National Survey Indicates Six in Ten U.S. Businesses Are Struggling with Working Capital Challenges, a Five-Year High
More small and medium-sized U.S. businesses report working capital challenges in the last three months than during any other period in the last five years, according to new results from the second quarter 2017 Private Capital Access (PCA) Index report from Dun & Bradstreet and Pepperdine Graziadio School of Business and Management.
The Q2 PCA Index results show that 66% of businesses that were surveyed reported working capital as the reason for seeking financing in the last quarter, an all-time high for the survey since its origination in 2012 and up 22% from Q2 2016 (54%).
Women-owned and minority-owned businesses are feeling the effects of a working capital crunch more acutely, the latest survey has also found. Both women-owned (72%) and minority-owned (80%) respondents cited working capital challenges as the lead reason for seeking capital last quarter.
Twenty-two percent of small (<$5 million in revenue) and medium-sized ($5 million – $100 million in revenue) businesses reported that their accounts receivables payments have slowed over the past three months. This has impacted surveyed small businesses’ ability to grow at a much higher rate than their medium-sized counterparts (42% versus 24%). Slower accounts receivable payments disproportionately impacted women- and minority-owned businesses, with 47% of women-owned and 44% of minority-owned businesses reporting that their ability to grow was impeded.
“While access to capital for small businesses has steadily increased since the Great Recession, these businesses are still feeling the effects of being the last paid on the totem pole,” said Bodhi Ganguli, Lead Economist at Dun & Bradstreet. “While it’s great that banks and alternative lenders are lending at more accessible rates, the capital issues businesses are facing are unfortunately coming from the slowed payments from their business partners. As the Federal Reserve continues to raise the interest rate and the cost of borrowing increases, small businesses will likely feel this crunch more and more.”
Capital More Accessible, but Small Businesses Weary of Interest Rate Hikes, Wary of Future Increases
Despite the working capital crunch, demand for and access to capital is slightly up for both small and medium-sized businesses year-over-year. Small companies fared better this quarter than medium-sized companies, as both demand (up 7.5%) and access (up 1.4%) were higher for small than medium-sized business demand (6.4%) and access (2.8%) over Q1 2017.
Businesses continued to register concern about the impact of interest rate hikes. In mid-June, the Federal Reserve instituted the second interest rate hike of 2017, and signaled it would likely institute one more increase in the remainder of 2017 and up to three increases in 2018. Twenty-percent of small businesses had expected the second hike to challenge their ability to access capital, compared to just 7% of their medium-sized counterparts. Seventeen percent of small businesses and 28% of medium-sized businesses believe increases impact their ability to expand to new markets.
“What we’re seeing is that while small and medium-sized businesses are still able to access capital, they’re realistic about the possibility that interest rate hikes may result in tighter margins and impact their ability to obtain financing in the future,” said Dr. Craig R. Everett, Director of the Pepperdine Private Capital Markets Project. “Business owners can generally handle a one-off rate hike, but the fact that the Fed is acknowledging the very real possibility of four additional increases in the next year and a half, on top of three in the last seven months, is causing greater uncertainty about future ability to expand.”
Despite the effects of the looming hike, lower middle market business revenue change expectations are up 2.9% over Q1 2016. Eight out of every ten businesses expect to perform better this year than last year, a near 30% increase since 2016. Surveyed businesses are also planning to raise financing in the next six months, up 33.3% since one year ago. This projection is the second highest in five years.
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 Q2 2017 Index report was derived from 1,167 completed responses collected April 26 – May 3, 2017.