Working capital remains elusive for small- to medium-sized businesses (SMBs). The risks taken by entrepreneurs with a product and a dream can be staggering, and they often don’t end happily. It’s a reality that makes financing those dreams both a challenge and a catalyst for alternatives.
In a discussion for PYMNTS’ new SMB TV series, Karen Webster hosted Tasia Ford and Paul Ford, co-owners of Big Red’s Hot Sauce; Connie Evans, president and CEO of the Association for Enterprise Opportunity (AEO); and Bernardo Martinez, vice president of global merchant lending at PayPal, where the topic of working capital access for SMBs exposed the human side of this dilemma.
Tasia and Paul Ford told a story that’s familiar to bootstrapping founders. A high-paid driller by profession, Paul Ford was turned onto the hot sauce passion by a friend. After making a few batches and giving free bottles to co-workers, he got his first order for several cases. Before long, sales were in high demand, and he quit his drilling job to go full-bore into hot sauce.
Their problem wasn’t product or demand; it was access to capital. Turned down for a business loan, the Fords put their life savings into establishing Big Red’s. That was a big risk.
Happily, it’s worked for Big Red’s since 2011, but the Fords’ tightrope walk illustrates a common problem, especially for people of color seeking loans through traditional channels.
Evans said the Fords’ experience with banks is common, as most SMBs served by the AEO are seeking loans of $250,000 or less.
“Banks don’t seem to think that a $250,000 loan or less is worth it to them,” she said. “It’s too costly, and these business owners don’t have the collateral and other kinds of documentation and assets that traditional financial institutions are seeking.”
Heading up PayPal’s merchant lending program, Martinez echoed those concerns, saying: “The story for Paul and Tasia is really at the core of why we’re doing what we’re doing at PayPal. The reality is that capital access is roughly a $1 trillion dollar problem around the world.”
Reinventing SMB Underwriting
PayPal is reframing merchant lending by scoring on metrics that banks and financial institutions don’t have handy: the flow of sales and payments these SMBs generate from its platform.
“What we’re doing right now is looking at different types of information that otherwise was not present,” Martinez said. “That’s really the core issue that we have been able to solve, that gap, and being able to provide, to customers like Paul and Tasia, quick access to capital.”
That ability to use sales insights for underwriting business loans is PayPal’s superpower, and it goes further, as he added that “the landscape is changing, and companies like PayPal can help you not only set up your payments but also help with your invoicing” to improve cash flow.
Evans interjected that cash flow makes or breaks SMBs, which makes the Fords’ 11-year success story even more impressive, while showing, as she said, that “being able to have the kinds of partnerships and relationships Bernardo talked about is critical because, again, more than anything else, cash flow takes out these small businesses.”
And Paul Ford added that “even when you get capital, you have to have a plan for the capital.” For Big Red’s that might mean having funds for 30 pallets of glass bottles during the holidays instead of the usual 12.
Tasia Ford said operating in multiple channels — online, direct-to-consumer (D2C), wholesale, retail, events — helps square the cash flow equation because “if I have nothing but net 30s, that can hurt your cash flow, but if I can balance it out, and I have retail coming in as well as wholesale accounts, it can provide a level of comfort and a bit more security.”
Digital data captured in a commerce platform goes a long way here. Martinez said the sales data that SMBs need to make their case is often in disparate systems “that is difficult for the small business owner to capture and provide to a financial institution. The beauty of PayPal Working Capital is you get the loan, and you set up a repayment based on your cash flow” within PayPal.
On Staying a Student
The Fords make an ideal case study for SMBs seeking growth capital in that they’ve diversified sales channels, done diligent bookkeeping, and engage in routine planning for the future.
Also giving kudos to the Fords as SMB operators who are doing all the right things and seeing the payoff, Martinez said: “People underestimate planning. Connie mentioned a lot of things that were important, but I’ll stress the importance of planning. Planning takes patience and perseverance, and when you get [it right], you end up having a much better outcome.”
Tasia Ford capped the conversation, saying: “When you educate yourself and become more knowledgeable about the world around you and how business works, it gives you the confidence to step into an office and apply for something that you wouldn’t have if you didn’t have the expertise or the knowledge. I would say, ‘Stay a student.’”