Small businesses expressed caution about borrowing capital for growth and expansion in the year ahead, according to the latest Private Capital Access Index (PCA Index) from Dun & Bradstreet and Pepperdine Graziadio Business School.
Thirty-three (33%) of surveyed small (<$5 million in revenue) and mid-sized ($5 – $100 million) businesses reported raising or attempting to raise financing for growth or expansion in the past three months, compared to forty-three (43%) that reported doing so in Q1 2018. Fifty-seven (57%) of businesses in Q1 2019 said demand for financing was for planned growth and expansion compared to sixty-five (65%) in Q1 2018.
Business interest in borrowing to grow and expand appears to have plateaued, said Dr. Craig R. Everett, director of the Pepperdine Private Capital Markets Project. 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.
Among businesses seeking credit, more businesses report tapping into informal, short-term sources of credit. The top three sources for financing success for Q1 2019 are personal credit cards at seventy-eight percent (78%), business credit cards at seventy-eight percent (78%) and friends and family at seventy six percent (76%) “ the highest ever reported for all three.
When asked if the government shutdown has impacted their business, eighty-two percent (82%) of respondents said the government shutdown had no impact, thirteen percent (13%) said it negatively impacted their business, and five percent (5%) said it impacted their ability to pay their bills on time.
In a separate, related 2019 Economic Forecast report based on the same group of respondents, forty three percent (43%) of businesses said they were preparing or planning to prepare for a recession.
Minority-Owned Businesses Face Access to Capital Challenges
Sixty percent (60%) of minority-owned businesses surveyed said the current business financing environment is restricting growth opportunities for their business, compared to forty-seven percent (47%) of the whole sample of businesses surveyed. Minority-owned businesses also shared the current lending environment is negatively affecting their ability to hire new employees at a much higher rate of sixty-six percent (66%), compared to forty-four percent (44%) of all surveyed companies. When asked if raising debt financing is difficult, sixty-three percent (63%) of minority-owned responders said yes, compared to forty-seven percent (47%) of the whole sample.
More minority-owned businesses attempted to raise financing in the last 3 months than their small and mid-sized business counterparts, at thirty-six percent (36%) versus twenty-nine percent (29%). While alternative sources for capital are on the rise for most businesses, just fifty-seven percent (57%) of minority-owned companies secured funding in the last quarter from friends and family compared to seventy-six (76%) of the whole sample.
Minority-owned companies are planning to raise financing in the next six months at a higher rate of forty-one percent (41%) versus twenty-six percent (26%) of the whole sample, with sixty-four percent (64%) citing their need for financing is due to expected increase in demand, compared to forty-nine percent (49%) of the whole sample. When asked for the leading reason in preventing their ability to hire, forty percent (40%) of minority-owned businesses cite government regulations and taxes versus ten percent (10%) of the whole sample.
Minority-owned businesses are optimistic for growth and expansion despite their challenges in accessing the funding to do so, shared Nalanda Matia, lead economist at Dun & Bradstreet. 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.
Despite the challenges, they are more optimistic for their business performance in 2019 compared to 2018, as forty-eight (48%) shared they believe it will be substantially better (versus twenty-eight percent (28%) whole sample), and fifty-seven percent (57%) are extremely confident their business will grow this year versus the forty-one percent (41%) whole sample.
The PCA Index is a quarterly indicator produced by the Pepperdine Graziadio Business School and Dun & Bradstreet. The Q4 2018 Index report was derived from 592 completed responses collected between January 24-February 4, 2019.
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Lauren Ward, 310-919-2230