Business Financing Report: Small, Midsize Companies Need Working Capital Management Alternatives

A new study conducted by CFO Publishing and The Receivables Exchange reveals that many small and midsize businesses continue to experience a significant “liquidity gap” when it comes to cash flow, even as large companies are regaining access to the capital markets. The study consisted of a survey of 321 senior finance executives at small and midsize businesses (SMBs) to determine the attitudes and best practices executives are employing to manage cash flow and meet working capital needs. The new research shows that finance executives at small and midsize businesses are increasingly open to financing alternatives to help them to bridge the liquidity gap as the business financing landscape changes. The Receivables Exchange is the world’s first online marketplace for real-time trading of accounts receivable, offering faster access to capital, without constraints.

“Our collaborative research shows that small and midsize companies are constrained by traditional financing options,” said Justin Brownhill, CEO and co-founder of The Receivables Exchange. “As companies cope with extended payment terms from larger customers and a lack of affordable financing, many are restricting growth. We hope this report sheds some light on the cash flow challenges companies are facing, and shows how innovative financial solutions, such as online receivables financing, can help them gain access to a flexible, affordable source of capital.”

The Receivables Exchange partnered with CFO Publishing to conduct this research as part of its mission to bring affordable and flexible access to capital to small and midsize businesses. The study found that:

While most small and midsize businesses report little-to-no access to capital, nearly 75% of survey respondents said that they expect growth to come from selling to new customers – often a capital-intensive strategy.
Nearly 60% of companies said they do a large volume of business with companies larger than their own. As they work to reduce - days sales outstanding (DSO), they are increasingly thwarted by their customers’ attempts to extend payment terms, indicating that the working capital “tug-of-war” between large companies and their smaller suppliers continues to be a major business challenge.
Close to 50% of respondents said that “improving DSO is important to their financial health,” yet less than 25% expect their DSO to improve over the next two years. Many respondents reported intense frustration at the inability to control one of the most important indicators of financial health.
Frozen out of credit markets, more than 70% of companies surveyed are expecting to call for a self-funding growth strategy driven by cash flow from operations, operations that remain cash flow-challenged for many respondents.

The study also found that many companies are focusing on improving operating efficiencies to control working capital. Among the strategies they cite are “holding financing staff more accountable, focusing on speedy invoicing, creating alternative payment schedules for independent contractors, and delaying payments” to their own suppliers.

After years of liquidity scarcity and operational improvements, companies are increasingly open to more efficient and affordable means of lowering DSO and optimizing working capital. The study showed that respondents are increasingly open to online receivables financing as a working capital solution, as are businesses throughout the U.S. In the first half of 2010, receivables trading volume on The Receivables Exchange grew by more than 300% as of July 31, 2010.

Called the most innovative e-commerce company in the world for 2010 by The Wall Street Journal, The Receivables Exchange is a flexible financial solution that allows businesses to significantly shorten DSO by selling receivables in a competitive online auction. The Exchange is transforming the business financing landscape by allowing small and midsize companies to sell their receivables for 98 to 99 cents on the dollar, on average, to institutional investors, who compete in real time to purchase the receivables. By selling their receivables on the Exchange, companies are able to lower their cost of capital by 30%, on average. The competitive auction format drives down the cost of capital for small and midsize businesses, and allows them to gain access to a flexible, affordable funding source.

Read the full report on how small and midsize companies are using The Receivables Exchange to manage their cash flow without constraints. Or, sign up for the free webinar on Thursday, December 9 at 2 p.m. ET to listen to a discussion of the results of the survey.