Commercial Information Solutions
Mastering The SmallBusiness Market:
A Guide To Understanding
4 Critical Credit Risk Trends
The Great Recession may be over, but U.S.
businesses still face an uncertain economic
climate. That’s especially true in the small
business sector, where even minor setbacks
can affect a company’s ability to grow, to
invest and, ultimately, to pay its suppliers and
other creditors.
If your firm regularly extends credit to small-business customers, it’s important
to understand the underlying sources of credit risk in this environment. Here
are four key factors to consider, as well as an examination of the role that timely,
accurate business data plays in minimizing credit-risk exposure – without sacrificing
opportunities for profit and growth.
more
1. An Uncertain Economy
Weighs On SmallBusiness Owners
2. Small-Business
Owners Face Serious
Cash Flow Challenges
3. Small-Business
Closures Are A Fact
Of Life
4. It’s Harder Than Ever
To Assess SmallBusiness Credit Risk
1.
An Uncertain Economy Weighs
On Small-Business Owners
There’s no doubt the economy has improved since the depths of the 2008-2009 recession.
The more important question, however, is whether the economy has improved enough to
create a healthy environment for small-business growth.
Unfortunately, based on feedback from thousands of small-business owners, we’re not there
yet. According to surveys conducted by the National Federation of Independent Businesses,
small-business owner confidence remains stalled at recessionary levels. One in five smallbusiness owners cite weak sales as the biggest problem they face, and one in three say
they expect sales to fall during 2013.
28%
of the small-business
owners surveyed
described their situation
as “somewhat” or
“very” poor.
A late-2012 study sponsored by Wells Fargo and Gallup paints an even more troubling
picture: 28% of the small-business owners surveyed described their situation as
“somewhat” or “very” poor.
Many small businesses are positioned to survive and even thrive in these conditions.
Many others, however, will find it increasingly difficult to pay their suppliers and other
creditors, meet their payrolls, and satisfy other financial obligations.
Wells Fargo/Gallup study
2 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends
2.
Small-Business Owners Face
Serious Cash Flow Challenges
Cash flow is always a pressing issue for small businesses, many of which operate
without a significant cushion of working capital. When their customers are late with
payments – an all-too-common problem today – these firms must, in turn, delay
payments to their own suppliers.
The Wells Fargo/Gallup study cited above illustrates this trend; it found that 29% of the
small-business owners surveyed expected their revenue to fall “a little” or “a
lot” during 2013, and 30% also expect their cash flow during the same period to
be “somewhat” or “very” poor. Another study from B2B International reinforces this
trend, showing that up to 40% of all U.S. small businesses consider cash flow to be
a problem.
29%
of the small-business
owners surveyed
expected their
revenue to fall “a
little” or “a lot” during
2013, and
What do these findings mean for vendors and suppliers that extend credit to smaller firms?
First, they reinforce the fact that an unusually high percentage of small-business owners are
struggling to make sense of unpredictable economic conditions.
Second, and perhaps more important, the sheer number of firms with cash flow
problems represents a very real source of credit risk. These small businesses are more
likely to fall behind on payments, and those that do fall behind are more likely to become
seriously delinquent.
30%
also expect their cash
flow during the same
period to be “somewhat”
or “very” poor.
Wells Fargo/Gallup study
3 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends
3.
Small-Business Closures
Are A Fact Of Life
The familiar claim that 90% of all small businesses fail within the first year is simply not
accurate. The truth is that according to U.S. Census Bureau data, five-year survival rates
for small businesses range from 48% in manufacturing to 41% in retail and just 36%
in construction, with businesses in other industries falling elsewhere within this range.
Also keep in mind that “closing” does not mean the same thing as “failing.” Most small
businesses close voluntarily, as opposed to shutting down due to bankruptcy, insolvency or
legal action.
The good news, then, is that many small businesses operating today are unlikely to fail in
a manner that leaves their suppliers and other creditors holding the bag. The bad news is
that a significant number of firms do shut down without paying their outstanding debts, and
these exceptions to the rule still pose a major source of credit risk. Sorting through
the winners and the losers in this process is a difficult and imperfect process, but it’s also a
necessary task for companies that serve the small-business market.
Five-year survival rates
for small businesses
range from
48%
in manufacturing to
41%
in retail and just
36%
in construction, with
businesses in other
industries falling
elsewhere within
this range.
0.0
- U.S. Census Bureau
4 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends
4.
It’s Harder Than Ever To Assess
Small-Business Credit Risk
Companies that need to assess small-business credit risk face a daunting task. Consider
a few points that illustrate the sheer size and volatility of this market, according to the U.S.
Small Business Administration:
§§ There are now nearly 28 million small businesses operating in the United States.
§§ During 2011 alone, nearly 800,000 new businesses opened their doors – a rate of
nearly 3,000 new firms per day.
§§ Every day, 1,200 business telephone numbers are changed or disconnected, 1,920
firms will change addresses and 32 will change their names.
In addition, a large number of factors influence an individual firm’s ability to pay its suppliers.
Manufacturing firms are less likely to fail than retailers, for example, and those with a
high level of startup capital obviously represent a better credit risk than those started
on a shoestring budget. In addition, since the vast majority of small businesses are sole
proprietorships, the age, experience level and background of the proprietor can have a makeor-break impact.
If one thing is certain about 2013, it’s that all of these factors will combine to make the
process of assessing small-business credit risk as difficult as ever.
5 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends
There are now nearly
28 million
small businesses
operating in the
United States.
- U.S. Small Businesses Admiistration
Conclusion: Accurate And
Comprehensive Data Is The Key To
Managing Small-Business Credit Risk
Clearly, companies that wish to serve the small-business market must find a way to address
these risk management challenges. In fact, with small businesses accounting for 99.7% of
all U.S. firms with more than one employee and 46% of all private sector output, according
to the U.S. Small Business Administration, mastering this challenge represents an
enormous business opportunity.
With small businesses
accounting for
This is a daunting task, but not an impossible one. It begins with accurate, relevant and
up-to-date information from sources including:
of all U.S. firms
with more than one
employee and
§§ Public records;
99.7%
§§ Firmographic data, including business type and location;
§§ Business credit histories, including supplier payment and lease histories;
§§ Business banking histories – a major predictive factor in assessing credit risk;
§§ Owner credit histories – an essential element for understanding sole proprietorship
credit risk.
In addition, the risk assessment process requires the ability to analyze this data holistically
and to yield useful predictions about an individual small business’ ability to meet their
credit obligations. In order to accomplish this, it is especially important that companies use
risk-analysis tools that give a comprehensive view of risk exposure – and that focus on
credit risk factors associated specifically with the small-business market.
Armed with the right data and analytical tools, companies can assess small-business
credit risk and make informed credit decisions. Even at a time of continued economic
uncertainty and major challenges for small-business owners, this approach allows B2B
suppliers and vendors to recognize this market for what it is: A major opportunity for longterm growth and profitability.
Contact Us Today
For information about Equifax solutions to support your small-business credit risk
management, visit www.equifax.com/smbriskinsights or call 1-877-761-8379.
EFX-USA-00126-03/06/13
Equifax and EFX are registered trademarks of Equifax Inc. Inform > Enrich > Empower is a
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46%
of all private sector
output, mastering
credit-risk challenges
represents an enormous
business opportunity.
- U.S. Small Businesses Admiistration