Merchant Innovation

The Store Front Holidays

People are always looking for ways to “predict” the future.

Throughout history, the allure of knowing “what’s next” has spawned a range of methods to measure how likely – or not – it is that something will happen in the future. Some are rooted in folklore while others use sophisticated analytics to increase the likelihood that their predictions will prove true.

Nowhere is the urge to predict the future more intense than with regard to the economy – everyone, everywhere just wants to know how well it will perform. And, just like every other predictive analysis out there, there are any number of techniques that claim to make economic predictions precise.

But, if you want to really know how well the local economies are doing, look no further than “store front” businesses, says James Mendelsohn, CAN Capital CMO.

"Not all businesses are created equal and these businesses are a vibrant part of every economy,” Mendelsohn tells MPD CEO Karen Webster. “They are also emblematic of the types of businesses people think about when they want to start their own business. They think of opening a shop, starting a restaurant, owning their own salon, and all that requires capital."

Store front businesses — the ones that line the main streets of towns across the U.S. — make up an important and vital piece of not only the national economy, but also the local economies in which they operate. There are 4.3 million store front businesses in the U.S. and the Store Front Business Index measures the health of these businesses – and therefore the vitality of the local economies in which they operate by measuring three drivers of store front business health: wages, employment and sales.

The challenge for these businesses (as is the challenge for all businesses) is access to the capital they may need to smooth lumpy cash flow, and invest in growing their businesses. The inability to access capital easily, a problem made more acute during the financial crisis, has given rise to a variety of alternative lending sources, to fill the gap.

The Fed has taken an interest in these businesses, too, and recently released a study examining the economic resiliency of communities that have sustained disasters. What the study found, not completely unexpectedly, was that access to capital was one of the main determining factors in a community’s ability to rebound.

"The Fed has done something really interesting here,” notes Mendelsohn. “We know that access to capital is the No. 1 challenge for small businesses; it’s what allows them to expand and grow and hire. Storefront businesses, which we pay special attention to, are even more vulnerable because these are often the businesses that need to stock inventory, that have to operate at different locations, serve customers and pay employees through payroll."

The Fed’s findings are that communities with access to capital have a much greater chance of withstanding and coming back after disaster strikes.

"The Fed was able to pinpoint — and they did this at the county level which is extremely granular — counties where businesses could borrow were much faster to recover and much faster to grow,” observes Mendelsohn. “This just restores how important it is to get capital into the hands of small business owners because they can continue to drive their own growth, which contributes to the overall growth of the economy."

He goes on to note “we had a number of businesses that came to [CAN Capital] in the aftermath of [Hurricane] Sandy for capital and we were able to give them the capital they needed to re-open. And keep their business moving and importantly serve the other people in their community.” This ability to access capital when it’s needed most is vital to restoring a local economy and aiding the community after a disaster.

But just because a business has the ability to repay a loan doesn’t automatically mean they gain access to the capital they need to sustain and grow their business. “This is always the challenge,” notes Mendelsohn. CAN Capital, who helped to define this finance category, understands the unique challenges in making loans to small business owners.

"From the bank’s perspective it can be very inefficient to make smaller volume loans,” says the CMO. “The underwriting can be challenging — you have to understand the performance of the business, not just the credit profile of the owner. And that’s one of the reasons why CAN Capital helped pioneer this finance category, in order to more efficiently get capital in the hands of the businesses."

Small businesses aren’t just important parts of a local economy’s recovery. In general, as Mendelsohn remarks, “It’s a great time to be a business owner.”

Asked by Webster which regions and sectors are performing particularly well, Mendelsohn identifies the West, with results stemming from the building craze, which he says “makes sense as those regions are recovering a little bit faster and the base economy is growing more strongly."

And with the holidays upon us, the news only gets better, Mendelsohn points out, for small businesses, which are an increasingly important part of the holiday retail equation. While large box store retailers like Macy’s are forecasting lackluster holiday earnings, analysts say the outlook is rosy for small businesses this holiday season. It seems that in an era when consumers crave personal attention, custom experiences and a sense of uniqueness, small store front businesses are in a prime position to capitalize.

"Small businesses, and especially retail, are finding ways to connect with their customers, deliver more unique and interesting products and more personalized service,” concludes Mendelsohn. “What we hear from owners in that segment, the more they care about their customers, the more connected they get to them with digital and social media, the more results they’re seeing."

Last quarter, the growth of store front businesses outpaced GDP by a factor of three. And, that is perhaps the best predictor of all of the health and vitality of the local communities in which they operate.

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