Coronavirus. The US election. International trade. And did we mention Coronavirus? Such a potent cocktail makes the reality of a recession all too possible. Companies in every industry should consider how one would impact them. I know I’m thinking about how a recession could impact FinTech, especially those that cater to small businesses.
First, How Would a Recession Impact Small Businesses?
A recession often hits small businesses harder than larger businesses. Why?
Cash. Or rather, lack thereof. An overwhelming 82% of the small businesses that fail do so because of cash flow issues. And there’s not a bigger threat to a business’ cash flow than a recession.
A services business might find it challenging to get clients to pay on time during a recession, which, in turn, makes it hard to pay its own employees and vendors.
If we’re talking Coronavirus, small businesses that rely on products or materials from China, Italy, or other markets are going to find themselves without products to sell.
When cash doesn’t flow, spending stops. So these small businesses will pull back from tools and services they’ve been using in an effort to stop the bleeding.
Ah, now we’ve gotten back to FinTech.
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How Would Global FinTech Business Be Impacted?
A recession will, of course, affect each market differently. If you run a global business, it may not be as obvious or impactful if you have partners all over the world.
The problem is: you don’t have line of sight all the way down the chain, and that could be your undoing during a recession.
Let’s say you run a global payments business. Maybe small businesses aren’t even your direct customers. You work with large companies, many of whom are software companies based in the US. You’re not particularly worried about the recession…until those commissions you rely on start to dwindle.
Here’s what you don’t have visibility into. Maybe a handful of those software clients are seeing their small business customers cut back on spending, reducing their own revenues. Maybe some end up being gobbled up by larger companies who have their own payment services. Others may shut down if they can’t weather the economy. Whatever the reasons, you don’t always have answers, nor are you able to anticipate the impact.
So what can FinTech companies do to protect themselves—if history is any indication—in the inevitability of a recession?
1. Scramble Some Eggs
The metaphor is: don’t put all your eggs in one basket. Certainly, it’s a good idea to not rely on one industry or market (i.e. small business) if you want to avoid issues should the economy tank. But let’s just be honest: if a recession hits, some eggs are going to get cracked. The best you can do is make something out of the yolks.
Diversify your client base. Market across industries, and to varying sized businesses. If revenue goes down, find a price point that even a struggling business can afford. This strategy might cut back on profit margins, but it’s better to have a smaller margin than no margin at all.
2. Focus on Solutions That Create Efficiency for Existing Processes
When the economy is uncertain, all but the necessary gets cut from a small business’ budget. Spending on problems SMBs didn’t know they had is discretionary. Nice to have.
But if you can build solutions that reduce the time and cost of core work, your product will prove more impactful and less likely to be cut from your customers’ budgets.
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3. Patch the Roof While the Sun is Shining
Aside from being strategic about your products or services and diversifying your client base, you need to make sure your own finances are in shape and you’ve got a cash cushion, should a storm hit.
I’m fond of saying: the best time to patch the roof is when the sun is shining. Each recession is a lesson in this, because you see so many companies of all sizes fold or file bankruptcy. That’s because they didn’t patch that roof when the skies were clear.
I’m talking, of course, about financial planning. If you don’t have a healthy cash balance now, hurry and get one. Every business, large and small, should build a store of emergency funds to weather a downturn.
If you can’t set aside a portion of profits for that purpose, borrow the money. You may never have considered taking out a loan, but you’re better off borrowing when things are good than waiting until that stormy weather hits. If you wait until we’re knee-deep in a recession, your ability to borrow may disappear. Banks will not be willing to lend to you if you’re struggling. Even if they are, rates will be higher for you because the risk to lenders is higher.
The same goes if you’re seeking funding from investors. No matter how solid or appealing an investment you think your business is, your options will dwindle quickly in an economic downturn. You might have been pretty proud of your valuation pre-recession, but after that, you may not be as enticing an investment, especially to VCs who have to tighten their own belts.
Talk to a bank and other lenders to understand your options. If you’ve been in business a while and have great credit, you may qualify for a loan, or, even better, a line of credit that allows you to pull out what you need when you need it. But if that doesn’t describe your business, you may need to look at alternative lenders online who have less stringent requirements to qualify for financial products. Educate yourself about what you’re eligible for and what the best rate you can get is.
The fact is: few in the FinTech space have a playbook to weather a recession. Our industry is so new. It’s almost inevitable that we’ll lose a few players, but those of us who have the foresight to think and plan ahead will come out stronger for it.
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