The theory of the “longtail” was coined 20 years ago by British-American writer Chris Anderson. In his New York Times best-selling book, Anderson defines the term as a business strategy that allows companies to realize significant profits by selling low volumes of hard-to-find items to many customers, instead of only selling large volumes of a reduced number of popular items. In the context of supply chain finance, the longtail is made up of millions of small- to medium-sized businesses (SMBs). As the industry navigates this “New Normal” with many U.S. businesses facing suppressed demand environments, liquidity has never been more important.
SMBs felt the brunt of economic stress in the last three months from the Coronavirus disease (COVID-19)-driven disruption. A statistic from a PYMNTS.com survey says it only took three weeks — the 21 days between March 9 and March 27 — for 5% of the SMBs surveyed to report that they had closed their doors for good.
Surviving this economic environment is about liquidity. Most businesses in the longtail will first seek a line of credit or term loan from a traditional bank to solve that problem, but the reality is most banks are tightening lending standards. With limited options, we think treasury departments can play a critical role in providing liquidity to stabilize longtail suppliers as we navigate the uncertain road ahead.
Liquidity during a crisis
Why does it matter? The health and staying power of the longtail is critical to the resiliency of our economy. According to the Small Business Administration, U.S. small businesses employ a hefty 47.3% of the private workforce, with firms of fewer than 100 employees having the largest share. These businesses need consistent cash flow to survive and long payment terms are standing in the way. Unfortunately, with economic distress comes reduced orders and longer payment terms, a squeeze on both ends. This will drive up business failures, unemployment and hinder any recovery.
Funding the entire supply chain
Even prior to the disruption of COVID-19, less than 20% of a large corporate’s supplier base typically had access to an early supply chain finance program. It can be too costly to onboard these suppliers and maintain compliance for most traditional banks. Know your customer has traditionally deterred banks from working with smaller suppliers. The problem, as highlighted in a Barlow Research report, is demand for additional credit among small businesses is at decade high. A solution needs to be found. Rallying behind the longtail and supporting SMBs can be as simple as giving them access to alternatives such as an early payment program and supply chain finance programs the latter of which creates a win-win situation for both the buyer and supplier. Many non-bank financial technology companies are stepping up to fill the gap in supply chain finance created by restrictive bank programs. These programs are leveraging technology to reach down into the long tail to support SMBs that are typically on the outside looking in.
Prioritizing the longtail
It’s a challenging lending environment and neglecting SMBs will have broad and deep economic consequences. Stimulus programs passed by Congress to provide liquidity to businesses strapped for cash will only go so far. As of this writing, the SBA has approved over $530 billion in Payroll Protection Program (PPP) loans to over four million small businesses in the country. While they provide a few months’ worth of coverage for expenses such as payroll and rent, they are not substantial enough to cover all of a company's costs, nor the expense that many businesses will incur in pivoting to serve their customers in a post-pandemic world. Consider this Washington Post article, which issued a strong warning via analysts that this may only be the beginning of the worst wave of small-business bankruptcies and closures since the Great Depression.
The survival of the longtail suppliers is critical, and both lenders and enterprises can play a role in making sure that SMBs endure. While there is no disputing that traditional loan programs can be an absolute lifeline for many businesses, it is important to consider that alternative funding from non-bank entities have a huge opportunity to make a significant impact here. At a time when there is no magic crystal ball to predict what the remainder of 2020 holds, it’s more important than ever for lenders and CFOs to empower the supply chain longtail with the financial health and liquidity they need to not just survive, but continue to grow.