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Grow Your Business Finances

Working Capital Challenges Mounting for Small Businesses

Working Capital Challenges Mounting for Small Businesses
Credit: ElenaR/Shutterstock

Keeping enough cash on hand for day-to-day expenses has become a real problem for small businesses over the past few months, research finds.

A new report from Dun & Bradstreet and Pepperdine University's Graziadio School of Business and Management shows that more small and medium-size businesses in the U.S. had working capital challenges in the last three months than during any other period in the last five years.

Specifically, 66 percent of the businesses surveyed said they sought financing in the second quarter of 2017 because they needed more working capital. That's the highest percentage in the history of the study, which has been conducted since 2012. Further, the number of businesses that sought help is up 22 percent from the same time a year ago.

Women and minority-owned businesses are having the biggest difficulties managing their working capital. More than 70 percent of the women-owned businesses surveyed and 80 percent of the minority-owned businesses said working capital challenges were the primary reason for them needing to raise capital over the past three months. [Need a loan? Here's a guide on how to choose the right one]

Getting paid on time for the work they are doing is causing the greatest strain on small businesses' working capital. The research revealed that 22 percent of small businesses, those that have less than $5 million in revenue, have had their accounts receivables payments slowdown in recent months.

"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, a lead economist at Dun & Bradstreet, in a statement. "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."

The silver lining in the capital crunch small businesses are facing is that they are having an easier time accessing the financing they need. Access to capital for small businesses was up 6.4 percent over the past three months.

Overall, 37 percent of small businesses expect to try and raise financing in the next six months, up 33 percent from a year ago.

Federal interest rate hikes are one major cause of concern for small businesses. The study found that 20 percent of small businesses believe the most recent rate hike will hinder their ability to access capital, with 17 percent believing the expected increases in the coming year will hurt 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 Craig 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 their concerns, many of the small business owners surveyed saw their revenue increase over the past year. The research found that 49 percent of small businesses reported revenue increases in the past 12 months, with 22 percent saying their revenue stayed flat. Just 29 percent of the small businesses surveyed saw their revenue decline.

The study was based on surveys of 1,167 businesses from a wide range of industries.

Chad Brooks

Chad Brooks is a Chicago-based writer who has nearly 15 years' experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.