One of the trickiest things about running a business is keeping cash flowing. Sometimes, your accounts receivable are 30-60 days out, but it always seems like your accounts payable are due right now.
We wanted to get deeper insight into the role of cash flow in small businesses' daily operations, so we’ve been doing some research. In two separate national surveys, we polled a total of more than 5,000 local business owners in all 50 states. We asked about a range of topics, including how they think about cash flow management. Here are a few key revelations.
Cash is king for small businesses
We wanted to rank the top worries for Main Street businesses — a kind of “anxiety index,” if you will. In making the list, we were hoping to identify opportunities to remove some of the biggest stresses from overstretched small business owners. Take a look at what we discovered:
So, cashflow management is a top-10 concern, which makes sense since 82% of small businesses fail due to cash flow problems. But if you think about cash flow more broadly, it’s really just a function of having enough income to cover expenses. That means increasing revenues and profits, which are vital issues for small businesses, as we’ve written before.
In our Small Business Threat Index, we learned that a major slowdown in sales is one of the scariest things that can happen to an independent business.
The likely reason, which was also revealed in our national study, is that small companies have an incredibly small runway with regard to cash on hand. In fact, we found that 1 in 5 small businesses would shut down within 30 days if sales stopped entirely, and 3 in 4 would close their doors within six months without consistent revenue.
In short, small businesses need constant cash coming in or they’re in danger of dying. Therefore, sales is an obvious priority. But what about other cash flow management options, like business financing?
Glad you asked. :)
Small businesses aren’t looking for loans
In our research, we were surprised to find that most small business owners are NOT looking for financing, despite the cash flow challenges we outlined here. First we asked respondents if they’re looking for a small business loan, and if so, when. Here’s what we learned:
So, 58% say they don’t need financing, and only 19% have concrete plans to obtain a small business loan in the next 12 months. That’s not a huge number, considering the thin margins most businesses operate on.
Next, we ask how much financing small businesses are looking for. Take a look:
Interestingly, when we asked the question this way, the number of business owners who reported that they don’t need financing rose 5 percentage points, to 63%. Because we talked mainly to owners of established businesses, most respondents were looking for small loan amounts, which is where online lenders are increasingly stepping in.
In fact, according to ValuePenguin, the average small business loan from a bank ranges from $150,000 at small, regional banks to $600,000 at large banks. Online lenders, on the other hand, average anywhere from $16,000 to $175,000. A likely reason is that online lenders make smaller, more frequent loans, like crowdfunded loans or invoice factoring.
Don’t want it, or can’t get it?
One reason local merchants may not be looking for financing is they don’t think they qualify for it. We asked respondents which types of funding their business would be eligible for and, surprisingly, there wasn’t a lot of confidence in any category.
Interestingly, more merchants think they can get a traditional bank loan than an online loan, which likely either speaks to rising qualification criteria among online lenders or the lack of familiarity with these loan-makers among small business owners.
How is your business handling cash flow management? If you’re doing some interesting things to generate revenue or obtain financing, drop us a line at firstname.lastname@example.org and we’ll profile your business on our blog.