billion, which is equal to 5% of the US GDP! Furthermore, the study showed that the average SMB has $84,000 in unpaid invoices, which would have a major negative effect on the business’s cash flow.
Here is a case in point: An automotive customization business from Arizona recently applied for business funding but was rejected on the basis that its average monthly revenue is $9,000, falling just below the required amount of $10,000. Based on the statistics provided above, the chances are high that this business’s revenue shortfall was a result of unpaid invoices.
Thanks to innovations in FinTech and payment technology, there are ways to set this right for SMBs. In particular, three payment technologies have the ability to turn things around for SMBs by ending their payment struggles, thus improving their financial profiles and their chances of getting approved by alternative lenders.
Think of all the situations where you’ve wanted to buy something, but the merchant only accepts cash and you have a card. You’re just one of many sales lost to that merchant. There is a solution to combat this problem. Mobile payment technology turns any consumer’s smart device, such as a smartphone and tablet, into a mobile cash register and accounting tool. Using this type of technology, such as the one provided by Square, every business on the go or without a traditional storefront can accept card payments from customers.
Since implementing Square’s mobile payments in its business, Reynolds Towing Service in Illinois has managed to help 30% more customers every day.
By 2021, mobile payments are projected to reach $282 billion – that’s three times of what it was in 2016. Additionally, some forecasts suggest that by 2022, contactless payments will make up more than a third of electronic payments in the US. Businesses that aren’t already offering mobile payments to their customers need to catch up to stay competitive and financially healthy.
One of the easiest ways to make immediate payments is by using a digital payment network such as Venmo, which allows customers to complete immediate bank, debit, and credit card payments through an app. When you give customers the option to pay through a digital payments network, you’re likely to increase your sales and cash flow.
As of 2017, over 2 million SMBs in the US accepted Venmo as a payment option, including Uber, GrubHub, and Foot Locker. Venmo partnered with Uber and Uber Eats after noticing that over 6 million Venmo payments referenced ‘Uber’ in their description, making it the most popular thing paid for through Venmo. By offering Venmo as a payment method, Uber is fulfilling a customer need and improving the user experience.
Installment payment solutions – like those offered by Splitit, PayPal Credit, Affirm, and Partial.ly – enable customers to pay their purchases off in interest-free monthly installments. This eases the financial burden of big-ticket purchases and helps keep a business cash flow-positive.
Vestiaire Collective is one small business that’s experienced an increase in customer order size since it started implementing Splitit on its online luxury product store. Their Splitit order ticket size is 120% larger on average than an ordinary, non-Splitit ticket.
GlassesUSA, another Splitit user, has seen an 85% increase in its average order value of products of $120, as well as a 10% decrease in cart abandonment.
Collaboration between alternative lenders and payment technology companies is the next logical step. This is already happening in the industry, as are acquisitions. In September 2017, PayPal acquired Swift Financial, an online business lender. Now known as LoanBuilder, the company offers flexible term loans to businesses that already use PayPal’s services. Businesses that offer easy payment methods such as PayPal’s are already taking steps to improve their customers’ payment experience and improve their cash flow.
We expect to see an increase in these types of partnerships as more and more alternative lenders reject a fund-and-run approach in favor of a more holistic, long-term relationship with their customers, looking for ways to add value and help their business customers grow.
Something as simple as making it easy for customers to make immediate, direct payments to small businesses will have a positive impact on the alternative lending sector. I expect that as the adoption of payment technologies by SMBs increases, so will approval rates by alternative lenders.