Among the biggest challenges small and medium-sized businesses (SMBs) tackle — in good times and not so good times, economically speaking — is cash flow. As fundamental as revenue is, it doesn’t just matter how much an SMB brings in, but how much access it has to those funds when it needs them. Needs, Nav CEO Levi King told Karen Webster in a recent conversation, often come in two flavors for the typical small business owner. When things are going well for an SMB, managing cash flow is usually oriented around growth and being able to capitalize on opportunities to expand. When things aren’t going so well, managing cash flow is usually more about surviving to profit another day, and keeping the lights on and payroll covered.
The mostly good news as 2019 heads into its final quarter is that things look reasonably good. Nav certainly has data on that subject — as it is a business financing marketplace for SMBs that leverages AI and machine learning to offer recommendations to its roughly 1 million U.S. SMB customers on possible financing paths, as well as advice on how to improve their overall financial positions. What they are seeing now, he noted, is that the ratio is stable between businesses looking for access to capital because they want to grow versus those looking because they need to solve problems — there are more financing options for SMBs that need it than there have ever been.
However, while many of the systemic issues that plagued the segment — particularly around underwriting and access to capital — in the early part of the 2010s have been greatly remediated, things could still be better. There are many credit options out there, but many are still quite expensive. About half the companies Nav works with have started using the data and recommendations the company provides to improve their credit rating, King noted, but the other half haven’t, even though many keep resolving to get to it any day now. Possibly most concerning, businesses are doing as well as they did during the last period of economic strength, not any better, and that means it is not clear how ready they are for when an economic downturn inevitably comes.
“The economy is still going pretty well, but I am nervous for SMBs, for what happens when things start not going so well, because I don’t know if the economy has really been made great again for small business. And I don’t think any of them are in any great shape for a downturn,” King said.
There is hope on the horizon, though, in the form of better products aimed at subprime, near-prime and thin-file SMB borrowers. The marketplace owes small businesses better products, he noted, and it is starting to see interesting possibilities for building them. The problem — and potential storm cloud — is the risk of that economic downturn that will certainly show up someday, and whether financial services or FinTech will be ready to help SMBs whether the storm.
The Value Of Getting Ahead Of The Data
Nav’s platform, King explained, can do things for its business partners primarily — one present-oriented, one future-oriented. In the present, it can help them match up with the financing option that is best for them (i.e. use its analytics to model the business against what the lowest-cost, most-accessible options are for them).
The more future-oriented service Nav offers is to leverage the fact that the company has gotten “pretty darn good at predicting when cash flow issues are on the horizon,” and making recommendations to their SMB partners to take action before they arise.
“The old joke is that the best lenders lend money to people who don’t need any, and we’ve gotten good at seeing that things are strong now. But a dip is probably [in] four months, so now is a good time to get a line of credit, because it is easier and less expensive to get credit when you don’t need it,” King said.
The half of Nav’s customers that act on those future-oriented insights aren’t interested in their data, or interested in acting on it, and don’t consistently report that they are going to start any day now. The limiter, he noted, isn’t interest, but time, and the fact that the average small business owner doesn’t have any. The reality, though, is that it is time they need to make — because being a subprime borrower in the world of SMB financing is much like being a subprime borrower in the consumer space: expensive. The interest rates will be bigger, processor discounts will be higher. The reality is that the service provider that looks at credit data is going to charge more for a lackluster profile.
“If you are in a 10 percent margin business, being in the prime category might be the difference of having a margin of 12 or 15 percent,” he said. “The credit cost is the issue that often means the difference between being a business that is treading water and staying open, and one that is thriving and expanding. The ones that really get on top of their data, they aren’t about surviving anymore — they are about getting ahead.”
As economic uncertainty may yet loom on the horizon, King noted, businesses getting ahead will likely survive. Those just treading water? They could easily drown.
What Comes Next
While no one can say exactly when the economic downturn is coming (and there are no certain indicators in Nav’s data that necessarily sees one coming), logic and the entire history of the market says that a slowdown is coming for the economy someday. That is slightly worrying for SMBs, particularly those struggling with cash flow in good times, because so much becomes uncertain in the face of a weak economy.
Take, for example, the proliferation of FinTech firms wading into the world of SMB underwriting — Square, Stripe and PayPal are just the three of the biggest names that spring to mind. The emergence of financing from those sources, King said, is an exciting development for SMBs, because it allows businesses that might otherwise be classified as subprime to get access to relatively low-cost financing, since those service providers actually have a good idea of what an SMB’s monthly revenue flow is, and can evaluate its risk with a richer data set. The problem is that it remains to be seen if these FinTech service providers that have recently expanded into underwriting will have the same appetite for it in the event of an economic downturn. The recent past has plenty of examples of firms that expanded into credit products when times were good, only to quickly quit the field when economic conditions softened.
“I wonder how committed these tech companies will [be] to a lending business in a downturn. There might be some brand risk to them if they start tightening standards on customers they have worked with, if they suddenly can no longer get financing they are used to. This financing can really be a much better deal for businesses, but the possibility of a downturn still makes me nervous for its future,” King said.
The other big-known unknown in the lives of SMBs — and a strong argument for getting ahead of one’s data today while things are still stable economically — are the various FinTech lenders that have grown into the SMB lending space in the years since the Great Recession. These firms are an important part of the expanded option set SMBs now have when it comes to securing underwriting in various forms. What most of them have in common is that they too have never faced an economic slowdown. The question that no one has an answer to right now is if they are ready, as they say they are, for that inevitable event.
“It is a real question [of] how they are going to get through a potential storm when they are not profitable or barely profitable today when times are good,” said King.
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