which will begin paying out on Day 3.
Every dollar that comes in each day can be reinvested in another deal, compounding earnings at warp speed.
If the system is so good for the funding provider, then must it be really bad for the small business? It’s a question I asked myself years ago when it was first introduced to me and I arrived at this conclusion: daily is also good for a business, just as long as it’s not too much each day.
There’s a reason why landlords require 1 or more payments of rent upfront and why they wince on the 5th every month thereafter. There’s a reason why the IRS subjects taxpayers to withholding. There’s a method behind the madness that is automatic 401k contributions, employee healthcare payments, and other benefits that are automatically withdrawn from each paycheck. There’s a reason we work 40 hours a week spread out over 5 days instead of all 40 hours crammed into 2. As Americans we fare better when we do things incrementally.
You want to know why many Americans wait until the 5th of the month to pay their rent? It’s usually because they don’t have the money on the 1st.
You want to know why the people of this country don’t rise up and demand an end to income tax withholding? It’s because we’re pretty sure we’ll never be able to make the payment if it’s in a single lump sum once a year.
Why are retirement contributions automatically deducted from our paychecks? It’s because there’s a decent chance we’ll get distracted and forget to do it ourselves. Either that or we’ll fall prey to our own delusions that in return for not contributing this week, that we’ll contribute double the following week. 30 years later we’ll wake up and panic that we have no retirement savings at all.
Let’s face it, there is peace of mind in paying incrementally. Just as I began writing this very story, I learned that UDR, a publicly traded property management company began offering rental tenants the ability to pay rent on a bi-weekly basis. This is their rationale for it as stated on their website,
“Life and your cash flow don’t always re-start on the first of the month. So why stress about paying rent in a single payment? At UDR you don’t have to worry. Our convenient Bi-Weekly Rent Payment Program allows you to pay half of your rent on the 1st, and the other half on the 15th. Now, you can manage your budget with more confidence and less stress.”
Sure, there’s something in it for them by speeding up the payment cycle, but they’re focusing their campaign on a point of pain for many of their tenants, the likelihood that they’ll have the entire month’s rent on a single day. The proposed solution benefits both parties.
There are numerous reasons why banks are afraid of lending to small businesses, especially ones with less than perfect credit and/or volatile cash flow. They take the chance that on 1 particular day of the month, a borrower will have enough to cover 30 days worth of payments. That’s like placing a big bet on red or black, literally. You never know what the account balance will be as the cash flow wheel spins round and round. That’s just business. It’s unpredictable.
Banks don’t like to pay roulette. That’s why adoption of the daily payment model is continuing to take off. With the assumption that each payment is not excessive, I have little doubt that on average, risky small businesses have more success in satisfying the terms of a daily plan than they do a monthly one. There’s no panic at the end of the month. It’s like income tax withholding. The money just comes out and all that remains every day is the budget to play with. What could be less stressful than that for a small business?
But let’s face it, this arrangement has one side compounding earnings faster than a speeding bullet. YEAH!!! BULLETS!!! But is it enough?
Small businesses are risky investments. If you’ve ever watched Shark Tank, then you’ve walked a mile in the shoes of a banker. Each episode, the show features business owners who pitch a set of wealthy venture capitalists to invest in them. As a viewer you’ll find yourself cheering for the entrepreneurs you love and denouncing the ones you hate, usually on twitter.
There are millions of entrepreneurs out there that are already on solid footing. They have a history, customers, and heck, even profits. But the traditional lenders of yore, banks, can tolerate very little of them. Thankfully the rejection does not go viral on social media as it can on Shark Tank, but it can sting all the same.
The new era of non-bank funding providers evaluate these entrepreneurs using a new set of standards. Monthly’s out but if it were to be daily, well then maybe we’re on to something. The cost of financing available in the daily payment
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