Merchant financing helps SMEs navigate the Black Friday sales jackpot

Black Friday: The busiest season for small businesses

Because they have relatively little cash flow, small businesses are always vulnerable to peak season — in both good and bad ways.

We’ve written at length about the challenges SMEs face from market volatility, seasonal changes, and other variables, but positive events can pose a problem too. Black Friday has become a very important date in the calendar for any merchant. In the UK, small business retailers enjoy average sales growth of 40% the day after Thanksgiving, from £650,000 to £910,000. In 2021, consumers spent £9.42 billion on Black Friday shopping. Broken down to look at specific industries, the sales increases are even more impressive:

• Fashion and Apparel: 92%
• Electronics: 66%
• Sports and Outdoor: 55%
• Health and Beauty: 54%
• Home and Lifestyle: 47%

With Black Friday transactions increasingly taking place online, e-commerce merchants are especially well placed to benefit from this sales jackpot.

However, the dark side to this booming sales period is that without adequate provision to meet the demands, small businesses are likely to miss out due to inventory shortages, understaffing and rising overheads. 

That’s where revenue-based merchant financing comes in.

What challenges do SMEs face during sales season?

The biggest challenge for SMEs when facing any irregular sales event is maintaining cash flow. During periods of economic turmoil, it can be difficult for small businesses to pay for the essentials they need in order to trade. But let’s consider the pitfalls that can arise for SMEs as they prepare for one of the biggest trading days of the year.

• Inventory shortages

Inventory is crucial for all kinds of merchants, and especially for those trading in different sizes of the same product— like a clothing boutique. Running out of stock at a critical moment can be damaging to a company’s profits, as well as its reputation and customer retention. While a business can plan ahead and order excess inventory, this still requires significant up-front capital. And if stock runs out before payments have cleared, there may be no money left to buy more.

• Understaffing

Black Friday is a stressful time for retailers and their employees. Without adequate staff to handle a temporary spike in orders, packing, sales and distribution - any business will struggle to serve their customers demands. That’s why many small businesses choose to take on temporary staff during peak periods, or pay existing staff for working overtime. If all goes well, increased revenue will more than pay for the additional wages. But again, taking on more staff requires instant access to working capital that many small businesses don’t have. Without the cash flow available to pay staff, Black Friday may hurt a business more than it helps them.

• Excess returns

Although Black Friday is a gift for many retailers, it’s a known fact that many purchases made in the winter months are returned. Between 2019 and 2021 there was a 129% year-on-year increase in the number of purchases returned, and the value of returns rose 74%. Luckily, most retailers anticipate this and are able to compensate with Christmas sales and more constituent revenue throughout the year. However, if SMEs experience higher-than-expected number of returns, it can take a huge toll on cash flow and they may need revenue-based merchant financing to get through.

• Rising overheads

When a business sees their sales rise, they’re likely to see overheads rise as well. Outgoings for energy, distribution, packaging, and logistics are all likely to go up during the Black Friday period, and many of them will need to be paid for before profits are recouped. Flexible merchant financing is the best way for a business to prepare for potentially lucrative sales periods.

Navigating the sales period with revenue-based merchant financing

SMEs need merchant financing to seize the opportunities and face down the challenges Black Friday presents. But traditional lenders often lack the capability to help them at this critical time. With the right embedded merchant financing solution - brokers, platforms and traditional banks can support SMEs through these difficult but potentially profitable months. That’s because revenue-based embedded finance has a number of advantages traditional lenders simply can’t offer.

• Instant offers are crucial for SMEs, and especially during busy periods. With little available cash flow and a need to buy inventory, pay staff, and cover overheads - when SMEs need merchant financing, they need it fast. Even in the best of times, roughly 57% of UK small business owners have experienced problems with cash flow, and 69% have concerns about maintaining it. Nonetheless, 8% of SMEs say quick access to finance is the biggest issue facing their business, and the need is surely higher leading up to events like Black Friday.

• Automated application journey connected to open banking is a major draw to SMEs applying for credit. Many traditional platforms use slow, complicated systems, leading to 57% of all SME credit applications being abandoned because they’re too difficult to complete. When a small business owner has all the other pressures of Black Friday to think about, they’re likely to pay a premium for the easiest merchant financing solution they can find.

• Alternative credit indicators are a little discussed advantage of revenue-based embedded finance, and a major benefit for small e-commerce companies. Without long credit histories, many small businesses can struggle to access credit when they need it, but when a platform is able to use metrics like online reviews and social media trends to assess applications, reliable approval is much easier to give.

• Revenue-based repayments allows SMEs to borrow with confidence. Because repayments are based on the amount the business makes, rather than a fixed interest rate, companies can prepare for an event like Black Friday with flexibility. If they’ve overshot on inventory but sales aren’t quite as projected, they can continue to trade without overpaying on interest. Since repayments are taken immediately with revenue-based finance, businesses also know exactly how much capital they have to work with in case they need to order more inventory, or process returns.

Final thoughts

Black Friday provides a huge opportunity for small businesses, and a great chance for platforms and banks to support them. Providing fast, accessible, reliable merchant financing to SMEs one year means they’re likely to return for the next, creating a reliable revenue stream for lenders.

To find out more about YouLend’s fully white-labeled, revenue-based embedded finance solutions, book a demo today.