Small businesses (less than $5 million in revenue) are starting 2018 in a strong financial position with greater success securing credit from a range of sources and generating strong cash flow. Access to major sources of credit was higher compared to a year ago, signaling general strength for small businesses according to the Q1 2018 Private Capital Access Index (PCA Index) from Pepperdine Graziadio Business School and Dun & Bradstreet.
In the first quarter 2017, 32.2 percent of small businesses said they were successful securing business financing from a bank loan in the prior three months whereas in Q1 2018, 35.2 percent said they were successful (a relative increase of 9.3 percent). In Q1 2017, 23.7 percent of small businesses said they were successful securing an asset-based loan in the prior three months; in Q1 2018, 25.4 percent said they were successful (a relative increase of 7.2 percent).
The PCA Index, a measure of business access to credit, reached the highest level for small and middle market businesses ($5-100 million in revenue) since the PCA Index was first calculated in Q1 2012 – from 26.6 in Q1 2012 to 33.9 in Q1 2018 (a relative 27.4 percent increase). The PCA Index for small businesses in Q1 2017 was 33.1 and in Q1 2018 was 33.9 (a 3.4 percent relative increase).
“The trend of increased access to credit is good news for both small and middle market businesses, and signifies continued expansion and revenue growth,” said Bodhi Ganguli, lead economist at Dun & Bradstreet. “At the same time, we are seeing greater access to working capital which is critical to fuel continued growth.”
Middle market companies were particularly successful securing asset-based loans. In Q1 2017, 66.7 percent of middle market businesses said they secured loans from asset-based lenders in the prior three months; in Q1 2018, 77.8 percent said they were successful (a relative increase of 16.6 percent).
“Asset-based lending involves companies pledging assets such as accounts receivable, inventory, equipment or real estate as collateral,” said Dr. Craig R. Everett, director of the Pepperdine Private Capital Markets Project. “The rates and terms for these loans are better than factoring, but typically not as favorable as cash flow loans from banks. The fact that we are seeing small- and medium-sized companies moving away from factoring and into asset-based loans suggests improved financial health and stability.”
Businesses reported stronger cash flow, suggesting they are getting paid more regularly and on-time. In Q1 2017, 47 percent of all businesses said they didn’t need to raise financing because they had enough cash flow; in Q1 2018, that increased to 53 percent (a relative 12.8 percent increase).
“After a prolonged era of uncertainty, small businesses are finally seeing some breathing room in their cash position,” said Everett. “Stronger cash flow means that paying the bills every month is less of a concern. I imagine that many small business owners have started to sleep better at night.”
Growth also appears to be strong as 88 percent of all businesses are confident their business will expand in 2018 (89 percent of small businesses and 92 percent of middle market businesses said they expect growth). Looking ahead, the most significant small business challenge is finding and retaining profitable customers, while middle market businesses are most challenged by attracting and retaining a quality workforce.
The PCA Index is a quarterly indicator produced by the Pepperdine Graziadio Business School and Dun & Bradstreet. The Q1 2018 Index report was derived from 1,237 completed responses collected between January 8 and 19, 2018.