Beating The SMB Cash Crunch

Many firms live the equivalent of paycheck to paycheck — with less than a month’s worth of cash in the bank. Financing receivables offers small and mid-sized firms a working capital lifeline in a world where banks are skittish lenders, TradeRocket’s Jeff Gapusan, head of capital markets, told PYMNTS in the latest installment of PYMNTS Topic TBD.

What does it take for a cash crunch to become a cash crisis?

About 27 days.

As the JPMorgan Chase Institute noted in research released last month, the median small business has enough cash on hand to survive — without any new inflows — for just under a month.

That’s hardly financially sound and shows the fragility of SMBs, among the more important drivers of the United States economy and job creation, as they, in essence, live paycheck to paycheck (albeit as a corporation, not an individual or family).

The average cash balance in the till on a daily basis comes to about $12,100, a somewhat alarming number that demonstrates just how small the cash cushion is that small businesses have in the event of a fiscal emergency — or in the event that they want to expand and take advantage of new business opportunities.

In the latest installment in the PYMNTS Topic TBD series, Karen Webster and TradeRocket Head of Capital Markets Jeff Gapusan talked about whether this was a sign of a shaky business or a sound business with liquidity needs.

Gapusan believes it is more the latter than the former.

“Through the course of discussions with prospects and clients, we can see that there are cash needs, and there are also needs for liquidity, which could be easily unlocked for most small businesses,” he explained, if they had the same access to the liquidity tools that their larger counterparts have.

Traditional lenders, such as banks, said Gapusan, have been hesitant to lend (to smaller firms) as they face constraints on how much capital they can put to work, in tandem with regulatory requirements. They have to keep a certain amount of capital on the books for liquidity and solvency themselves. This reticence of banks to lend, said Gapusan, “leaves out the middle-market companies that are just as hardworking and [offer the same] economic benefits for the country” in terms of hiring (as much as 50 percent of all hiring in the U.S.) and contribution to GDP.

For smaller firms, said Gapusan, banks tend to look at the personal credit of the business owner and founder as a key factor in determining creditworthiness. As businesses scale, he continued, there are thresholds that need to be crossed before banks start to part with loans, and that threshold can be daunting, as firms must scale to to as much as $15 million–$25 million in revenues. But lending gaps, he said, can continue even beyond that level, with banks finally finding a comfort level with enterprises as large as $500 million–$1 billion in sales.

And yet, companies falling below that critical mass do have assets on which they can rely, said Gapusan, notably purchase orders and specifically purchase orders from large clients. TradeRocket, he said, seeks to unlock the value in those orders and invoices, especially as they may come from large buyers among Fortune 500 or global players, with no real risk to fulfillment of those invoices being paid.

“The buyers of goods and services,” Gapusan told Webster, want to “extend payables,” but the smaller firms that are doing business with those larger firms want to shorten their days sales outstanding. Trade financing (or financing or receivables), he said, leverages the transparency of the larger firm’s relatively stronger balance sheet, and thus, for the institutions funding the transaction, said Gapusan, “there is a higher degree of probability” of getting paid, while enjoying a higher risk-adjusted return on capital.



The PYMNTS Cross-Border Merchant Friction Index analyzes the key friction points experienced by consumers browsing, shopping and paying for purchases on international eCommerce sites. PYMNTS examined the checkout processes of 266 B2B and B2C eCommerce sites across 12 industries and operating from locations across Europe and the United States to provide a comprehensive overview of their checkout offerings.

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