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How Real-Time Payments Can Right-Size Small Business Cash Flow

June 28, 2023

Small and medium-sized businesses (SMBs) haven’t been able to catch a break in recent years.

But tough times make tough companies.

Still, after emerging straight from the pandemic years into a record inflationary environment juxtaposed against rising interest rates and ongoing macro and geopolitical hostility, one thing has remained constant for firms looking not just to survive but to thrive: the importance of cash flow management.

Even so, for those firms looking to be proactive and strategic about their access to working capital, legacy payment methods with inherent delays can create uncertainty and make it difficult for SMBs to gauge their financial positions accurately.

“Legacy systems are slow, for starters, and batch-based so they tend to favor predetermined transactions like payroll or recurring bill pay, which leaves out a lot of ad hoc and other on-demand use cases where real-time money movement is critical,” Drew Edwards, founder and CEO of Ingo Money, told PYMNTS.

“We just live in a world today that moves a lot faster than the legacy systems can support,” he added.

Not having a clear picture of how much money is in their accounts at any given moment can have far-flung deleterious effects for small businesses.

“A restaurant, for example, that’s using ACH to do drawdowns on its loans has to think through the whole weekend by Thursday so they could put in requests for their money then and hopefully get it on the following day, Friday. And if they got that wrong and needed more cash over the weekend, they were between a rock and a hard place because it would be too late to draw down more before Tuesday,” Edwards said.

Removing Financial Uncertainty for Main Street SMBs

Fortunately, Edwards said that good news is on the horizon and is even already here with many lenders for those SMBs historically underserved relative to their larger peers by legacy payment processes.

That’s because the emergence of real-time payments offers a potential game-changing solution. By enabling on-demand transfers powered by the new Real Time Payments system, money can be available 24/7 to significantly improve SMBs’ daily cash flow, providing them greater financial control and flexibility.

Accelerating payments via the RTP network removes financial uncertainty by ensuring that, instead of potentially overdrawing their accounts or stiffing vendors when they do not have cash on hand, SMBs have on-demand fast access to their liquidity and can better manage unexpected expenses, make timely payments to vendors and avoid potential and operationally devastating financial setbacks.

“If they realize they’re short on some supply, then they can click a button and get needed cash a minute later — it’s in their bank account and they can go and buy what they need. It helps alleviate one of the number one challenges to running a small business, cash crunches,” Edwards said.

This agility enables SMBs to make timely purchases, ensuring continuity in their operations and enhancing customer satisfaction. Real-time payments provide SMBs the flexibility to seize opportunities, respond to market demands, and promptly adapt to changing business circumstances.

Scaling the Widespread Adoption of Real-Time Payments

While the potential benefits of real-time payments are evident, widespread adoption among SMBs depends on their banks’ readiness to implement faster payment solutions.

“If an SMB is banking with somebody that doesn’t offer RTP, that’s what’s holding up the adoption, not the SMB choosing not to use RTP,” explained Edwards.

That’s because SMBs typically rely on their banking institutions to offer real-time payment capabilities, and if their bank has not implemented these systems, they won’t be able to take advantage of the benefits.

“Keep in mind that SMBs don’t really know what real-time payments are — they just know they want to move money into their bank accounts and at what speed can the bank do that? If it’s not available, then they just have to choose a slow rail,” he added.

The lack of awareness and understanding about real-time payments among SMBs adds to the challenge of scaling the solution.

Fortunately, FinTechs can play a role in educating SMBs about the benefits of real-time payments and helping them navigate the transition and hasten the elimination of the delays associated with legacy payment methods, enhancing SMBs’ daily cash flows and boosting their financial operations.

As the payment landscape evolves, embracing real-time payments can be a game-changer for SMBs, offering them a competitive advantage in today’s fast-paced business environment by building a faster, more efficient future.

“My hope is that RTP, FedNow, push to card, and any other fast rails that come along, can get up and running at scale, because that creates truly great customer experiences where there’s always a way to get the transaction done. And when you’re dealing with getting somebody their money or getting a small business their money, that’s critical,” Edwards said.