It's been several years since the Great Recession ended, and everyone wants to know how small businesses are doing, since they are key drivers of employment and economic recovery.
A new study, released late last week by Pepperdine University and the Federal Reserve Banks of Chicago and San Francisco, and online lending marketplace FundWell.com, attempts to do that by assessing small businesses' total financial health.
Specifically, the study, which polled and indexed 940 small business owners using more than 200 variables, found that the better a business owner's knowledge of financial products, specifically credit and alternative finance, the better their overall financial health.
Here are a few takeaways:
- More than a third of businesses rated as being in excellent financial health reported they were either very knowledgeable or extremely knowledgeable about the four primary asset-based financing products, which are inventory financing, accounts receivable financing, trade credit, and equipment leasing financing.
- More than a third of businesses in poor financial health had either limited knowledge or had never heard of such products.
- More than 45 percent of businesses in excellent financial health had successfully secured either credit card or long-term financing from banks.
- No businesses in either poor or below average had ever secured bank financing of any kind.
Additionally, the businesses in best financial health were the best planners. More than 60 percent of financially healthy businesses had a budget and and a separate bank account for payroll. Fewer than five percent of businesses in poor financial health had done either of those things. Similarly, the majority of financially healthy companies always had cash on hand to meet payroll, payroll tax, and health insurance obligations. Just half of businesses in poor financial health always met their payroll obligations.
And just in case you're wondering, it's not the case that the most successful businesses always scored the best. The study determined that 40 percent of businesses with annual revenues of more than $1 million were actually in poor financial health.
The study leaders say they hope the research can be used by lenders to develop alternative means of assessing business health, by looking more intently at management and financial capacity issues.
As the study authors observe: "Issues related to knowledge, management practices, and capacity can also increase the vulnerability of a small enterprise."