Main Street's Pending Cash Flow Crisis - Gift Cards?!
Updated: Jun 18
Business is not the same without human interaction. Bars, restaurants, hair salons, spas, gyms, and more have had to drastically pivot their business model or temporarily shut down altogether.
In response, many of these businesses have launched gift card campaigns, encouraging their fans to buy gift cards now to help them stay afloat until the economy reopens. Some beloved businesses have sold tens of thousands of dollars worth of gift cards during the economic shutdown. But while community support is amazing, there is a growing concern among business owners that the gift cards they’ve been selling may cause cash flow issues once the economy reopens.
Gift cards - an impending cash flow liability
When getting your books in order, accountants put gift cards in two sections; it’s added to your cash reserves but it’s also a liability. When a customer buys a gift card, they are giving you money now in exchange for a prepaid product at a later time.
When a customer comes into a restaurant for dinner and uses a gift card, your business still uses ingredients and staff time to meet that need. This has a price and notably, your customer will not pay for it with money. Under normal circumstances, this is not a big deal because very few customers use gift cards at a given time.
Unfortunately, the economic shutdown has created a perfect storm where these gift card liabilities may start to hurt your bottom line. First, gift cards have become one of the go-to ways to support businesses that people cannot patronize at this time. Spas, gyms, experience spaces, and boutiques alongside restaurants have been encouraging their community to buy gift cards leading to a surge in demand. Second, as the economic shutdown continues, small business cash reserves are shrinking. While a business is not open they may still have costs to pay for including rent, payroll, and existing debt. Small cash reserves and thin margins mean that most small businesses are less resilient to even relatively small changes to cash flow. And lastly, as the economy slowly reopens many businesses will have the upfront challenge of restocking and restaffing in the midst of a recession.
Even though a customer might have bought a gift card, during the economic shutdown those funds are likely to have already gone to fixed costs or payroll. With margins predicted to be thinner than ever in a slow recovery, the first few months after the economy reopens can be difficult if a business has to divert some cash flow to redeeming gift cards.
Giving businesses time to breathe - slowing down gift card utilization
According to a Paytronix Report, about 40% of gift cards get used within 30 days of being purchased. With businesses looking ahead to redeeming 40% or more of their gift card liability so close to the economy reopening, the gift cards that helped a business weather the shutdown may be the ones that keep it from recovering quickly.
While it’s true that about 59% of gift card purchasers say they spend more than the face value of a gift card on the day they redeem it, unless we change customer’s behavior or put unpopular restrictions on gift card redemption, there are very few ways to prevent gift card liabilities from becoming a significant issue for small businesses.
That’s why we at Honeycomb wanted to create a new gift card product that spreads out business’s gift card cash flow liability and rewards people for waiting to use their gift cards. It’s called the Honeycomb Loyalty Bond Program. With Honeycomb Loyalty Bonds, a business’s customers can buy loyalty bonds to support local business and earn 1.3x in gift cards. Here’s how it’s special though -- these gift cards mature over time. Every 6 months, a business’s customers will receive a quarter of their loyalty bond, giving business customers more reasons to treat themselves, while keeping business cash flow smooth as the economy reopens.
As an economy, we’ve never witnessed a period where revenues go from normal to zero so quickly across entire industries. In the days and weeks ahead, local businesses will face many challenges but they’ll do it with a supportive community around them, ready to help as best they can. Let’s crush that gift card liability looming in front of us and emerge stronger on the other side.
Interested in getting cash now and customer loyalty for years to come, learn more about Honeycomb's Loyalty Bonds Marketplace here.