The US economy has performed well over the past two years. Entrepreneurs have bought and sold small businesses for record amounts. And owners get approved for bank loans easily.
Yet, heading into the first quarter of 2019, 43% of small and medium-sized businesses say they have prepared for a recession. Or they say they plan to prepare. Are these businesses seeing more than what the economic indicators are showing?
Well, small businesses feel the impact of changes in the economy earlier than large companies. And the latest Private Capital Access Index (PCA Index) says small business is expressing caution about borrowing capital.
Small Businesses Are Cautious About Borrowing Capital
Director of the Pepperdine Private Capital Markets Project Dr. Craig R. Everett highlights the precautions these businesses are taking.
Everett explains what the data shows in a release issued with the report.
“Business interest in borrowing to grow and expand appears to have plateaued. Many businesses are playing it safe by maintaining more informal sources of funds and running their business with an eye on cash flow and profitability.”
Pepperdine Graziadio Business School and Dun & Bradstreet conduct the PCA Index Survey Responses Trend Analysis upon which the report is based. And the index is published quarterly from responses gathered between January 24-February 4, 2019.
The index seeks to measure the demand for private capital. And it also attempts to gauge the health of the private capital markets. This includes determining the demand for small business financing. But it also takes into consideration access to private capital, and private financing market policies.
Respondents in the survey said they are tapping into informal or short sources of credit. These sources are replacing going to traditional funding institutions.
The financing sources small businesses will be seeking out 2019 are personal and business credit cards at 78% and using friends and family at 76%. The index says this is the highest reported rates for the three options since it started keeping track in 2012.
The challenges for accessing capital was higher for minorities compared to the whole sample of businesses.
Capital challenges for minority-owned business will not get better in 2019. Sixty percent said the financing environment is restricting their growth opportunities for their business. The number is 13% higher than the whole sample of businesses (47%).
Because of the financial difficulties, minorities owned businesses said it will negatively affect their hiring (66%). But they are more optimistic than the whole sample about their performance in 2019.
Almost half or 48% said they will be substantially better than in 2018, while only 28% of the whole sample said the same. In terms of growth, 57% said they are extremely confident their business will grow in 2019 compared to 41% for the whole sample.
Nalanda Matia, lead economist at Dun & Bradstreet, said things can get worse for minority-owned businesses if the economy stumbles. Matia said, “While the current lending environment is steady at the moment, an economic downturn is a greater risk for these types of businesses who are already facing challenges in a healthy lending environment.”
Even while businesses are looking for alternative source of credit, the vast majority said they are extremely confident (41%) and somewhat confident (46%) their business will grow in 2019. Only 10% said they are somewhat unconfident with 2% adding they are extremely unconfident.
As to the challenges, 28% said finding and retaining profitable customers would be an issue in 2019. Attracting and retaining a quality workforce will be a problem for 21%, and getting capital to grow rounds up the top three challenges with 12%.
The survey also raised the recent government shutdown and whether it had a negative impact on SMBs.
The Government Shutdown
The latest government shutdown was the longest on record, but the full impact on the economy is still to be determined. During the shutdown, the economy added 300K jobs and for most of the respondents in the survey, it didn’t have a negative impact.
More than 4 in 5 or 82% said the government shutdown had no impact, with 13% stating it negatively impacted their business. The remaining 5% said it impacted their ability to pay their bills on time.
I’d like to see this kind of survey go a little further and ask exactly what SMBs are doing to prepare. Actions speak louder than words, especially on a topic like this.
I guess it comes but it is also a great opportunity for growth.