Fintech has been a major disruptor in the financial world over the last few years. Their promise of quick access to funds available at your fingertips has changed the landscape of commercial lending. Perhaps the most attractive part of it is that everything is done seamlessly online. So it would be reasonable to assume that as millions of Americans are under stay-at-home orders, Fintech should be the go to source for funds to keep struggling small businesses from collapsing. However, it is turned out that the major Fintech companies are doing the exact opposite. Instead of providing the access to capital that small businesses are desperate for, they instead are shutting down their operations altogether.
A prime example of what is happening in the Fintech world is perhaps one of the largest and most well known lenders in the Fintech arena, Kabbage. Not only is Kabbage not providing Paycheck Protection Program (PPP) loans under the CARES act, they have completely stopped giving out loans altogether. The only thing that they are offering small businesses these days is a platform to sell gift cards on which they claim they will not profit from. But small business owners aren’t alone, Kabbage is also furloughing most of their employees and completely shutting down their office in Bangalore, India. A company that has received billions of dollars from investors, not only is turning its back on its clients, but also on its own employees.
Even more surprising is the fact that on March 10th, Kabbage’s CEO and founder Rob Frohwein suggested a three week lockdown for the country. While certainly he was correct about a lockdown being needed to stop the spread of the virus and flatten the curve, he also believed that it would be a good thing for small business. He wrote “my hope is that a plan like this one saves millions of lives and saves millions of businesses – many of them small businesses that cannot afford three months, a year or even potentially longer exposure to this threat. Small businesses are most at risk during long periods of disruption. We need to avoid this as small businesses account for more than half of the non-farm GDP in the United States and two-thirds of all new jobs.” While he did argue for only three weeks, and not months, given that China has been locked down for over three months, it is pretty unrealistic to expect things would go back to normal after only three weeks. However, here we are three weeks in, and for some parts of the country even less, small businesses are struggling to stay alive and Frohwein’s company has already stopped giving loans. When states actually decided to follow his suggestion that he claimed would be good for small businesses, he decided to stop supporting small businesses. Clearly large Fintech companies like Kabbage do not understand, or perhaps don’t even care, about the needs or success of small businesses.
Other lenders in this space are also shutting down operations. Two of the more popular Fintech companies to put new loans on hold and to stop allowing existing clients to draw on their line of credit are Fundbox and OnDeck. However, they certainly aren’t alone, and the few companies out there still giving loans are restricting funding only to certain industries such as the grocery and medical industries. For companies in hospitality and other industries that have been shut down, there simply aren’t any options available. At a time when small business owners need funding the most, Fintech is not providing their customers with access to the funds they desperately need.
To make matters worse, for small businesses that already have a loan or line of credit with a Fintech company, they will be unable to look elsewhere for funding as the Fintech companies are holding their assets as collateral. Unfortunately for small business owners, there is nothing they can do about this since the law protects the Fintech companies in a situation like this. To further add insult to injury, these Fintech companies, including Kabbage, will continue to make daily or weekly withdrawals from the bank accounts of small businesses that no longer have any revenues. This of course is the price to pay when we allow algorithms to make major financial decisions in place of humans.
Another type of Fintech is supply chain financing, where C2FO is a leader in the space. C2FO effectively works as an intermediary between vendors and their customers. If a customer is willing to pay an invoice early, they will submit it to their vendors via C2FO and the vendors will have the ability to offer them a discount in order to get paid that same day, rather than wait until the invoice becomes due. It is then up to the customer to either accept or decline that offer, and if they decline the offer the vendor can offer a larger discount the following business day. In theory it’s a win-win situation for both vendors and their customers. Vendors get paid earlier and oftentimes the cost is a little bit less than if they factored the invoice, while cash rich customers get a discount on their merchandise. C2FO doesn’t make commissions facilitating these discussions, and the funds do not pass through their accounts, they make their money through a monthly service fee from retailers who choose to use their platform.
However, where supply chain finance fails is in a situation like the current coronavirus pandemic. Many cash rich customers no longer have positive cash flow. With their stores having been closed for several weeks, many of these companies have furloughed or laid off employees, they’ve stopped paying rent, and they are extending the terms of their invoices (regardless of whether or not their vendors approve). In the clothing industry, due to the fact that merchandise is purchased a season in advance and it isn’t going to be able to sell this year, many retailers are requesting very large discounts along with extended terms from their vendors. In other words, major retailers aren’t submitting invoices to C2FO for early payment, or if they are, they are requiring extremely large discounts. As a result, companies that have been relying on supply chain finance for the last few years are finding that immediate funding is either no longer available or is too expensive.
Furthermore, for vendors who saw supply chain finance as a way to avoid needing credit insurance, now they are stuck with receivables for customers who may be struggling financially, and depending on how long they are forced to remain closed, may even need to file for bankruptcy. We already saw this sort of activity happen in the months leading up to Toys’R’Us’s demise in 2017. Toys’R’Us had partnered with C2FO to provide vendors early payment, and customers who wanted to receive early payments in the months leading up to the initial bankruptcy were being forced to give discounts of 25-50%. To make matters worse, after Toys’R’Us filed bankruptcy, these payments would have been considered preferential payments and the bankruptcy court would have demanded they get returned. As major retailers are forced to stay closed longer, there is a very real threat that we may see a lot more of this.
Shockingly, C2FO is trying to advocate for small businesses by arguing that major corporations should get government bailouts. According to their data, small businesses around the world have $16 trillion in open receivables, and if they received payment for these receivables today, it would help them survive this current crisis. While these funds would help small businesses, who don’t already get an advance on their receivables, to survive the next 30 days, it will do nothing for these small businesses a month from now when they are still not getting in any new orders. Without any orders, they will have no receivables, and this type of funding will no longer be available Furthermore, their theory is that the large corporations could use these bailouts to pay their suppliers, the reality is that this has never been the result of government bailouts in the past. The bailouts in 2008 and 2009 worked wonders for the banks, but did nothing for the people who lost their homes due to foreclosures.
Even if these major corporations used these funds properly and paid off receivables owed to small businesses, it wouldn’t help small businesses who sell to other small businesses. At DSA Factors our clients sell to both major retailers as well as small businesses. Our clients, all of whom are small businesses, do approximately 55% of their volume with other small businesses. Another 28% of their volume comes from major retailers like Amazon, Target, Walmart, and other essential businesses such as grocery store chains that are thriving right now and are in no need of receiving a bailout. That leaves just 17% of total receivables owed to small businesses that could actually get paid with such a bailout. Of that 17%, many of these businesses are cash rich (TJX) or have a strong online presence (Wayfair) and will not require a bailout to weather this current economic downturn. Sadly, C2FO is just another example of how a massive Fintech corporation does not understand the actual needs of small businesses.
For many small businesses who loved the appeal of fast and easy funding that Fintech offered them, that funding has completely disappeared at a time when they need it most. There is little doubt that Fintech companies will be back in business at the end of the COVID-19 pandemic, after all, they will be sitting on the billions of dollars that they’ve stopped lending. However, are the small companies who made them rich going to continue to seek out their services? Will small businesses feel betrayed that the Fintech companies who were so quick to offer support, quickly turned their backs when times got tough? Will small businesses ultimately be bankrupted because the Fintech companies won’t stop pulling funds directly out of their bank accounts? This is the first economic downturn in the Fintech age, but it certainly won’t be the last. At least for now, it looks like Fintech isn’t up to the challenge.