One of the biggest challenges faced by small businesses amid COVID-19 has been accessing capital to support cash flow. This was especially evident in the early months of the pandemic. An April survey of U.S. small businesses found that those with less than $10,000 in monthly bills had enough cash on hand to cover only one month of expenses.
But what many stakeholders may be unaware of is that small businesses, governments and lenders in various regions around the world have been experiencing different realities when it comes to keeping working capital flowing. While governments offered various grants and state-backed loans, some business owners were slowed by the daunting task of compiling and submitting documentation about their finances and business conditions. COVID-19 shone a light on the importance of accurate and up-to-date financial information – and the ability to share it digitally.
Across three large economies—U.K., Australia and the U.S.—some businesses and financial institutions were able to respond with greater agility than others. In particular, businesses running their accounting systems on the cloud, with seamless connections to their banks, were able to access simpler and quicker application processes than those using desktop-based software or none at all. Given that the financial technology within these three markets is at different stages of development, it’s important that we compare how businesses and financial institutions reacted to continue to improve small businesses’ access to capital.
Open Banking U.K.
In the U.K., Open Banking had already been mandated for two years when COVID-19 emerged. Small businesses were becoming accustomed to sharing their financial data with third parties such as lenders, budgeting apps and accounting software. This meant that the financial documentation needed to access grants and loans was more readily available. Banks could share it at the customer’s request or customers could choose to share it themselves from their cloud-based accounting software, confident that it offered a real-time picture. Meggie Palmer, the founder of corporate consulting company PepTalkHer, said her cloud-based accounting platform was “a lifesaver” when it came to applying for government grants.
U.K. alternative lender iwoca already had a rich cloud accounting integration in place when COVID-19 hit. Iwoca offered a five-minute application process for loans of up to £250,000, with a promise of funding delivered within 24 hours. More traditional banks, such as NatWest, offered similarly fast decisions on an invoice finance product called Rapid Cash. By connecting their accounting platform, small businesses could access a credit line of £25,000 to £500,000 within 48 hours of approval.
In Australia, open banking had yet to launch when COVID-19 appeared. But the nation’s businesses already had some of the world’s most robust direct feeds of transaction data or ‘bank feeds’, thanks to a decade of integration with cloud-based accounting platforms. Businesses were able to apply for unsecured loans of up to A$500,000 from a variety of bank and non-bank lenders by sharing their accounting-platform data, receive a decision within minutes and get funding in as quickly as a day.
Australian accounting platforms, meanwhile, pivoted to develop software that would help customers apply for government relief. One is a tool that helps small employers identify workers eligible for a wage subsidy program called JobKeeper – and to report those payments to the tax office every month. Another solution is a cash-flow forecast tool, which projects cash flow a month in the future, assuming all bills are paid on time.
Because these tools are built on a cloud-based accounting platform, software updates can be pushed to subscribers seamlessly with no need for any downloads or action on the user’s end; the new functions simply appear in the software.
And while data from Xero Small Business Insights for July showed for the second month in a row that small businesses continued to add jobs and saw levels of revenue recovery, varied state restrictions translated into different levels of economic activity. In July, New South Wales and Victoria outperformed other states; however Victoria’s resumption of lockdownserves as a reminder of current volatility and the continued importance of cloud-based services.
The United States
In the U.S., meanwhile, open banking has yet to arrive, and few banks offer direct feeds of transaction data into a customer’s accounting software. Perhaps these are two of the reasons many small businesses and financial institutions were frustrated with the federal government’s $669 billion Paycheck Protection Program. Of course, one-fifth of the available PPP fund was unallocated.
The good news is that we have seen cloud-based applications and accounting platforms help fill the gap. For example, in the U.S., the cloud-based payroll app Gusto moved quickly to help small business employers access federal relief. Gusto integrates with cloud-based accounting software. It built features to help automate the process of applying for the PPP.
By drawing on tax, accounting and payroll data stored in the cloud, the app was able to expedite the application process, saving hours of work and reducing manual errors.
In Wisconsin, certified public accountant Mike Jesowshek used Gusto to help secure PPP loans for just over half of his small-business clients, which are mostly attorneys, fitness studios and professional services firms.
“All of our clients use cloud-based accounting software, which made the process much easier,” says Jesowshek, founder of Brookfield-based JetroTax. “We didn’t have to worry about sending files back and forth to the client, or wondering whether we had the most up-to-date one. We were able to access everything we needed without having to bother the client. It made the rough, stressful, and bumpy rollout of PPP much easier to bear.”
Once small businesses emerge from the pandemic, they may have to be prepared financially and technologically to survive the next one. The last six months have underscored the need for U.S. small businesses to move beyond spreadsheet accounting, embrace the cloud and eventually open banking. Those that do can more quickly evaluate their cash position, improve their chances of success, and be better prepared to share data with their financial institutions when help is needed.
The pandemic also shone a light on the role of financial institutions in enabling fast and efficient access to capital. And we may see the acceleration of new services, such as those offered through the likes of cloud based lending platform Waddle, which enables banks and fintechs to more easily lend to small businesses by leveraging their accounting data. Financial institutions that are able to seamlessly connect to these customers through the cloud and reduce friction in processes such as loan applications will also be well-positioned as we navigate the economic repercussions of this crisis and other unexpected challenges ahead.