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Small business turning to personal credit

A survey conducted by Galaxy research for American Express has found that Australian small businesses are increasingly relying on unconventional funding methods to ensure the cash flow consistency.

The Small Business Pulse Survey demonstrated that of the over 3,400 small business respondents, more than 80 per cent claimed to be worried about the cash flow momentum of their business, while just under 50 per cent cited cash flow as a major business concern.

“Over 80 per cent of SMEs still worry about the flow of money coming in and out of business. Almost half of them state that this was probably their biggest concern that keeps them awake at night,” said Jason Fryer, head of small business services at American Express.

Fryer suggests that this concern over and difficulty with cash flow comes down to small businesses still struggling to establish and maintain sound credit relationships with financial institutions in the wake of the GFC.

Most importantly, the survey also found that in lieu of conventional methods, business owners are instead turning to personal credit in the form of loans from friends and family (23 per cent), delaying payments to creditors, and the use of personal savings (44 per cent) to ensure their business continues to run smoothly.

“To combat cash-flow problems, over 70 per cent actually have taken some steps that may be not the most sensible steps,” said Fryer.

“They’ve dipped into their own personal savings. Over a third use personal credit cards to improve cash-flow, which may sound like a sensible thing to do, but personal cards are a really good line for personal expense, rather than using a business card which is much more tailored to small businesses.”

Another significant concern that the survey has presented is that over a quarter of respondents delayed payments to creditors as a means of balancing their cash flow.

“Twenty seven per cent have delayed supply payments,” said Fryer.

“Now if you think about how the supply chain, a lot of small businesses work with other small businesses in terms of supply relationships. So delaying supplier payments has a big knock-on effect to everyone in the chain,” said Fryer.

“On the flipside, one of the good things that came out of the survey is that the majority of business owners are optimistic about the outlook for business growth. Almost half of them are predicting greater profit over the next six months, and over half expecting greater profits in the next 12 months,” he continued.

“And while one in four experienced a reduction in profit in the past 6 months, less than one in ten are expecting to have reduced profit in the year to come. So, that’s a very optimistic, it’s a good sign of optimism that they’re looking forward to the future. Projections for employment are also really positive. Twenty five per cent are expecting to take on additional staff next year. That is the strong side of it.”

Image credit: Thinkstock

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