When SME Self-Sufficiency Turns Self-Destructive

Small and medium-size enterprises face an uphill battle in becoming successful companies, and while the U.S. often prides itself on the concept of pulling yourself up from your bootstraps, there can be a point when self-financing your small business can turn self-destructive.

SME lending platform BlueVine recently conducted research on how small businesses access working capital; according to the findings of its Small Business Survey, the vast majority of SMEs are turning to the bootstrapping route to get by. The data could hint that this self-sufficiency is not their best move.

A survey of 700 entrepreneurs across verticals found that 83 percent have “bootstrapped” themselves to continue building out and growing their companies. That is, these business owners are using their own, personal funds to keep the business operating.

Further, nearly half (48 percent) said they went without pay to support their business, and 17 percent said they have been forced to delay major expenses, like payroll, to keep the financial wheels turning at their firms.

Just 15 percent have used a bank loan to support their capital needs, researchers found. According to BlueVine, the data suggests that turning towards a bank could be an afterthought for companies; one-third of business owners apply for a personal bank loan to finance their companies.

Additionally, 40 percent of the small business owners that did apply for a bank loan reported having a negative experience with the process.

The lack of interest among SMEs for bank financing isn’t for lack of cash flow woes, however.

For the business owners that were forced to see their companies go under, the majority of them said they never even attempted to take out a business loan.

According to BlueVine, expanding business credit lines is the most commonly cited top priority for entrepreneurs in 2016, followed by managing expenses. But with more than half of SME owners tackling the financial books themselves, these entrepreneurs aren’t accessing resources from banks and other financial services firms not only to access working capital but to manage it, too.

While growing their client base was ranked as the top concern for SME owners this year, number two was funding day-to-day expenses, like supplies, payroll and inventory. In third came funding long-term expenses, like investing in equipment.

In fact, four of the top six primary concerns for small business owners involved cash flow management, including invoice processing and long payment cycles.

What To Do

In an effort to help these bootstrapping entrepreneurs, BlueVine posted some statistical evidence of the areas of money management that most frequently trip up small business owners.

Researchers found that one-third of entrepreneurs found taxes to be the most surprising expense that they did not anticipate when first launching their companies. More than a quarter (28 percent) said expenses related to technology — like payroll or HR software — took them most by surprise.

And nearly half pointed to government regulations as the external force that has the greatest impact on their company.

While BlueVine’s report sheds light on the small business owner’s plight, the data does not necessarily imply whether it’s small business owners that need to be more proactive at reaching out to banks and other financial services players or if it’s the banks that need to make the first move.

What is clear, however, is that a gap exists between SMEs and financial service providers; additional research seems to agree, too.

A report published by Ormsby Street earlier this month, for instance, found that more than a third of self-employed entrepreneurs turn to a consumer financing option — payday loans — to cover late payments delayed by their corporate customers.

More than a quarter of SMEs across Europe told Intrum Justitia for its European Payment Report 2016 that they aren’t using bank resources, like bank guarantees or credit insurance, to safeguard against their late payments from corporate customers, either.

According to financial services firm Fiserv, which recently found data to suggest that small businesses will be increasing their demand for digital, mobile and online banking solutions this year, it’s up to the banks to bridge the disconnect between small business owners and their corporate finance needs.