Growing number of SMEs have no cash reserves

More than one in five SMEs have zero cash reserves, according to new research from small business lender Prospa, with economic challenges, labour shortages and late payments the main contributing factors.

The You Gov study, commissioned by Prospa, revealed that 22% of SME leaders surveyed said their business currently had no cash reserves at all, while 18% reported they were reliant on less than a months’ worth of expenses, and 21% predicted they would run out in just one or two months.

Nearly half of SMEs said they had reduced their own income, while 31% had dipped into personal funds to pay business expenses as rising costs persist.

Prospa general manager of sales and partnerships Roberto Sanz (pictured above left) said economic challenges, staffing shortages, and late payments were contributing to inadequate cash reserves among small businesses.

“The retail and hospitality sectors are particularly affected, facing a triple threat of reduced discretionary spending, increased supply chain costs, and rising fuel and energy expenses,”  Sanz said.

“These industries are especially vulnerable due to typically smaller cash reserves and limited options for cost-cutting measures.

“Overall, SMEs are currently holding cash reserves equivalent to only two to three months of expenses …  ideally, businesses should be aiming for a buffer of three to six months of operating expenses.”

Rising operating costs coupled with reduced discretionary spending from customers was tightening business cash flow, Sanz said.

Meanwhile, the latest Equifax data shows that some small business owners are suffering greater financial stress than consumers.

Early stage mortgage arrears for consumers were up 30% in Q1 compared to the same period two years ago, but for sole traders in construction this figure was 60%.

“SMEs in this sector are 30% more likely to be in arrears,” said Equifax executive general manager Moses Samaha. “Similarly, sole traders in the hospitality sector are 75% more likely to be in early mortgage arrears than the average consumer.”

“With insolvencies at their highest point since 2015, a rise in interest rates may impact the survivability of many businesses – particularly those, like the SMEs and sole traders in construction and hospitality, that are facing financial stress in both their professional and personal lives.”

While the RBA’s decision to keep the cash rate on hold in June was welcome relief to struggling SMEs, Sanz said the warning of further rate increases later this year meant businesses must prepare financially.

“In today’s macroeconomic climate where small businesses have little to no cash reserves, gaining fast access to additional funding can be critical to ensuring business continuity and success.

“However, many small business owners may feel their eligibility for finances is becoming increasingly complex.”

SMEs show resilience

Prospa’s survey also revealed Australian business leaders’ resilience to adverse market conditions as they took “a solutions-first approach”.

More than three in four (77%) said their business already had or was likely to actively adopt strategies in the next 12 months to manage the impact of rising costs.

A total of 43% planned to reduce non-essential expenses, while 38% had plans to increase their prices in the next 12 months. Nearly one in five (21%) of metro-based businesses cited an increased support for technology adoption.

“As businesses adapt to the changing climate, they’re increasingly seeking advice from brokers to navigate alternative funding options and gain access to the cash boost they need,” Sanz said.

“By providing tailored and thoughtful solutions to their clients, brokers will enable SMEs to weather the storm and drive profitable growth.”

Personal finances under pressure

The non-bank lender’s survey also revealed the pressure on SME owners’ personal finances.

Nearly half (46%) of those surveyed said they had reduced their own income, and a further 31% reporting dipping into their personal funds to pay business expenses.

Business owners considering or likely to switch in the next 12 months to lower-cost suppliers totalled 19%, while 12 % were reducing their pay or bonus, and 11% had reduced operating hours.

Increased stress or burnout was also high at 44%, and 29% said they had less time to spend with friends and family due to rising costs and a challenging economic environment.

SME owner’s experience

Belinda Keehn (pictured above right), founder and owner at BJ’s PJs, said as an Australian small business owner, the current economic climate was becoming increasingly tough to navigate.

“Rising costs and fierce competition from overseas has meant less business is coming through the door, making it harder than ever to keep the lights on,” Keehn said.

She said while BJ’s PJ’s boomed during the pandemic in line with the unprecedented appetite for loungewear, consumers were spending more on household bills and less on themselves.

“When my cash reserves dried up, I made the tough decision to use my personal savings to pay off my business’ expenses.

“Since 2022, this equated to over $100,000 - all of my savings. I also haven’t paid myself a salary in the same period, and am still unsure when I will be able to do so.”

Keehn said the knock-on impact on my personal life had been profound.

“The increased stress of trying to keep the business afloat has led to burnout, which becomes a vicious cycle that is hard to get out of. 

“In the near future, I hope to see more government-led support for the small business community so we can continue to do our part to contribute to the economy.”

How brokers can help SMEs

Sanz said brokers had the ability to bridge the gap in awareness of alternative lenders amongst small businesses.

“We know the lack of awareness of alternative lenders limits the opportunity for SMEs to grow and navigate challenging times,” he said.

Sanz said brokers also played a critical role in the freeing up of cash flow for businesses by matching a funding solution to the business need.

“This is particularly helpful for small business owners unfamiliar with financing options or navigating complex loan processes.

“Working with alternative lenders like Prospa enables brokers to streamline the lending process for SMEs while ensuring strong client relationships. This can help brokers future-proof their business by building new revenue streams.”

SMEs turn to non-banks

Sanz said Prospa’s purpose-built Credit Decision Engine pulled in real-time data and insights including risk parameters and models, pricing and credit policy and other credit, compliance and regulatory requirements to determine the creditworthiness and risk appetite of small businesses.

“This proprietary technology, combined with our hands-on lending specialist teams, means that we’re able to deliver funding solutions that small businesses want and need.”

Alternative lenders provide speed and flexibility that traditional lenders don’t, said Sanz.

Prospa had been operating for more than 12 years and had provided $4 billion of funding to support small businesses.

What feedback have you had from SME customers about the pressure they are under? Comment below