Categories: B2B Payments

Small Firms Face The Downside Of Economic Growth

Corporate finance professionals are split on the future of the U.S. economy.

The Deloitte CFO Signals Survey was released earlier this month, and researchers found nearly all chief financial officers at large U.S. corporations expect the U.S. economy to slow down in 2020, although they continue to view the current state of the economy as “good.”

Separate research from TD Bank released last week, meanwhile, revealed half of corporate treasurers are not predicting an economic recession this year.

Whether a recession is ahead or not, businesses — and in particular, small- to medium-sized businesses (SMBs) — remain optimistic. The U.S. Chamber of Commerce’s Q4 2019 Small Business Index, conducted with MetLife, reached an all-time high for the quarter with 69 percent of surveyed SMBs saying they are in good health, and 59 percent reporting optimism for the future.

But economic strength and SMB growth aren’t without their challenges.

Gregory Woloszczuk, president and co-founder of SMB advisory services provider GMW Carolina, recently spoke with PYMNTS about the challenges SMBs face today despite a robust economy and opportunity for expansion.

The Talent Crunch

One of the largest hurdles they face today, he noted, is in finding and retaining talent.

“As the economy is heating up, attracting and retaining talented people” is one of the biggest challenges, he said.

Indeed, the strength of the U.S. economy and record-low unemployment rate has led to SMB owners struggling with a shrunken talent pool. And while the rise of the gig economy has expanded that pool, Woloszczuk said on-demand workers don’t benefit every kind of SMB.

For SMBs in need of short-term labor for a marketing project or equipment installation, gig workers can be immensely beneficial, he said. On the other hand, “if their business is brick-and-mortar, for example a restaurant or retailer, gig workers can have very little benefit overall because the ramp-up time for learning a POS [point-of-sale] system, or learning recipes, is difficult.”

Cash Flow Pains

Woloszczuk also emphasized that in a robust economy, while SMBs may be able to ramp up their sales and expand their customer base, the challenge of actually collecting payments from their clients continues to add a significant burden on their cash flows.

PYMNTS’ own research has found an estimated $3.1 trillion caught up in SMBs’ receivables in the U.S.

“Small businesses are notoriously not that strategic about looking at cash flow, whether managing receivables or payment terms, or making sure they don’t have outstanding balances,” Woloszczuk said.

The result of such a cash flow bottleneck can be a domino effect of future financial problems.

Among the largest is the friction SMB owners face when seeking capital. Often times, he said, SMB owners will wait until they are in a cash flow crunch to seek capital — for instance, when they’re facing a high volume of unpaid receivables — and that’s exactly the moment when banks won’t want to finance that business.

“Notoriously, small businesses will wait until they’re in trouble, and at that point, nobody wants to open up a line of credit for them,” noted Woloszczuk.

He added that in his personal experience, he’s seen SMBs forced to rely on personal credit cards for emergency funding, a strategy that has landed some entrepreneurs to declare personal bankruptcy. In other cases, he’s witnessed SMBs failing to pay their taxes because they’re in such a financial bind, ultimately forcing them to shut down.

“It’s the age-old saying: ‘Banks are only willing to give you money when you don’t need it,’” he said. “That’s still the case today; it hasn’t gotten easier.”

Rising Cybersecurity Risks

Phishing attacks and other cybersecurity threats continue to intensify for companies today, a threat that even a growing economy cannot mitigate. TD Bank’s recent report found that 40 percent of financial professionals surveyed agreed cybersecurity remains a top threat and their top operational challenge for the year ahead.

But this risk isn’t reserved for large businesses. Woloszczuk pointed to a separate analysis from Verizon published last year that found 43 percent of cyberattacks target SMBs. Exacerbating this risk is the observation that many SMBs are unaware this risk is so high, and as a result, said Woloszczuk, SMB owners continue to expose themselves in unsuspecting ways.

“You may have one computer to process payment and do email, which opens you up to more vulnerability,” he said. “Small businesses also have opened up their networks for free guest Wi-Fi, which also opens them up to exposure.”

Combining Tech With Education

There are simple ways SMBs can strengthen their position in today’s market and address some of their biggest pain points.

In cybersecurity, for instance, Woloszczuk recommended that SMBs separate their payment systems from the systems they use to conduct email correspondence. He also highlighted the importance of investing in automation technologies to support cash flow management and accounts receivable processes, as well as obtaining lines of credit or business loans before a company is in dire straits.

Many of the technologies available can quickly prove a strong return on investment, he said.

“It really is pennies on the dollar and can be beneficial,” he noted. “The harder challenge is the education factor for the small business owner to understand that, while they’re cash-strapped, another $150 a month could save them $10,000, or speed up their receivables.”

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The pressure on banks to modernize their payments capabilities to support initiatives such as ISO 20022 and instant/real time payments has been exacerbated by the emergence of COVID-19 and the compelling need to quickly scale operations due to the rapid growth of contactless payments, and subsequent increase in digitization. Given this new normal, the need for agility and optimization across the payments processing value chain is imperative.

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