The overwhelming majority of U.S. businesses are small businesses — close to 90 percent of U.S. companies employ fewer than 20 people. Of those, four in 10 generate less than $100,000 in annual revenue. We’re talking about roughly 29 million small companies that collectively represent 99 percent of American businesses, from candy stores to indie contractors. It’s a wondrous story of economics and human ingenuity. Too bad they’re struggling to get paid.
As reported in The Small Business Guide To Rapid Settlement Report, a PYMNTS and Mastercard collaboration, the biggest problem facing America’s vital network of small businesses is money — or more accurately, the speed of money.
Over 60 percent of respondents tell PYMNTS their operations begin to experience negative effects of poor cash flow within just one to seven days. Delays run the gamut from “check’s in the mail” to waiting for ACH transfers to become available.
Whatever the reason, payment lags pose an existential threat to millions of small businesses without ready access to financing. This is changing, and not a moment too soon.
Get Paid, Get Made
Lack of access to capital explains why more than 57 percent of all small to medium-sized businesses (SMBs) surveyed are interested in switching to providers that offer rapid settlement solutions. It’s a service for which they’re willing to pay small fees or percentages, which in turn can free up more of the $4.4 trillion spent by small businesses and their employees annually. Rapid settlement has the potential to create a number of positive economic effects, firstly, improving financials for indispensable SMBs.
Everyone knows the frustration of slow-moving money, but for SMBs it’s a matter of actual survival. Maintaining good supplier-vendor relations, taking care of employees, reinvesting in the business all require access to capital, and for most SMBs that’s not a bank loan: it’s about collecting what they’re already owed, but faster. The inability to do so causes a ripple effect of problems like paying suppliers too slowly and, in some cases, interfering with timely payroll.
Compare that to the 63 percent of SMBs surveyed that use rapid settlement systems — and forecast revenues to increase by at least 10 percent as a result. Companies using rapid settlement solutions uniformly report better cash flow, higher levels of reinvestment — and presumably improved morale inside small companies that find themselves on a better financial footing.
Faster payments for SMBs are happening in a variety of ways, with credit cards and PayPal topping the list as number one and two, respectively. A preponderance of paper check and cash payments are keeping SMBs in the slow-moving traffic lane, but they don’t have to stay there anymore.
The True Cost of Slow Money
Depending on whether the small business involves physical locations or is online only, different payment methods and speeds have differing effects. PayPal is the prime revenue source for merchants that do most of their selling online. Firms that derive under 40 percent of revenues from online sales tend to be the most dependent on paper checks and cash, which only serves to exacerbate existing cash flow difficulties. It’s a wakeup call for SMBs to digitize as much of their supply chain as possible, while removing all barriers to digital payments for customers.
It’s a serious situation. As the report states, “Firms with lower revenues unsurprisingly tend to experience the impacts of delayed settlement more severely, with 27.1 percent of those in the $500,000 to $1 million bracket saying such delays put them at risk of losing their businesses.”
That’s an unacceptable risk for any business owner, small or otherwise.