Derik Sutton from Autobooks and Currencycloud Discuss How Cash Flow Problems are a Major Issue for SMBs

Cross-border payment platform Currencycloud notes that financial innovation is now taking place at a “record pace.” However, when it comes to smaller businesses, you must first address their cash flow problems, because “nothing else matters” (if you can’t solve this issue first).

Derik Sutton, VP of Marketing at Autobooks, recently discussed (with the Currencycloud tearn) why “cash flow is everything when it comes to small businesses.”

Sutton talked about the current cash flow problem for SMBs and how Fintech firms may have “squeezed out banks for deposits.” He also went over the different incentives for banking institutions and Fintech companies.

As noted by the Currencycloud team:

“Small business has been traditionally underserved by financial institutions, but in many ways, COVID-19 has accelerated existing issues. And while everyone has touted the V-shaped recovery of the stock market, many SMBs are facing a K-shaped recovery — with just as many businesses are going under as those bouncing back.”

Many SMBs depend heavily on face-to-face or in-person interactions for their business models, so it’s understandable that the Coronavirus crisis could lead to serious disruptions, the Currencycloud team wrote in a blog post.

They added that you’d think the main priority for these SMEs would be PPP small business loans. But that’s not the data Derik has found, the company confirmed. Their biggest or most critical issue is being able to maintain adequate cash flow — which is “already precarious even in the best of times.”

Sutton added:

“As an industry, anything we can do to make it simpler for a business owner to get paid is the biggest benefit we can provide.”

In survey data covering around 600,000 US-based SMBs, it turns out that “the median cash reserves for small businesses cover about 27 days,” the Currencycloud team revealed. They pointed out that this isn’t an “ideal number” by itself. They further noted that it takes around 27 days (on average) for small businesses to get paid on a low-end invoice. Currencycloud also claims that this number is “often much higher, stretching into 40 or more days.”

They further revealed:

“Most businesses are woefully behind the curve when it comes to cash flow. So, sure, PPP loans were a huge priority in the face of lockdowns, but cash flow — just as it was before the pandemic — is the ultimate priority for small businesses. This perpetual concern for small businesses often presents a problem for traditional banks.” 

As explained by Currencycloud, traditional banking meant that a client had the option of paying with cash or check — which would usually mean sending invoices and then waiting for a check to arrive in the mail (and there was usually just one way a company could get access to that capital, which was by physically depositing the funds into an account).

However, Currencycloud points out that digital platforms and services have changed consumer behaviors in numerous ways. For instance, consider the emergence and rise of payments Fintechs like Square or Paypal.

Now, the consumer is “dictating methods for payments,” the Currencycloud team claims. They added that this means “the average small business is getting paid in 12 or more different ways.”

For traditional banks, this might be a problem, according to Currencycloud.

They added:

“More often than not, they offer 2 verticals: basic banking and treasury or cash management services. The first is too simple to cover the expanding financial needs SMBs are facing, while the second has features that are far too complex (and expensive) for the average SMB.”

Sutton points out that “whoever controls the deposit, controls the relationship.” Meanwhile, Fintech firms might be better positioned to address these challenges since they’re usually “geared toward frictionless and affordable solutions in the space,” Currencycloud noted.

They believe that “if banks want to succeed in this sector going forward, they need to enable businesses to do more business online and get paid online easily and affordably.”

They added:

“If traditional banks can’t control the deposit, it will be near impossible to keep hold of customer relationships.” 

For Derik, it’s “not too late for banks.” However, they must be “more willing than they historically have been to strike the right partnerships with Fintechs more able to provide these services than they have been,” Currencycloud notes.

Currencycloud also mentioned:

“One of the biggest challenges for traditional banking when it comes to overcoming this is the different incentives behind legacy banks and Fintechs. Traditional banking centers on managing risk and earning a return in a way that is perfectly measurable. This means slow, predictable growth. This means safe and reliable decision making….Fintechs are often VC-backed, bootstrapped, and in a hurry. Their investors want to see growth — they want to see money being pumped back into the business to fuel that growth. The incentives are geared around growing as fast as possible, getting access to more money, and reinvesting it in the business.”

Derik thinks that this schism will be “the defining principle in the way financial services develop over the next few years.”

Currencycloud concluded:

“Regardless of the discrepancy between incentives, the core of the matter is unchanged. Whether traditional financial services or fresh-faced Fintechs, if these companies are to capture the SMB market, one priority stands above every other: Solving the SMB cash-flow problem.” 

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