Alternative Finance’s Unique Position to Help with Employee Retention and Engagement

Although the finance industry is often unpredictable, businesses usually react to an impending recession in a cyclical way. As business generally slows down, companies will try different ways of cutting costs. One such method is laying off employees, which we have witnessed in the recent mass layoffs in the tech industry. Although tech may currently be dominating the headlines, the finance and fintech industries have been struck by layoffs as well. At the end of 2022, Goldman Sachs laid off over 400 additional employees on top of hundreds more from a few months prior. Wells Fargo was reported to have laid off hundreds of employees as well. 

Naturally, the effect of a possible recession on the finance industry at large extends to the fintech industry, especially in lending. This is illustrated by mass reductions and hiring slowdowns across the board; Chargebee, Chime, Opendoor, Pleo, and Stripe are just a few of the companies announcing layoffs, reducing their workforces by 10-18%. Other companies, such as Intuit’s Credit Karma have implemented hiring freezes.

Recessions tend to hit small businesses especially hard. Because they have fewer resources available to them compared to large corporations, many can struggle due to “reduced cash flow, loss of demand, staffing reductions, and marketing constraints.” Small business also deal with unique issues. For example, many small businesses spend money as it is received, meaning that delayed payments from customers have a more immediate impact on their bottom line. Customers will also have less money to spend on their goods and services, especially if small businesses are unable to compete with lower prices from huge corporations.

To counter these problems, small businesses will sometimes turn to layoffs as a money-saving tactic. However, turnover can have devastating effects on a business, and they might wind up costing the company more in the long run. Writing for the Harvard Business Review, economists Sandra J. Sucher and Marilyn Morgan Westner suggest that whatever costs are saved via layoffs are outweighed by, “bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation.” It can cost between 50% and 250% of an employee’s annual salary to hire and train a replacement, costing American businesses about $1 trillion annually. Layoffs can also break the trust your remaining employees have in your company and reduce the quality of their work as they worry about future layoffs and other forms of mistreatment.

It may actually be more beneficial to engage with the employees that you already have to ensure that they continue working for you. Research by the Corporate Leadership Council shows that positive employee engagement can reduce voluntary turnover by 87% and increase performance by 20%. Sucher and Westner suggest that the four key factors impacting job retention are recognition and reward, work-life balance, professional growth, and belonging and diversity, and each of these offers unique opportunities for engagement. For example, remote work opportunities provide flexibility and freedom, lowering employee turnover by 25%. The best way to retain employees is to make them feel like their employment with your company is valuable while showing what you are willing to offer to prove that.

According to Gallup research, when comparing businesses with the best and worst employee engagement, there was a median difference in customer loyalty of 10%. This is very important as it builds up a reliable source of revenue from people you are already familiar with, providing a bit of cushion for your business as you gain and lose new customers. This could also be beneficial for maintaining a good reputation amongst potential future customers as your loyal employees could leave good reviews for your business online or recommend it to others via word-of-mouth or social media.

Implementing new or improved methods of employee retention and engagement can be costly, however. This means that many small businesses will turn to lenders for aid. As the larger legacy companies are tightening their lending practices, customers are pivoting to alternative financing options to keep their businesses afloat. According to the 2021 Global Alternative Fund Survey, 51% of investors stated that the value offered by alternative funds is higher than it was even a few years ago, with 6% of respondents saying it is “significantly better.” Right now, small business owners are looking for lenders that can offer “flexibility in product and fund structures,” and we at Breakout Capital offer that flexibility.

With that in mind, what new opportunities can alternative finance offer? For starters, we can help with funding the aforementioned retention and engagement methods. Loans can be used to supplement materials and other costs so that businesses can still have the funds to make sure their employees are treated well. On top of that, alternative financing can be used in tandem with the Employee Retention Credit. As part of the CARES Act, this credit provides funds to businesses which did not lay off their employees in 2020 and 2021. These businesses can earn up to $26,000 per employee retained as “refundable tax credits funded by the IRS.” Businesses even retain eligibility if they used PPP funds, so there are many options available to those who need them. Another bonus of alternative finance companies is their unique dedication to diversity, equity, and inclusion (DEI), with 65% of investors making it a priority in their business endeavors.

Despite the negativity surrounding a potential recession, the bright side is that alternative financing vehicles such as Breakout Capital will be able to help small businesses make it through to the other side of it. While bigger corporations are relying on layoffs to keep their finances in check, it may actually be more beneficial for small businesses to retain and engage with their employees. The world of alternative finance opens up more opportunities for them to commit to employee retention and DEI, meaning that when choosing between success and doing what is best for their employees, businesses can, in fact, have the best of both worlds.