Small to medium businesses (SMBs) prop up the economy in virtually every developed nation on the planet, and that makes it all the more bizarre that financial services consistently fail to help them. A Buy Now, Pay Later (BNPL) credit facility would transform how businesses operate and create a new financial operating system for SMBs.
Banks failed businesses
It can take over six months to open a business account, and there’s no guarantee that the account will be opened, business loans are offered at painful interest rates, and creating operating cash flow is a nightmare for businesses when faced with tough times. Fintechs have improved the situation but it can still be a long process and that’s just one basic way that financial products have failed to meet the needs of SMBs.
This lack of care given towards businesses by traditional financial institutions means that SMBs have been forced to choose between selling equity and going into debt via a credit instrument. Neither of these options is ideal. And neither of them is a real solution to the underlying cash flow issues for businesses that have forced them into this position. When a business is waiting for invoices to be paid, taking on long-term consequences is not an appealing solution.
Now fintechs are offering viable alternatives for businesses. Banking as a Service (BaaS) is a hot topic at the moment, an approach to modular banking that could see businesses accessing loans through providers that both appeal and are familiar to them. However, it fails to address the underlying issue of taking on credit that has long-term implications. BNPL credit bridges a gap in terms of what financial products are offered to businesses – provided through a credit card and tailored to a businesses’ needs with the intelligence to understand on the fly that cash flow issues are temporary is the future of SMB financing. Credit that works in this way means that businesses can plan spending effectively without wasting time chasing invoices to make their next move.
The power of cash flow
Cash flow is often the lifeblood of a business – it can mean making payroll during a tricky month, seizing an opportunity at the right time, or making any one of a thousand other immediate purchase needs. Having to trade that flexibility in exchange for long term consequences is hardly ideal for most SMBs.
SMBs should not need to spend so much of their time focused on cash flow. Unfortunately, it’s often integral to the survival of a business and in the past having positive cash flow overall has not been enough for businesses to succeed. Business profits often come in peaks and troughs across the year depending on season and product demand. And the troughs can spell doom for a business if they choose to grow a new area or develop a new product. It can also mean that the business is unable to seize an unexpected opportunity because money is tight at the moment, and they need to wait for cash flow to improve.
But why should that be the case? If an SMB has achieved net profitability then its actions do not need to be dictated by temporary problems. BNPL credit can be tailored to the data points provided by cash flow peaks and troughs so that repayment is guaranteed and businesses can portion out their money consistently throughout the year. Essentially, it's making a sound financial decision based on past performance of the company to a far greater degree than was previously considered.
Traditional solutions ask too much
Traditional financial solutions for SMBs often demand far more than is necessary thanks to banks historically having leverage over businesses.
Selling equity is a common avenue for SMBs to raise capital, but it drastically reduces revenue gain over time for the business owner. This isn’t an issue if the business is a startup looking for hypergrowth. However, most businesses aren’t looking for hypergrowth, but rather steady development and returns over time. Splitting those dividends with others for years because of temporary cash poverty is hardly ideal.
Another way of raising money short-term is to delve into credit through a business loan. Unfortunately, these are often for large sums of money with long repayment structures and punishing interest rates. They also leave an indelible mark on the business's credit history and can make raising further capital more difficult as a result, or subject SMBs to even worse interest rates. This can put businesses in a painful situation when facing existential threats such as the pandemic and find themselves needing to pivot their business strategy at pace.
Fintechs are introducing alternatives to these traditional solutions and taking advantage of the digital ecosystem to deliver more business-aware products.
BaaS won’t save you
Open Banking can be game-changing for small businesses if it has a built-in infrastructure. There’s the possibility of wrapping Open Banking data into a product to issue credit based on occasional soft credit checks. However, that could easily result in companies using credit to kick the can down the road rather than to accomplish specific business goals. Open Banking also had a difficult start in markets like the UK and it seems that it will take significant work for the scheme to bear fruit in areas where the infrastructure hasn’t had consistent investment for years.
Banking as a Service is the hot topic of the industry right now. The modular approach to banking is heating up discussion everywhere and boils down to three key traits:
Ultimately, this is why BaaS isn’t going to save SMBs from their cash flow issues. While access to the financial product may be faster and cheaper than traditional methods, the products are still the same. Having the products configured to the individual needs of each SMB may be possible but as of yet no one is doing this and it may not even be possible to deliver such a customised product via BaaS.
The power of BNPL credit is proven. Consumer credit delivered in this way has faced some criticism for fringe cases but is undeniably popular and when used by consumers with healthy finances has proved to be a useful way for them to manage personal finance. For SMBs, BNPL credit is an even more powerful tool. It can be issued through a close examination of a business’ transaction history with a flexible credit limit depending on what stage the SMB is at in the year and provide a safety net for businesses to take bold steps.
Thus, BNPL offers a lot of benefits for cash flow management. Nothing else on the market can effectively support businesses during times of low cash flow without demanding extortionate repayments in return. Fintech has long aimed to support and service traditionally underserved areas of the market, and a BNPL business credit card is the next step in compelling financial products to better serve small businesses.
About Edo Omoniyi
Edo is the COO of Cape, a corporate credit card for SMEs. Cape is re-inventing the Corporate Credit Card to help digital business owners gain control of their cash flow through the platform, encompassing three integrated core features: a revolving line of credit, a Buy Now, Pay Later instalment plan and expense management capability. Previously, Edo was a senior product manager for the consulting arm of 11:FS working on a range of banking projects. Prior to that, Edo managed a number of key initiatives for Zego and Neyber as a senior product manager and strategist.
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