Access to business finance is critical for small and medium-sized businesses (SMBs) on the high street – businesses generating less than $10 million in annual revenue and having physical locations from which they conduct their business in the main shopping districts of cities.
But according to a study by PYMNTS Intelligence, only 39% of these SMEs have access to funding sources such as business credit cards and working capital loans, with 8% of these SMEs at risk of closing up shop.
Drilling down into the data shows that businesses in the hospitality (11%) and retail (10%) sectors are slightly more likely to go out of business.
That’s in line with recent news of rising small business bankruptcies, as reported by PYMNTS on Sunday (October 1) in The Wall Street Journal (WSJ).
According to the WSJ report, nearly 1,500 small businesses filed for bankruptcy under Subchapter V of the bankruptcy code — a provision that makes it easier for small businesses to restructure — in the first nine months of 2023, nearly matching the total for all of last year.
In addition, defaults and delinquencies on small business loans have exceeded pre-pandemic averages, the WSJ noted, citing data from Equifax. The report attributes this surge to the lack of ability for small businesses to issue shares or seek financing from sources such as private investors, unlike larger companies.
This limited access to capital makes them more vulnerable to economic fluctuations, especially when interest rates rise. In addition, the inability to secure affordable financing can lead to financial stress, making it difficult for small businesses to sustain operations and meet their financial obligations.
Declining cash reserves
This challenging economic environment has also affected businesses’ access to cash, PYMNTS Intelligence research shows, with 18% of Main Street SMEs lacking access to cash as of July this year, up from 15% in January 2022 Mr.
Among those affected, personal and consumer services businesses face the biggest challenge in accessing cash at 28%, followed by small and medium-sized retail businesses (23%).
Overall, most SMEs on Main Street have a cash cushion of $28,000, with the sectors’ amount of ready cash representing less than half of average monthly sales.
This and challenges related to the economy will continue to be a challenge for most SMEs, with 45% of SMEs citing inflation and almost 20% respectively citing uncertainty in economic conditions as their biggest challenge.
However, more than half of Main Street’s small and medium-sized businesses remain optimistic about the future. In July, 57% of these businesses expected their revenue to increase compared to July last year, a trend that has remained relatively stable since January 2023.
Middle market firms use working capital to improve productivity
The high cost of accessing working capital is a particular challenge for middle-market firms, companies that typically generate annual revenues ranging from $50 million to $1 billion.
These businesses often find themselves in a dilemma because existing financial solutions are not tailored to their specific needs, which fall between small and large businesses.
The findings, detailed in a study conducted by PYMNTS Intelligence and Visa, titled “The 2023 Corporate Working Capital Index,” show that working capital has been instrumental in the business growth of mid-market firms, with 70% of corporations , who have used working capital solutions, see improved business metrics as a result.
In fact, top-performing growth corporations averaged $3.3 million annually in accounts payable (AP) savings, reduced days in default (DPO) by five days, and improved cash conversion cycles.
The study further reveals that using working capital for strategic purposes, including covering anticipated cash flow gaps and growth initiatives, enabling firms to pay suppliers earlier than expected and integrating more suppliers into payment systems, which in turn leads to discounts and better supplier relationships such as reduced errors, delays and HR time.
Additionally, instead of overdrafts and loans being an expensive substitute for other forms of strategic growth capital, virtual credit cards have proven critical for mid-market companies, the PYMNTS study further reveals.
In fact, the use of virtual cards has skyrocketed in recent years, with mid-market businesses expected to triple their use by 2024.
The use of this solution – considered the “Swiss Army Knife” of working capital solutions by CFOs – is associated with increased operational efficiency driven by higher supplier integration and flexibility in usage patterns.
Looking ahead, almost all mid-market firms plan to increase their use of financing in 2024, with most seeing it as a tool to fund strategic growth in today’s uncertain macroeconomic environment.
