LOS ANGELES, September 28, 2016 /BUSINESS WIRE/ — Although businesses have reported steady increases in access to credit since 2012 and an increase in demand for credit compared to the same time last year, small businesses are still scrambling to secure working capital, according to the third quarter 2016 Private Capital Access (PCA) Index report by Dun & Bradstreet and Pepperdine Graziadio School of Business and Management.
Study: Small businesses report “slow accounts receivable” impacting their financial condition
Both small (less than $5 million in revenue) and mid-sized ($5-$100 million in revenue) businesses combined reported a 7.8 percent increase in access to capital and a 3.1 percent increase in demand for capital year-over-year. However, about two percent more businesses than a year ago reported seeking financing for “working capital fluctuations” — defined as fluctuations in business funds that are used in day-to-day trading operations and generally considered to be a standard measure of a company’s efficiency and economic health.
“Small businesses are getting even more access to credit, and this correlates to continued expansion and revenue growth,” said Jeff Stibel, Vice Chairman of Dun & Bradstreet. “These small businesses are leaner than they were before the recession, and typically not able to rely on the same liquid assets as larger companies, making access to working capital critical to fuel continued growth.”
Business concerns about a stable financial future were evident in the 25.7 percent increase in businesses citing “worsening financial conditions” as a reason for seeking financing, compared to the year-ago period (35.2 percent in Q3 2016 versus 28 percent in Q3 2015).
Concerns about cash flow were also reflected in the increasing percentage of businesses noting that “slow accounts receivable” were impacting their financial condition. Twenty-seven percent of small and mid-sized businesses reported that slow accounts receivable led to additional borrowing to sustain cash flow. Among small businesses, 27 percent in Q3 2016 noted the need for additional borrowing compared to 25 percent in Q3 2015, an increase of 12 percent. Both small businesses (39 percent) and mid-sized businesses (15 percent) reported slow accounts receivable as a reason for slow or stopped growth in Q3 2016. In addition, among both small and mid-sized businesses, 8.3 percent anticipated revenue decreases in Q3 2016.
“As this research demonstrates, the health of the U.S. business community can be viewed through multiple lenses. Increased access to and demand for credit is a favorable metric when assessing near and long-term costs and opportunities, but notably, businesses are viewing the future with growing trepidation,” said Dr. Craig R. Everett, Director of the Pepperdine Private Capital Markets Project. “Our analysis suggests that businesses appear to be less concerned about short-term growth and profitability than on ensuring future liquidity.”
As companies brace for worsening financial conditions, the Q3 2016 data suggest that cash flow skittishness may be leading businesses toward alternative financing and lending options, including higher-risk solutions, to free up liquidity. Increasingly, businesses reported the use of factor lending, a type of debtor finance in which a business sells its accounts receivable to a third party (a “factor”) at a discount (29 percent sought factor lending in Q3 2016 versus 22 percent in Q3 2015, a 24.1 percent increase). A business will often factor its receivable assets to meet its present and immediate cash needs.
Similarly, fewer businesses are accessing trade credit, a financing option under which suppliers extend credit to businesses for the purpose of buying now and paying later. More than 17 percent fewer businesses reported access to trade credit in Q3 2016, compared to Q3 2015 (57 percent in Q3 2015 versus 47 percent in Q3 2016). Study authors hypothesized that the decrease could correlate with a decline in business activity, or that suppliers have tightened trade credit due to concerns about the operational stability of trade business partners.
The PCA Index is a quarterly indicator produced by the Graziadio School of Business and Management at Pepperdine University with the support of Dun & Bradstreet. The Q3 2016 survey is based on 1,888 completed responses collected July 6 – July 29, 2016.
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About the Pepperdine Graziadio School for Business and Management
A leader in cultivating entrepreneurship and digital innovation, the Pepperdine Graziadio School of Business and Management focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally oriented education through part-time, full-time, and executive MBA programs at our five Southern California locations and Silicon Valley and Santa Barbara campuses, as well as through online and hybrid formats. In addition, the Graziadio School offers a variety of master of science programs, a bachelor of science in management degree-completion program, and the Presidents and Key Executives MBA, as well as executive education certificate programs. Follow the Graziadio School on Facebook, Twitter at @GraziadioSchool, and LinkedIn.