Many small businesses face a dangerous financing gap that payment companies hope to fill with short-term credit products similar to those that have grown in popularity with consumers during a challenging economic environment.
"The issue can be as simple as 'I have T-shirts that I sold from my factory, but I'm not going to get paid for another 90 days. But I have to keep the lights on,'" said Alex Song, head of finance and capital markets for Ramp, a firm that integrates corporate cards with software to manage nonpayroll spending.
Ramp expanded its platform in late August to allow businesses to manage vendor payments through short-term credit. Ramp joins other fintechs such as Resolve in selling services to small-businesses clients that are facing uncertain cash flow due to inflation and supply-chain crunches. These products are designed to work through existing payment relationships to prevent businesses from turning to banks for credit.
"If you're selling furniture to consumers and office buildings and have a manufacturer waiting to get paid, you're facing a potential gap," said Chris Tsai, CEO of Resolve, a payment company that manages credit checks, enrollment, invoicing and reconciliation for B2B transactions.
Ramp's Alex Song says BNPL-style short-term credit can help address supply chain shortages for small businesses.
Ramp's new product, called Flex, integrates with accounting software and is designed to fund operating expenses while a business waits for pending payments to pay off the loan. Ramp pays the business' vendors up front, and the business chooses to pay Ramp in 30, 60 or 90 days for a fee that's based on the length of the transaction — the shorter the terms the lower the fee —with the business' incoming payments going toward paying off the loan. Flex is part of Ramp's Bill Pay invoicing product, with Flex appearing as a financing option. Ramp is competing with banks and other payment companies that provide credit.
Several payment companies offer short-term credit to small businesses based on future payment flows — Block and PayPal are two of the largest. But there is still room in the small-business market for more options, according to Song. "If you're an American small business, there are very few people to help you," he said.
Ramp's offering is similar to buy now/pay later, which allows consumers to finance the purchase of a product they can't afford to pay for in full at the point of sale. Only in this case, the concept is being applied to address small business' inventory expense, client payments and the negative impact on liquidity.
"There are a lot of lenders that will issue a five-year or a 10-year loan, but that may not cover all short-term expenses," Song said. "And it's hard for businesses to get that kind of credit from a bank."
A reduction in business spending is already underway, and that will create more liquidity stress, Song argues, citing Ramp's analysis of anonymized payments on the corporate cards that it manages for clients.
The average spend per business fell 6% from May to June 2022, compared with a 17% increase between May and June 2021, according to Ramp, which did not disclose the exact volume amounts. Venture capital-backed startups reduced spending 9% in 2022, after increasing spending 25% in 2021. Spending on supplies also decreased, according to Ramp's data. Spending on electronic equipment fell 41%, while software purchases fell 6%.
Other data also points to stress on business payments, particularly for buying and selling supplies and the impact of those costs on operations.
U.S. business logistics expenses in 2021 were $1.85 trillion, or 8% of gross domestic product, the highest share of U.S. GDP since 2008, according to the Council of Supply Chain Management Professionals' annual report on the "State of Logistics," which was released in June. Inventory carrying costs, or the value of the goods in stock compared to the cost to store those goods, was 26% higher in 2021 over 2020, the CSCMP reported, adding this data creates longer lead times for orders, and inventory that is often not matched to demand.
Resolve, which provides payment technology and business credit, is preparing its company for an uptick in BNPL lending to small businesses — and more competition as European-focused firms target the U.S. Resolve was spun off the consumer payment processor and consumer BNPL lender Affirm in 2019.
"That use case of paying a manufacturer is a perfect example of where to flex BNPL muscle," Tsai said.
For businesses, BNPL can reduce the pressure on cash flow that results from delays in the supply chain, Tsai said.
Some of the same risks for consumer BNPL apply to business BNPL, said Larry Talley, founder and CEO of Everyware, a firm that develops software for text payments and other digital channels.
"A lot of these businesses may have used up credit and are looking for a solution to stock up on inventory," Talley said. "The problem is if they aren't selling that inventory the install fees and turn into late fees."
BNPL for consumers or business is also still not heavily regulated, Talley said. "It's sort of like the Wild West."
While consumer BNPL is gaining attention from regulators over consents about mounting debt, business B2B's terms are shorter — as little as one month as opposed to four or more monthly installments — and thus less prone to credit risk, Tsai contends.
"There is a pressure on buyers who are getting slower payments," Tsai said. "Everyone is trying to manage the sales payments that are outstanding, to gain control over the cash curve."