Small businesses, which collectively form the foundation of the U.S. economy, continue to wade through market volatility, many with dwindling chances of survival.

It’s a saddening scenario that justifies the existence of financial relief initiatives across the private and public sectors, most notably, the Paycheck Protection Program (PPP).

But according to CEO Evan Sohn, many of these initiatives exist with businesses like restaurants and salons in mind. Undoubtedly, these small to medium-sized businesses (SMBs) have been hit hard by the pandemic and economic fallout, but they’re not the only ones.

Speaking with PYMNTS in a recent interview, Sohn pointed to the recruiting industry — made up of tens of thousands of small and independent recruiters — which faces unique cash flow challenges not necessarily alleviated by the traditional financing sector or federal funding programs.

“The reality is a recruiter is a small business,” he said, “whose revenue is pretty spotty.”

In a recent initiative with an alternative lender, is looking to fill that financing gap through a strategy that Sohn explained showcases the value of embedded finance to target the niches of the small business ecosystem with the greatest need.

The Cash Flow Pitfalls Of Recruitment

Every small business will likely struggle with cash flow challenges at some point in its existence, but certain financial constraints can hit as a result of the uniqueness of one SMB from another. Certain business models, seasonal operations, and a variety of other factors can all influence the financial wellbeing of a company.

The same goes for the recruitment industry, in which smaller players are forced to bear the burden of payment delays as a result of the industry’s payment models.

One common model, explained Sohn, is for a recruiter to be paid a percentage of the salary of the individual being placed for employment. Yet traditionally, an employer will not actually pay the recruiter for a certain timeframe, like 60 or 90 days, while it waits to ensure the talent is a proper fit.

In another model, one that is expanding due to the growing gig economy, recruiters will place contingency professionals with an employer, which then relies on the recruiter itself to compensate that temporary worker. Yet the recruiter is still waiting 60 to 90 days to be paid by that employer for services provided.

“I have guaranteed cash coming in. However, I need a bank or a funder to help me fund this overall process,” said Sohn. “This is a great opportunity for a lender to come in and support that process.”

Traditional banks have historically been unable to fill this need, he noted, finding it too unprofitable to allocate resources to understand the nuances of this industry and finance small and single-operator companies. Federal efforts like PPP loans, meanwhile, were designed for restaurants and salons — small businesses with many staff and, thus, high payroll volumes, while recruiting firms aren’t necessarily the right fit, Sohn added. recently announced a partnership with Fundomate to fill this gap. Through the collaboration, Fundomate now has the potential to gain visibility into SMBs on the platform and understand financial flows to underwrite financing at competitive rates.

Embedded Finance’s Niche Opportunity

Initially, this collaboration will see handing off the customer relationship to Fundomate via a link that takes a small business to a branded portal. But moving forward, Sohn said he sees opportunity to embed the financing experience more seamlessly within itself.

This not only offers a more efficient and favorable experience for the small business borrower but, for Fundomate, there is even greater opportunity to integrate with data to strengthen its underwriting process by having visibility into SMBs’ incoming payments.

Embedded financing can address the market’s particular challenges in other areas, too. Sohn said is in talks with a buy now, pay later (BNPL) company to enable the hiring businesses on the platform to access their own working capital tool by paying for recruitment services in installments, while the recruiter itself gets paid more quickly.

As more marketplaces and ecosystems consider the potential value of embedded financial services, it’s not only the end users’ experience that they’re exploring. Sohn noted that such models are also increasingly beneficial to the financial service provider facilitating services through these models, not only by strengthening their underwriting processes with integrated data but by lowering their customer acquisition costs.

“If I’m walking around with a community of over 800,000 small and independent businesses, that’s a phenomenal lead-gen [lead-generation] service for a company like Fundomate,” he said.

Historically, small businesses had been left out of traditional lenders’ financing efforts, leaving FinTech and alternative lending communities to address the need with better banking, lending, payments and other financing experiences. And as embedded financing digs its heels into new markets, the opportunity to strengthen the experience for the small business end-user continues to grow.

Yet there is rarely a one-size-fits-all solution to address the ongoing working capital gap in the SMB arena. With embedded finance now allowing nonfinance companies to fill these needs for their customer and user bases, the market has a chance to take a more niche, targeted approach to small business lending through features and functionality targeted to specific industries.

That’s good news for the recruitment space, says Sohn, which, as the gig market grows, will benefit from connecting talent and recruiters to banking services they have historically lacked.

“At the end of the day, these are small businesses,” he said. “While everyone in the capital world has been fawning over restaurants and salons with cash advances, there has not been a concerted effort to provide a phenomenal offering for small and independent recruiters.”



About: Buy Now, Pay Later: Millennials And The Shifting Dynamics Of Online Credit, a PYMNTS and PayPal collaboration, examines the demand for new flexible credit options as well as how consumers, especially those in the millennial demographic, are paying online. The study is based on two surveys, totaling nearly 15,000 U.S. consumers.

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