The JPMorgan Chase Institute’s “Growth, Vitality, and Cash Flows: High-Frequency Evidence from 1 Million Small Businesses” report analyzed and identified seven cash flow patterns. These patterns relate to issues with cash flow management. Analysts defined a relationship between cash flow management and the business’ performance; they also noted that these patterns fluctuate as the small business moves through the business life cycle. The patterns are identified in the following ways, within two separate segments:

Segment #1: More Regular Patterns

• Regular Weekly: Not much deviation is seen in these companies, as they are usually standard in their revenue and expenses patterns.
• Regular Weekly + Financing: Same as regular weekly, with the addition of extra financing.
• Semi-Monthly Revenues: These companies take in large revenues bi-monthly and pay expenses weekly.
• Semi-Monthly + Financing: Same as semi-monthly, with the addition of extra financing.

Segment #2: Less Regular Patterns

• Erratic Timing: Timing of cash flow is irregular, but not volatile.
• Volatile Expenses: These companies experience volatile expenses yet more stable revenue. Usually, companies deal with volatile revenue and stable expenses.
• Sporadic Revenues: These companies are heavily financed to make up for sporadic revenue. Usually, these companies see revenue about every seven weeks and the amounts received are greatly varied.

New Small Businesses Adapt to Become Stable Over Time, or They Close

As new small businesses move through the business life cycle, their cash flow becomes more regular. However, those most at risk for closure are those who experience volatile expenses that are increasingly difficult to manage due to their unexpected nature. We see many of our most forward-thinking small business clients secure and hold more cash than necessary to ensure those volatile expenses are handled.  Imperial Advance provides alternative financing and working capital solutions to clients in a wide range of industries, including Automotive Repair,  Business Offices, Construction & Contractors, Dental Practices, Franchises, Grocery Stores, Gyms & Fitness, IT & Marketing, Landscaping, Liquor Stores, Medical Practices, Restaurants & Bars, Taxi & Limo Services, and Trucking & Logistics.

 The Transition from Irregular Cash Flow to Stable Cash Flow is Managed Differently — Ultimately, Stable Firms Will Thrive While Dynamic Firms Are More Likely to Exit

If a company from any of the aforementioned segments can develop a way to stabilize their cash flows and expenses, they are more likely to make it than those who cannot figure it out. Irregularity is a given when a company is new; financed growth firms deal with irregular revenue, while organic growth firms face irregular timing for both expenses and revenue.

What Can Be Done for These Small Businesses?

Policymakers could positively impact the economic growth of small businesses by focusing on both segments, not just those businesses that are heavily in the financed growth category — which is typical in this situation. One suggestion is to identify and implement programs to support small businesses in figuring out how to manage irregular cash flow and provide exposure to a wider range of funding sources. These adjustments in policies and programming could effectively impact the broader economic growth.

 

 

The Federal Deposit Insurance Corporation (FDIC) conducted its biennial survey on unbanked and underbanked households in the United States: the FDIC National Survey of Unbanked and Underbanked Households. The latest statistics are from 2017 and relied on responses from more than 35,000 American households. According to the FDIC, the organization is “committed to expanding Americans’ access to safe, secure, and affordable banking services.” The survey sought to gather valuable insight into the unbanked and underbanked population, which can then be utilized by policymakers and financial companies to enhance access to financial assistance.

1 in 3 African-American households are underbanked. 1 in 6 Hispanic households are unbanked.  Interestingly, African-American and Hispanic small business ownership rates are soaring, but financing continues to be a challenge.  Studies show that minority-owned businesses receive lower loan amounts than non-minorities and consequently have to use more of their personal savings or credit to run their business.  For many minority-owned businesses, alternative financing has become the preferred way to grow their business and we have helped thousands of owners get access to some of the best rates and terms for their business — sometimes approving AND funding the small business loans in as little as 24 hours!

Statistics on Bank Usage in American Homes

The study found that 6.5% of households in the U.S. are unbanked — which means that no one residing in that home has either a checking or savings account. This amounts to 8.4 million households. Since this FDIC survey began in 2009, 2017 showed the lowest level of unbanking.

Being underbanked is a different phenomenon — this means that the household may have a checking and/or savings account at a bank, but they also rely on financial services provided outside of banks, including: money orders, check cashing services, payday loans, pawn shop loans, refund anticipation loans, rent-to-own services, international remittances, and/or auto title loans. In 2017, 24.2 million households were underbanked, or 18.7%. This is 1.2% lower than the 2015 data for underbanked households.

Conversely, 68.4% of U.S. households are considered fully banked. These families/individuals have a bank account and did not use alternative financial solutions as outlined in the underbanked category.

Underbanked or unbanked households generally consist of:

• Low-income
• Less educated
• Young families
• Black and Hispanic
• Disabled
• Volatile income

2017 unbanked rates were lower or nearly the same than previous years. Yet, while black, Hispanic, and young households are less unbanked than ever before, these groups are still disproportionately unbanked.

Why Be Unbanked?

There are quite a few reasons why households remain unbanked. Those responding to the survey said:

• 7% said they don’t have enough money to keep an account.
• 2% said they don’t trust banks.
• 9% said bank account fees are too high.
• 9% said bank account fees are unpredictable.

Key Differences Between Banked and Unbanked/Underserved Households

Nearly all banked households had a checking account, and 78% had a savings account. Yet, savings account rates were much lower in low-income, less-educated, Hispanic, disabled, and rural households. Most banked households do not utilize bank tellers to perform banking transactions, preferring bank mobile access — particularly banked homes that fall into the high-income, more-educated, younger household, nondisabled, and volatile income categories. However, underserved households actually preferred to use bank tellers — although the study does not ask why (note that FDIC researchers stated they would dive deeper into why underbanked households utilize bank tellers more in a future study question).

Rather than using a checking account, underbanked or unbanked households more commonly used prepaid cards than banked households. They use these cards to pay bills, access cash at ATMs, deposit checks and direct deposits, and make purchases.

Credit Card Use

Mainstream credit cards (like Visa or American Express, etc.) were most used by banked households at a rate of 76.3%. On the other hand, only 7.2% of unbanked homes had a mainstream credit card, and 60% of underbanked homes did. Ironically, the reason why many underbanked/unbanked households don’t have mainstream credit cards is their lack of a credit score, which makes it very difficult to even obtain a mainstream credit card.

Possible Next Steps for Policymakers and Financial Institutions

There are a number of ways to better integrate unbanked individuals and households into the financial system.  For example, new underwriting techniques can be adopted to help individuals with little or no credit history to begin building a credit score.  Underbanked households can be encouraged to see the utility and advantages of mobile banking apps and payment services.  Improve outreach efforts by bank tellers and greeters.  Offer counseling and educational services that can provide helpful information about useful financial products and services.

The Model Safe Accounts Pilot was originally launched in January 2011 by the Federal Deposit Insurance Corporation (FDIC), an independent agency created by Congress tasked with maintaining stability and public confidence in the nation’s financial system. The Model Safe Accounts Pilot was designed as a case study to determine how financial services companies could provide low-cost banking accounts to underserved consumers. The pilot was enacted as a program aligned with the FDIC’s mission to ensure that every American household has access to banking programs — no matter what their income level.

The Underserved Banking Population

In previous studies, the FDIC found that over 25% of American households are considered underserved. It is critical that all Americans should have access to a safe and secure place to save their money to improve their access to financial security.  There are many areas of opportunity for banks and other financial organizations to provide safe and low-cost accounts to the underserved population that tends to have low- or moderate-income levels.

Many of our business clients also struggle with navigating a complex small business lending bureaucracy that seems intent on placing increasing demands and restrictions on the entrepreneurial class. At Imperial Advance, we are committed to offering our clients fast and affordable working capital loans, fast business loans and affordable funding options.

The Benefits to Consumers

Over 3,500 Safe Accounts were opened, which was comprised of 662 transaction accounts and 2,833 savings accounts. Companies that offered a Safe Account found that it worked as well or even better than the other checking/savings accounts offered by the financial institution. The study found that a large number of underserved households maintained their Safe Account throughout the year. In fact, 81% of transaction accounts and 95% of savings accounts remained open at the conclusion of the Safe Account pilot program. Also, there was a low overdraft risk with Safe Accounts; this demonstrates that Safe Accounts have the potential for longer use and lower costs than more traditional banking accounts.

What the Banks Learned

The financial institutions benefitted as well.  Most reported that the costs associated with running Safe Accounts were similar to managing their regular bank accounts. This could be because the Safe Accounts did not have paper checks and the costs related to maintaining them. Also, many financial institutions reported that the Safe Accounts pilot was a positive educational experience for the banks as well, and demonstrated that they can, in fact, offer low-cost products to the underserved population without straining their other services. Banks also knew to train their tellers to tout the Safe Accounts program to those who may need it. Finally, numerous business models for Safe Accounts were discovered, which suggests flexibility in the FDIC Model Safe Accounts Template to best serve the needs of the financial institution and its customers.

The largest challenges reported by banks was properly marketing/advertising the Safe Accounts program and ensuring their staff was more than adequately trained to assist the Safe Accounts customers.  By developing strategic alliances with community organizations, churches, legal, accounting and investment professionals, the Model Safe Accounts Pilot can be a model for other innovations to more effectively integrate the unbanked and underbanked into the financial system.