Data Snack: 40% of SMBs would close if cash flow dried up today

A new survey from Fundbox found that nearly 40% of small businesses would have to close their doors within two months if cash flow dried up today.

Cash flow gaps represent the biggest headache for the vast majority of SMBs – a study found that 82% of the time, poor cash flow management is the main reason why small businesses fail.

This is not because they don't have a good product or service, or good customers. It's because there's an issue with the timing of inbound and outbound cash flows.

Over time, the inbound and outbound balance out. But when growing as a business, more has to be spent today to drive more cash flows in the future, which can create quite a few problems for small businesses.

"These cash flow gaps usually happen because you have to invest money upfront to deliver a product or a service, but you only get paid after the fact. And so this timing mismatch creates a problem. And ironically, it creates a problem when you're growing a business," Prashant Fuloria, Fundbox's CEO, told Tearsheet.

Moreover, a lot of small businesses have to offer 30-day, 60-day or 90-day terms to their customers, and the resulting timing mismatches hurt their cash flows. And the bigger the clients, the worse the terms, he added.

"There's a trillion dollars of unpaid invoices that are owed to small businesses in the US – if it were made available, this could be used by the small businesses to better run and grow, but it's not made available right now," Fuloria said.

According to Fundbox's survey, 74% of SMBs reported experiencing a cash flow issue in the past year. The survey asked decision-makers at 1,520 small businesses with revenues of up to $5 million and an employee headcount of less than 100 about how the macroeconomic trends over the past six months were affecting their business. 

The survey also found that digitization is growing across this vital sector of the U.S. economy, with respondents indicating interest in technology investment to drive growth.

But SMBs also need a steady stream of working capital to be able to invest in the tools and technology that can future-proof their business. Many businesses have plans to digitize, but lack the capital available to make it happen.

Businesses report ongoing challenges in securing capital, supply chain delays, depleted savings, and increased debt from COVID, and the rising cost of capital as interest rates continue to increase. 

"It's clear that small businesses know what they want from capital providers. Respondents shared that they value transparency, partnership and human touch, easy access, and flexibility. 47% choose cash flow solutions based on transparency in fees, while 37% base their decision on word of mouth," the report found.

Interestingly, despite all of these challenges, most small business owners remain optimistic about the future of their business – almost two-thirds of them expect the business to actually grow.

Small businesses are already using tech to drive performance across various aspects of their business. 69% use digital marketing, 63% use payroll software, 53% use HR software, and 29% use ACH to pay bills.

As over half of small businesses struggle to retain employees, 33% plan to increase employee salaries – a strategy that also requires steadier cash flow streams.