Despite government initiatives to connect small businesses to capital as quickly as possible, the U.S.'s Paycheck Protection Program (PPP) was wrought with confusion and inefficiencies. Even as small businesses are able to access capital, it's often not enough to endure the ongoing market volatility and uncertainty.
Traditional bank loans aren't always easy to access, either. For small- and medium-sized businesses in B2B industries like construction and manufacturing, the need for alternative funding products like asset-based loans and factoring could see an increase amid supply chain disruptions and B2B payment delays.
Understanding which financing products are most appropriate for B2B SMBs can be a challenge, however, particularly during high-pressure moments of slumping sales and revenue.
In a recent interview with PYMNTS, Commercial Funding Senior Vice President James Baugh painted a picture of the current climate for small businesses in B2B sectors in need of capital. With some traditional lenders pulling back from offering products like asset based loans and AR financing (factoring), and with B2B payment terms expanding throughout the supply chain, Baugh said it's critical that these companies not only have options, but are educated on which products are the right fit.
Earlier this month, Commercial Funding announced that it would be entering into the asset-based lending (ABL) arena to augment its existing AR financing solution.
They're similar products, explained Baugh, but certain companies will be better suited for one rather than the other.
"AR financing is definitely something that fits certain industries," he said, pointing to B2B sectors like transportation and construction as key targets. "It fits people who are newer in the lifecycle, like startups, or somebody who has had some challenging years."
Asset-based lending, meanwhile, is better suited for SMBs that have experienced a sudden period of high-growth, or a shorter-lived downturn.
This latter category can partially explain the company's entrance into the space, with Baugh noting that the current pandemic has caused an increase in the number of B2B SMBs experiencing a shorter period of revenue losses or a downturn.
Expanding the opportunity for third-party providers of these products is the fact that as a result of the cash flow struggles of many SMBs today, combined with market uncertainty, some of the traditional providers of ABL and AR financing — namely, smaller community banks — are largely pulling back from the market.
"There are risks that the banks are looking to exit because they didn't understand that their customers could be impacted by something like COVID," said Baugh.
For many small businesses with B2B business models, lengthening supplier payment terms and supply chain disruptions have added pressure on firms to access financing when traditional bank loans are unavailable. Baugh noted that even for SMBs that have secured a PPP loan, AR and ABL financing fits well to complement their cash flow needs.
An increase in late B2B payments behavior has further widened the ability for third-party service providers to step into the AR financing and ABL space. According to Baugh, traditional lenders still need to see consistent and steady AR turnover and 30-day payment terms in order to finance unpaid invoices, another factor behind banks' pullback from this space.
As such, Baugh said that he is "cautiously optimistic" about the market ahead. Despite the market disruption, he does not expect the coronavirus crisis to impact the way that Commercial Funding underwrites, instead viewing the pandemic as a rare, one-time event.
What will impact underwriting is an emerging technological landscape, with Baugh highlighting the opportunities in data integration with small business bank accounts and platforms like QuickBooks to enhance access to data and analytical capabilities.
B2B small businesses themselves are cautiously optimistic, too, according to Baugh, and ensuring that these firms have access to the financing they need to survive and thrive will be essential to maintaining that positive outlook.
"Customers are cautiously optimistic. People are seeing positive momentum," he said. "They're seeing customers return to purchasing again — not at the same level as it was pre-COVID, but they're seeing movement, and that gives them hope for the future."