Banks have largely ignored small businesses’ need for cash flow and receivables management solutions.
While several provide traditional cash management services—largely as an offshoot of their commercial banking value proposition—most do not have a solution for meeting their customers’ need for short-term financing.
While only 15-20% of small business have a small business loan, 60-70% value access to credit. The majority of these business seem to not want a traditional credit line or term loan. Rather, they describe the need for a line of credit that would be available to act as a reserve and buffer against occasional short-term cash flow gaps.
In most cases, the loan amount would be equal to between half and one month’s revenues. For example, businesses with annual revenues of around $500,000 would seek credit lines of between $20,000 and $40,000.
This unmet need exists largely because traditional small business lending models used by banks fail in this situation. This is driven by the high cost of manual underwriting and credit loss rates, the combination of which tends to make small business lending unprofitable. Banks are largely absent from the market for small-dollar loans for small businesses.
The stakes are quite high.
Oliver Wyman estimates that the total market for such cash flow and receivables management solutions represents annual profits of $2B. Further, 20% of small businesses would definitely or probably be willing to switch banks to access this solution, which represents a significant threat to a very lucrative banking profit pool.
New entrants have seized upon this unmet customer need to create a lending model that is based on the simple but powerful insight that the data describing a business’s cash flows can be a strong real-time indicator of that business’s creditworthiness. One source of data on a small business’s cash flows can be its merchant services account (if it is a card-accepting merchant).
Another source is the business’s primary checking account (whether the business is, or is not, a merchant). These new entrants are effectively disintermediating banks.
We recommend a two-pronged approach for banks:
Leverage areas where you’re differentiated
Banks have privileged access to cash flow data and an in-person distribution channel (branches); new entrants rely on partnerships to replicate these benefits.
Be honest in acknowledging what you need to build vs. buy/partner
New entrants have developed better technology platforms for underwriting and servicing, and banks may also be able to leverage partners who offer this bundled with their core product, e.g. payments processing.
Our detailed paper, “Helping Small Business Manage Cash Flow & Receivables”, discussing our recommendation is yours for the asking.