Navigating the cashflow crunch

For small businesses, the cashflow crunch has never been more real.

Whether in retail, hospitality, construction or another sector, small businesses share many of the same liquidity challenges, including high overheads, late payments and slim profit margins. Expenses like rent and wages still need to be paid, whether or not there’s any revenue coming in. And with some major global economic shifts hitting consumers in the hip pocket in recent years, it’s no wonder cashflow was one of the top concerns for small businesses in 2019.

The $80 billion cashflow gap

In 2019, just over 50 per cent of small businesses in Australia were cashflow positive while in New Zealand, the figure was 58 pert cent. And then came COVID-19. The global coronavirus pandemic had an immediate negative impact on hundreds of thousands of businesses in 2020. Gyms, restaurants and shops were forced to close or reduce their trading capacity, tradies were unable to enter people’s homes and many new projects were stalled. Many small businesses saw their sales dry up virtually overnight and late payments arrive even later than usual, making the cashflow situation even worse. And now, there’s an estimated $80 billion gap between the amount of credit that small businesses need and what’s available to them.

Government lifelines not enough

Government grants and schemes were a lifeline to many businesses last year, but it simply wasn’t enough. In August 2020, more than a third of Australian businesses predicted it would be very difficult to meet their financial commitments over the next three months, and small businesses were twice as likely to say this as large ones. The reality is that when times get tough, small-business owners are on their own. Many feel it’s all but impossible to access finance to fund or grow their business through traditional channels, such as banks. In Australia, around one-fifth of small businesses have found it relatively difficult to access finance. Barriers include the lengthy and onerous application process, the need to use personal guarantees and real estate as collateral, and the reluctance of banks to lend to what they deem as high risk businesses.

It’s financial and personal

Small business owners are usually the first ones to feel the cashflow crunch; often feeling a sense of responsibility to delay or forgo their own pay cheque to help pay staff or free up cashflow. And for two-thirds of small-business owners in Australia, cashflow issues within the business have actually led to financial difficulties in their personal lives, with business owners often taking on new loans or re-mortgaging their homes. Besides the personal toll it takes, there’s also an opportunity cost to not being able to take on new work. According to one estimate, low cashflow costs the small business sector $235 billion in lost revenue annually. Access to finance is critical for small businesses – both to fund business growth and to meet financial obligations due to the gap between revenue coming in and payments being due. And yet, banks have tightened their lending practices even further amidst COVID-19, and they continue to charge small businesses higher interest rates than big businesses. This has set the stage for a major shake-up of small-usiness finance, with a clear need for a fast, flexible, user-friendly alternative.

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