We all know a little something about SMBs, from shopping on “small business Saturday” to reciting anecdotes about how small businesses are the backbone of the U.S. economy. We admire small business owners, and we feel good when we support these businesses, because we know it can be hard out there.
On the other side of the coin, banks also want to support small businesses and are constantly looking for new products and services to offer these businesses. Banks know small businesses are often forced to fit processes designed for either the bank’s enterprise customers or individual consumers. Technology and processes don’t lend themselves to servicing the SMB.
Within the realm of credit and financing, there isn’t a staple product that’s a particularly good “fit” for small businesses. Working capital relative to B2B payments and invoicing for SMBs has evaded the banking sector for far too long. Certain market and business dynamics have paved the way for a much-needed change. It’s time to tap into small business banking to capitalize on the growth opportunity.
Market Factors Driving Growth
Small business banking is an underserved market. Annually, small businesses extend over $5 trillion in trade credit to their business customers with financial services acting as an intermediary for less than 10% of these extensions.
More specifically, according to the 2023 Economic Report by the National Small Businesses Association (NSBA), there was an increase over the prior year among small-business owners who indicated the biggest challenge facing their business was a lack of available capital.
The report also asks if capital availability is a problem to which the highest response given is that small businesses will be unable to grow or expand operations.
Even in our own recent small business survey, we found something similar: over 50% of respondents indicated they consider accounts receivable and collections a top business concern.
There’s no question that the SMB market is ripe for financing services, but maybe not in the way we traditionally think. BAI believes there may be a small increase in loan demand from SMBs this year, and that the SMBs’ primary bank will receive most of this potential business.
But what if we think bigger – beyond loans or deposits? How about an evolution of small business products in the market that embraces this growth opportunity (for both the bank and the SMB)?
The Hypothesis: Growth is Possible
Consider a platform specifically designed for B2B invoice payments where banks can deliver and fund a new, secured, structured financial service product. Consider the bank’s SMB customers (small business merchants/suppliers) having the ability to receive real-time, risk-free and debt-free invoice payments; the same benefits of card merchant services. Consider that the merchants’ buyers retain the value of trade credit/accounts payable at the same or better invoice terms.
We’re all accustomed to consumer transactions using credit cards, which effectively eliminated receivables on behalf of the seller. But why has this type of product not existed for SMB merchants? How can banks expand their small business products profitably, quickly, efficiently and safely into the much larger, untapped B2B trade credit market?
What Banks Want
In the most basic sense, banks are looking to balance growth and risk. The stakes are elevated when certain conditions persist such as rising interest rates, high inflation and the noise around recent bank failures.
In fact, many banks might be asking themselves right now how to attract and retain deposits (an increase in interest rates has led to more deposit outflows) and they’d likely put retail accounts and those tied to small businesses at the top of their list. This is a good start, because it likely reflects their desire to expand the current customer base to include more SMBs.
Besides pursuing a new market, the other classic way to grow is through new products. The added benefit of this approach is an increase in customer loyalty. Yet, the core issue is that the “right” financing product for SMB customers hasn’t really existed, until now.
If it did, banks might be inclined to design such a product to include benefits such as:
- Data-driven insights from highly predictive payment transactions
- Predictability in overall revenue amounts and timing
- “Fee” income generating instead of a standard loan or credit facility
- Low risk with controlled utilization
- Insurance credit enhancement
Whether or not a bank has a strong small business customer base, real growth will come through these types of innovative, new product offerings that address SMB pain points head-on.
What SMBs Want
Let’s put aside the fact that all small businesses are affected to some degree or another by certain uncontrollable factors, such as:
- High inflation and materials costs
- Delays in the supply chain
- Increased hiring and labor costs
Fortunately, solving problems in the realm of payments and invoicing is attainable. In our recent small business survey, over half of small businesses (56%) indicated they receive late payments. This is a problem worth addressing.
Relative to working capital, SMBs want:
- to get out of the lending business; eliminate risk
- to stop worrying about their customers’ ability to pay or the timing of payments
- to strengthen their balance sheet (to eliminate receivables without debt)
- to accelerate their cash flow and pursue new businesses (to optimize their growth potential without adding debt)
- to eliminate receivables and trade credit administration, inclusive of underwriting, billing and collections (while maintaining the relationship with the buyer)
A cash flow crunch is the small business owner’s worst headache. Most just simply want to focus on their core business function, take care of their employees, and not stress about things when they go home at the end of the day.
The Hidden Opportunity
Putting it all together, to help small business thrive, banks need an additional SMB-specific offering that doesn’t depend on the SMB qualifying for traditional lending. Instead, banks need a mechanism to allow their SMB merchant-customers to maintain control of the financing to their buyers.
It works much like traditional card merchant services, but maintains all trade credit benefits buyers require. Banks would pay their SMB customer (the seller or merchant) 100% of the invoice amount, less a flat fee.
Much like credit cards changed the game in traditional consumer financing, a solution like this in the hands of savvy banks would not only propel them forward as a forerunner in technological innovation, but also take customer experience to a whole new level by freeing up working capital for their SMB customers in a modern way.
Who knows, it might even mean taking part in raising that pedestal on which we put our U.S. small businesses. So, what if these trade credit rails were already built? What if the technology already existed? We can tell you they do exist and are primed for payments. So now it’s up to the banks to decide if the risk is worth the reward.
