Mastering The Small- Business Market:

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Elisabeth Thomas
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1 Commercial Information Solutions Mastering The Small- Business Market: A Guide To Understanding 4 Critical Credit Risk Trends The Great Recession may be over, but U.S. businesses still face an uncertain economic climate. That s especially true in the small business sector, where even minor setbacks can affect a company s ability to grow, to invest and, ultimately, to pay its suppliers and other creditors. If your firm regularly extends credit to small-business customers, it s important to understand the underlying sources of credit risk in this environment. Here are four key factors to consider, as well as an examination of the role that timely, accurate business data plays in minimizing credit-risk exposure without sacrificing opportunities for profit and growth. 1. An Uncertain Economy Weighs On Small- Business Owners 2. Small-Business Owners Face Serious Cash Flow Challenges 3. Small-Business Closures Are A Fact Of Life 4. It s Harder Than Ever To Assess Small- Business Credit Risk more

If your firm regularly extends credit to small-business customers, it s important to understand the underlying sources of credit risk in this environment.

2 1. An Uncertain Economy Weighs On Small-Business Owners There s no doubt the economy has improved since the depths of the recession. The more important question, however, is whether the economy has improved enough to create a healthy environment for small-business growth. Unfortunately, based on feedback from thousands of small-business owners, we re not there yet. According to surveys conducted by the National Federation of Independent Businesses, small-business owner confidence remains stalled at recessionary levels. One in five smallbusiness owners cite weak sales as the biggest problem they face, and one in three say they expect sales to fall during A late-2012 study sponsored by Wells Fargo and Gallup paints an even more troubling picture: 28% of the small-business owners surveyed described their situation as somewhat or very poor. 28% of the small-business owners surveyed described their situation as somewhat or very poor. Many small businesses are positioned to survive and even thrive in these conditions. Many others, however, will find it increasingly difficult to pay their suppliers and other creditors, meet their payrolls, and satisfy other financial obligations. Wells Fargo/Gallup study 2 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends

Unfortunately, based on feedback from thousands of small-business owners, we re not there yet.

3 2. Small-Business Owners Face Serious Cash Flow Challenges Cash flow is always a pressing issue for small businesses, many of which operate without a significant cushion of working capital. When their customers are late with payments an all-too-common problem today these firms must, in turn, delay payments to their own suppliers. The Wells Fargo/Gallup study cited above illustrates this trend; it found that 29% of the small-business owners surveyed expected their revenue to fall a little or a lot during 2013, and 30% also expect their cash flow during the same period to be somewhat or very poor. Another study from B2B International reinforces this trend, showing that up to 40% of all U.S. small businesses consider cash flow to be a problem. 29% of the small-business owners surveyed expected their revenue to fall a little or a lot during 2013, and What do these findings mean for vendors and suppliers that extend credit to smaller firms? First, they reinforce the fact that an unusually high percentage of small-business owners are struggling to make sense of unpredictable economic conditions. Second, and perhaps more important, the sheer number of firms with cash flow problems represents a very real source of credit risk. These small businesses are more likely to fall behind on payments, and those that do fall behind are more likely to become seriously delinquent. 30% also expect their cash flow during the same period to be somewhat or very poor. Wells Fargo/Gallup study 3 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends

The Wells Fargo/Gallup study cited above illustrates this trend; it found that 29% of the small-business owners surveyed expected their revenue to fall a little or a lot during 2013, and 30% also

4 Small-Business Closures 3. Are A Fact Of Life The familiar claim that 90% of all small businesses fail within the first year is simply not accurate. The truth is that according to U.S. Census Bureau data, five-year survival rates for small businesses range from 48% in manufacturing to 41% in retail and just 36% in construction, with businesses in other industries falling elsewhere within this range. Also keep in mind that closing does not mean the same thing as failing. Most small businesses close voluntarily, as opposed to shutting down due to bankruptcy, insolvency or legal action. The good news, then, is that many small businesses operating today are unlikely to fail in a manner that leaves their suppliers and other creditors holding the bag. The bad news is that a significant number of firms do shut down without paying their outstanding debts, and these exceptions to the rule still pose a major source of credit risk. Sorting through the winners and the losers in this process is a difficult and imperfect process, but it s also a necessary task for companies that serve the small-business market. Five-year survival rates for small businesses range from 48% in manufacturing to 41% in retail and just 36% in construction, with businesses in other industries falling elsewhere within this range U.S. Census Bureau 4 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends

range. Also keep in mind that closing does not mean the same thing as failing. Most small businesses close voluntarily, as opposed to shutting down due to bankruptcy, insolvency or legal action.

5 It s Harder Than Ever To Assess 4. Small-Business Credit Risk Companies that need to assess small-business credit risk face a daunting task. Consider a few points that illustrate the sheer size and volatility of this market, according to the U.S. Small Business Administration: There are now nearly 28 million small businesses operating in the United States. During 2011 alone, nearly 800,000 new businesses opened their doors a rate of nearly 3,000 new firms per day. Every day, 1,200 business telephone numbers are changed or disconnected, 1,920 firms will change addresses and 32 will change their names. There are now nearly 28 million small businesses operating in the United States. - U.S. Small Businesses Admiistration In addition, a large number of factors influence an individual firm s ability to pay its suppliers. Manufacturing firms are less likely to fail than retailers, for example, and those with a high level of startup capital obviously represent a better credit risk than those started on a shoestring budget. In addition, since the vast majority of small businesses are sole proprietorships, the age, experience level and background of the proprietor can have a makeor-break impact. If one thing is certain about 2013, it s that all of these factors will combine to make the process of assessing small-business credit risk as difficult as ever. 5 Mastering The Small Business Market: A Guide To Understanding 4 Critical Credit Risk Trends

Small Business Administration: There are now nearly 28 million small businesses operating in the United States.

6 Conclusion: Accurate And Comprehensive Data Is The Key To Managing Small-Business Credit Risk Clearly, companies that wish to serve the small-business market must find a way to address these risk management challenges. In fact, with small businesses accounting for 99.7% of all U.S. firms with more than one employee and 46% of all private sector output, according to the U.S. Small Business Administration, mastering this challenge represents an enormous business opportunity. This is a daunting task, but not an impossible one. It begins with accurate, relevant and up-to-date information from sources including: Public records; Firmographic data, including business type and location; With small businesses accounting for 99.7% of all U.S. firms with more than one employee and Business credit histories, including supplier payment and lease histories; Business banking histories a major predictive factor in assessing credit risk; Owner credit histories an essential element for understanding sole proprietorship credit risk. In addition, the risk assessment process requires the ability to analyze this data holistically and to yield useful predictions about an individual small business ability to meet their credit obligations. In order to accomplish this, it is especially important that companies use risk-analysis tools that give a comprehensive view of risk exposure and that focus on credit risk factors associated specifically with the small-business market. Armed with the right data and analytical tools, companies can assess small-business credit risk and make informed credit decisions. Even at a time of continued economic uncertainty and major challenges for small-business owners, this approach allows B2B suppliers and vendors to recognize this market for what it is: A major opportunity for longterm growth and profitability. 46% of all private sector output, mastering credit-risk challenges represents an enormous business opportunity. - U.S. Small Businesses Admiistration Contact Us Today For information about Equifax solutions to support your small-business credit risk management, visit or call EFX-USA /06/13 Equifax and EFX are registered trademarks of Equifax Inc. Inform > Enrich > Empower is a trademark of Equifax Inc. Copyright 2013, Equifax Inc., Atlanta, Georgia. All rights reserved.

This is a daunting task, but not an impossible one.

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