Why 2021 Is No Sure Bet For An SMB Rebound

As 2020 limps toward its exhausting conclusion, get ready for a massive rebound in 2021 — for consumer spending, for small- to medium-sized businesses’ (SMBs’) top lines, and for the U.S. economy in general.

Maybe not.

In an interview with Karen Webster, MerchantE Chief Financial Officer Shim Steinmetz cautioned that many variables are at play, which makes divining the future a bit dicey.

“I actually think that 2021 may not be a good year — I’ll be blunt in saying that,” he told Webster.

He noted that we seem to be in the midst of what might be termed a rolling industry recession marked by stubbornly high unemployment, sector by sector. Add to the mix the continued uncertainty of the election, the mounting death toll tied to the pandemic, and the murky horizon of a vaccine — and the recovery seems a way off.

“A significant percentage of American families have been affected by a trauma,” he said. “That trauma is just going to bleed into behavior at least until the beginning of next year. There can be an economic impact from that sadness — and a lack of spending.”

The muted outlook for the future comes against a backdrop, where businesses — large and small, across any number of verticals — are navigating unprecedented impact on cash flow.

The liquidity challenges are towering, he said.

“You cannot restructure when revenues go to zero,” he told Webster, adding that for a number of retailers and restaurants, “that’s probably the biggest liquidity crisis.”

That situation — where vanishing cash portends an existential threat — does not exist in other industries where, for example, airlines can raise money against assets such as planes, frequent flyer programs or even air traffic routes themselves.

For companies without those asset types to collateralize, said Steinmetz, managers cannot rightsize their businesses to compensate for the lack of cash coming into their coffers. Even cutting costs beyond the bone — say, a hypothetical 95 percent — still means that a company will lose money.

Where We Are Now

No surprise: Companies have had to pivot as a matter of necessity. Steinmetz mentioned restaurants as the most visible example of industry-wide pivots as they embraced delivery and takeout options in a collective bid to garner at least some sales.

At a high level — and with a nod to MerchantE’s own portfolio — Steinmetz said, “I’m impressed and excited to see how resilient the American economy is. In March and April, we saw a complete drop — a kind of shock and awe … and then, particularly for small- and medium-sized business, there was a sense of ‘I still need to work.’”

To get a sense of the rebound: MerchantE saw a drop in processing volume of about 15 percent in May, measured year over year, improving to 10 percent drops in June and flat in July.

“We’ve really seen a true V-shaped recovery in the business,” he remarked.

Business spend by companies is largely centered on customer acquisition — chiefly on marketing and PR. That’s a shift from traditional travel and entertainment (T&E), where people went to conferences or made sales calls.

FinTechs To The Rescue?

Of course, the gradual re-emergence of companies — and a tentative recovery of top lines — may need a bit of a helping hand, chiefly in establishing liquidity to weather the storm that’s still here. And although FinTechs have been heralded as a lifeline to help close the liquidity gap, Steinmetz said they’re not wholly the solution for SMBs.

Thus far, he told Webster, the tech-savvy upstarts like Kabbage have shown value chiefly through their own pivots, becoming distributors of Paycheck Protection Program loans to SMBs.

“All of a sudden, you had these FinTech platforms who had banking licenses, and they became the conduit for the government to get this money out to merchants,” he said.

And in the pivot of becoming an equity investor to a creditor — extending loans to corporate clients — FinTechs and banks have to craft new models. Steinmetz said that the “traditional” creditor mindset has been one of looking backward — say, across 12 months of operating history — to decide on loan covenants or restrictions. The coronavirus impact has wiped away the value of such lookbacks and necessitated that lenders think more like equity-owners and partners investing in the future — with input from SMB borrowers about how they plan to recover.

“FinTechs, if they are going to be good corporate citizens, need to loosen their historic credit lens and adjust for these shocks to the system,” he said

But although FinTechs may exist as major players in the economy, in job creation, they do not serve — according to Steinmetz — as enablers of innovation and new business formation in the ways that venture capital and traditional banking communities do.

“It’s not the responsibility of the FinTech sector to get businesses up and running,” he contended. “It’s the banking sector’s responsibility to fund growing businesses.”

Regardless of the business sector, it is critical that businesses have and understand data related to daily cash flows in and out of accounts — and that’s where FinTechs come in. Real-time access to accounts payable and receivables ebbs and flows via online platforms, and application programming interfaces (APIs) can help firms navigate any number of headwind shocks.

Where We Go From Here

As to who survives the current economic shakeout, Steinmetz said much depends on individual verticals — and the extent to which those sectors are prepared for the permanence of the digital shifts now underway.

“There are a lot of people that have, over the last 25, 30 years, been building small businesses that will not come back because they did not have the ability to manage liquidity … That’s just reality,” he said.

There will be retailers and restaurants that will not come back, and even some small regional airlines will disappear. Perhaps surprisingly, he said, malls will be a staple in the post-pandemic world as so many of us will be happy to go places to shop in person.

As we move through the myriad challenges extant now and to come, Steinmetz offered a general rule for firms to live, survive and thrive by:

“You can be a startup and sell $50 million of product, but if you’re not going to collect that for two years, you’ll never be around to collect it. You’ll be out of business. The nuts and bolts of business is to understand your cash flow.”