As we head into election seasons in both the UK and the US, there is one mantra that you can guarantee every politician no matter what their political leanings will say, “small businesses are the backbone of our economy.” Stating this position is an easy win for politicians in what is currently a very divided political climate. However, while the rhetoric will be rolled out, it will take time before action and outcomes filter down to small businesses. This however, is time that small businesses across the globe simply don’t have.
This really should worry all of us, as the fact is that small businesses are not so much the backbone of the global economy but are virtually the entire global economy. With billion-dollar business often grabbing the headlines, it can be easy to overlook the size of the small business sector. The reality is that small businesses make up the majority of businesses in operation. For example, the latest UK government figures for small and medium-sized businesses (classed as those with 250 employees or less) account for 5.7 million businesses in the UK. Or to put it another way 99 per cent of all businesses currently in operation. Unsurprisingly this also means that small and medium businesses are the biggest employers too.
The big numbers don’t stop there sadly. Despite 670,000 small businesses being launched in the UK each year, 60 per cent of them will become insolvent in just three years, while 20 per cent won’t even see their first birthday. This level of attrition is scary and for the global economy very damaging. When a small business goes under it can have a knock-on effect to other connected businesses and of course its employees too. So, given how important small businesses are to the economy, what can the fintech sector do to help?
How can we help?
The reality is that to help small businesses it is going to take both the public and private sectors coming together. Clearly, politics has a big part to play in helping small businesses, with issues such as business rates, tax and rent being just some examples.
Other areas though can be solved by our fintech community. In fact, fintechs are in a prime position to solve one of the biggest problems for small businesses, that of cash flow management and easy access to finance. Given the mismatch between banks having to offer funding that is often well above what many small businesses need or can afford and the difficulty and hassle of applying for funding, there is a gap that fintechs can close.
Such is this problem that in 2018 less than a quarter of small businesses felt credit was readily available. However, by working in with established small business services providers such as payment processing companies and online sales platforms, fintechs can help improve access to funding.
By combining forces, fintechs and service providers can even help with issues such as admin levels. Connecting funding to card takings means that payments are taken directly from each card transaction. This, therefore, helps reduce admin levels as payments are made without them needing to check account balance levels or authorise a transfer.
This system of taking payments also helps small businesses further as they only get made when the business itself is earning. This can be especially helpful for businesses which see high seasonal demand. For example, a restaurant or cafe could take out funding for as little as £2,500 to buy extra stock ahead of the Christmas season. Payments can then be taken as agreed upfront percentages on each card transaction to cover this cost. If there is a slower day or week due to bad weather for instance, then this won’t be an issue as Payments are only taken when the business itself is taking card payments. In addition, there are no hidden costs for small business owners to worry about..
This use of technology and data not only reduces admin but also opens up a whole world of possibilities. With service providers collecting data on the size, number and frequency of card transactions, they have an incredible window into what sort of funding a small business might need, when it might need it and how easily it can pay it back. In fact, such is the power of this data that small businesses can even be pre-approved funding without even needing to fill in a form. By pre-approving small businesses for funding, they can quickly access funding and have it in their account instantly, helping both remove the worry and hassle of applying for bank funding.
By combining the scale and trust of a large established small business service provider with the flexibility, technology platforms and access to funding in the size and type that small businesses need, the UK fintech scene can help service providers offer funding products that small businesses desperately need. Not only does this help small businesses to grow but also ensures the relationship between service provider and small business customer goes much deeper while building on the trust that already existed.
What about the rest?
Beyond funding however, we are already seeing from the rise of banks such as Tide, Starling and Mettle that new, more flexible business bank accounts are being launched that offer features that the established banks will take time to catch up to. Being able to quickly and easily manage accounts via an app or receive notifications when a payment is received or made are small changes, but for small business owners can have a hugely positive effect on how they operate.
The payment space too is seeing plenty of innovation from fintechs. Stripe, Square, Worldpay and Adyen are all offering services and solutions that are tailored towards the needs of small businesses. By providing features such as analyses of payment data and easy invoicing, small businesses can gain a deeper understanding of their own operations, keep track of stock level while also reducing their levels of admin.
Beyond technology though, as a community, the fintech sector needs to continue to be vocal in supporting regulations and best practises that will help grow and nurture small businesses. At Liberis we’ve made a great start in supporting our small businesses but more will be needed from our politicians and supporting industries like utilities and wholesalers that also supply our small business communities. As the backbone of the global economy, it is in everyone's best interests to have a thriving small business sector.
Rob Straathof, CEO, Liberis Group