The top financial concerns for small business owners today

An international study examined factors small business owners believe would improve their working capital efficiency, resolve cash flow problems and business relationships with customers.

What’s the top concern for owners of small to medium-sized enterprises (SMEs) in the UK? You might expect that the answer would be Brexit, but the second annual C2FO Working Capital Outlook Survey finds otherwise.

Although these businesses do rate economic and political uncertainty as obstacles affecting their growth, they consider competition from emerging markets, uncertainty about customer contracts, and cash flow problems to be more pressing.

The survey polled the owners of more than 1,800 SMEs in the United Kingdom, Germany, France, Italy and the United States about the factors they believe would improve their working capital efficiency, resolve cash flow problems and business relationships with customers.

Here are some of the primary survey findings from SMEs in the UK:

• SMEs are strapped for cash – 54 per cent say experiencing cash flow problems is their biggest obstacle to business growth.
• Funding is getting more expensive – 58 per cent cannot get funding at APRs below 8 per cent (compared to 52 per cent in 2015).
• SMEs are focused on the future – 63 per cent are primarily concerned about their ability to finance long-term growth.
• Financing options are limited – 76 per cent rely primarily on cash flow from operations to survive and grow.
• Companies recognise the value of early payment programmes – 69 per cent say it is important that their customers offer supplier-friendly accelerated payment options.

The survey finds that the majority of SMEs are focused primarily on long-term rather than short-term business issues. Overall, 63 per cent of UK SMEs surveyed say that uncertainty about customer contracts is one of their top three obstacles to business growth, 54 per cent cite cash flow problems, 51 per cent worry about economic and political uncertainty, 38 per cent point to difficulty in adapting to market changes and 37 per cent are concerned about late payment from buyers.

Late payments are an increasing problem for SMEs in the UK. In the 2015 survey, 11 per cent of UK SMEs report having customers who often pay their invoices late, but in 2016 that figure rose to 20 per cent. Because these companies rely so heavily on cash flow from operations, chronic late payments affect their ability to effectively operate and grow. This leads to supply chain risk for their customers, which is why both SMEs and the buyer companies they supply would benefit from closer collaboration and payables solutions.

We’ll examine some additional statistics and interrelated trends that show the challenges and opportunities UK SMEs currently face.

The high cost of borrowing

The working capital needs of more than 29 per cent of the UK SMEs have increased since last year, yet 43 per cent of these businesses report that their ability to borrow short-term working capital is limited or non-existent.

These SMEs are also held back by inflexible and time-consuming processes to obtain funding, as well as the high interest rates charged by many financial institutions for borrowing. Just 42 per cent of the SMEs surveyed say they have access to financing at annual percentage rates less than 8 per cent. Compared to SMEs in other parts of Europe and in the US, UK businesses that can obtain funding, pay higher rates to do so.

Cash flow from operations is key for SME funding

How do SMEs in the UK fund their businesses? More than three quarters of them depend on cash flow from operations. However, only 14 per cent of UK respondents say they are using supply chain finance, factoring or invoice discounting to improve their working capital position. UK SMEs are participating in these programmes in much smaller numbers than their counterparts in France, Germany, Italy and the US.

Although the survey did not ask how many of the SMEs had early payment programmes available to them, it did measure sentiment about the importance of customers offering supplier-friendly accelerated payment options. In answer to that question, 69 per cent of UK respondents agree that these programmes are important, which suggests that more UK SMEs would be open to utilising such options if they were available.

SMEs in the UK have increased their usage of both traditional banking and more innovative programmes such as peer-to-peer lending, but they could benefit from leveraging cash flow from operations via invoice discounting if presented with the opportunity by their customers.

Funding the future

When asked how they would spend additional cash, most UK SMEs reply with long-term business initiatives in mind. A quarter (25 per cent) say they would purchase new technologies, 24 per cent would invest in more inventory or equipment, 14 per cent would cover their existing obligations such as payroll and supplier invoices, 13 per cent would spend their money on employees through hiring, wages, insurance, etc, and 16 per cent would expand their operations by adding a new location, beginning exports to new markets, etc.

These forward-looking plans could ultimately be beneficial for the SMEs themselves, their customers and the economy as a whole. Buyer organisation programmes designed to partner with the supply chain for mutual success can help SMEs and their customers innovate to improve their industry and their individual companies.

The need for supplier-friendly cash flow solutions

Despite the marked increase in late invoice payments, 39 per cent of the SMEs say they would be uncomfortable asking their customers for early payment in exchange for a discount. As mentioned earlier, 69 per cent of respondents agree that it is important for their customers to offer supplier-friendly accelerated payment options, which would make it easier and more agreeable for SMEs to obtain the working capital they need. A formal early payment programme can improve a buyer company’s supply chain health and its relationships with the SMEs that make up the supply chain.

Matt McQuillan is director of business development at C2FO.

Further reading on cash flow problems and business funding

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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