Lend Small: POS Credit For SMBs

This year, Black Friday, Small Business Saturday and Cyber Monday all raised the bar on holiday shopping levels. ‘Tis the season for a surge in spending, especially at small businesses (SMBs). But contrary to popular belief, not everyone wins during peak shopping season.

For some businesses, seasonal shifts simply mean winter in the U.S. coincides with a dip in sales and a cash flow crunch. For others, a surge in sales could mean major miscalculations over investments in inventory and other resources. For everyone, the holidays are a time to consider taking out a loan. According to Quick.me CEO Ola Okeshola, the best partner in helping a small business decide when and how to access financing may not be the lender.

“A lender comes in and, as long as they get their money back, they don’t really care what happens to you,” Okeshola recently told PYMNTS’ Karen Webster. “Even in two- to three-year loan agreements, lenders are still pretty short-term-sighted.”

Instead, the executive said, payment companies are not only an expansive source of financial data, they also hold a long-term relationship to their small business customers, making them a vital piece of the SMB lending puzzle.

“Payment processors have a huge part to play,” he said. “They’re typically front and center of what goes on. The people who really care, long-term, as much as the small business owner are payment companies.”

During the holidays, data that payment providers hold can be critical to helping their small business clients understand how to navigate either a dry spell or a surge in sales.

“For SMBs, whether ‘seasonality’ is good or bad all depends,” he said. “In retail, typically there is a lot of buying, and consumer demand goes up. There are some businesses for which consumer demand dips during this period. Seasonality is good in that you can reasonably predict what’s going to happen, and you know it happens every single year.”

But unlike larger companies, said Okeshola, small businesses lack access to resources, like Deloitte reports, that can provide a clearer, more precise picture of how seasonality will impact their business, and can often be overwhelmed with their financial data without the tools to analyze it properly.

“They need access to data to make more accurate predictions, but that’s what I believe small businesses don’t have access to,” he explained. “That’s where payment processors can come in and provide more value than they typically provide.”

A lack of visibility into exactly how seasonality will impact cash flow can fast-track a business to a breakdown if they aren’t able to accurately calculate how much they need when seeking financing, the CEO said.

Even businesses on the positive end of seasonality — those that enjoy a spike in sales — may find themselves in financial trouble, because they borrow too much as they look to invest in inventory and other resources they need to prepare.

“Typically, small businesses will know that toward the end of the year, there will be an increase in consumer demand, and then go out and raise money to stock up on inventory,” he said. “And it turns out they invested more than they needed — and that’s a problem.”

“What happens when a small business comes in and says, ‘We need $100,000?’” he continued. “We go in and look at our data, and we can say, ‘We think you’ll be out of business if you do that; it doesn’t make much sense. We can only give you $20,000 or $30,000.’”

“We tend to take both a micro and macro perspective to financing. While the business owner is super focused on the micro needs of why he or she wants a loan, we are able to go a step higher by taking that micro data and comparing that to macro data,” Okeshola explained. “An example of macro factors could be demographic or even industry trends. For instance, maybe you had only two close competitors last year, but this year you have 10. In this case, the business owner should not make decisions solely based on the assumptions from last year. Payment processors, in collaboration with companies like Quick.me, can help in providing this kind of insight.”

According to Okeshola, payment processors have to help in the effort to link SMBs with the right working capital financing; but using transaction data from point-of-sale (POS) firms could also address a rising problem that the CEO has noticed among small businesses that struggle during the holiday shopping season: loan stacking.

“Again, it all goes back to data,” he said. “When you’re on the negative end of seasonality, you may go out there to borrow money that you can’t pay back. It leads to loan stacking. There is a lack of data and insight, so people respond the way they know best — and typically, the way they respond is by going out and raising money.”

Transaction data from POS providers then becomes not only useful to the small business owner, but also to the lender, which is negatively impacted by loan stacking, defaults and overborrowing, according to the CEO.

“This year, we’ve seen a bunch of lending companies go out of business,” he said, adding that just as small businesses tend to take out more loans to repay their old ones, many alternative lending entrants are raising venture capital to fuel growth, but ultimately fail because their small business borrowers fail too.

And if the small business borrower fails, the payment service provider takes a hit as well.

“When a small business goes out of business, the payment provider loses money,” said Okeshola. “They have a responsibility to make sure the small business stays in business. And they can actually do more by helping to provide insight and partnering with companies to provide that data.” Hence, it is crucial that payment processors see lenders either as critical partners or as an existential threat to their business.

At least, that’s according to Okeshola’s own experience. He’s folded that mindset into Quick.me’s market strategy: partnering with POS providers that have the SMB financial data necessary to underwrite a loan and that have a stake in whether the small business can successfully pay it back and use that loan to grow.

In this way, the small business, POS and lender are all connected, said Okeshola, so it’s time for everybody in this industry to play their part in smarter small business lending.

“At the end of the day,” he said, “all of us need to take a step back — the lenders and the small businesses. It’s high time we become more data-driven in the decisions we make.”