An increasing number of small businesses are piling up their credit card debts to finance their operations, providing them immediate cash flow, according to a Massey University research published last week.
The University’s Centre for Small and Medium Research conducted the annual longitudinal Survey, in which 1808 small and medium-sized companies participated.
A Report, titled, Managing under Recession: Perspectives from New Zealand Small Firms, accompanying the Survey said that 78% of the respondents used their personal credit cards in 2010 to improve their cash flow, up from 67% last year.
Professor Deakins said personal credit cards had become the most widely used form of business finance along with trade credits.
“These findings reflect the fragile nature of the recovery as the recession continues with businesses not wanting or not able to access a bank loan.
“For a business owner, this is a relatively flexible way to finance cash flow and meet working capital requirements,” he said.
Debt Risk
Professor Deakins said that these businesses carried the risk of bad debts arising out of the current money market conditions but credit cards provided a temporary solution.
According to the Survey, about 25% of the SMEs had invested personal savings into their companies last year, showing a marginal decline from 27% in 2009.
It said that owners of companies that were stagnant had stopped investing their personal savings, possibly because they had exhausted this financial option.
This Centre published its first survey conducted in 2009 last year.
The 2010 Report showed diversity of experiences in relation to the economic conditions and the response of businesses.
The 2011 Survey said the number of medium-sized firms that reported increased turnover had risen considerably compared to 2009, indicating that such firms were on the road to recovery compared to micro and small firms.
“It seems that the longer the recession lasts, the more important product and service quality becomes a competitive advantage. In long lasting, tight economic conditions, the quality of products and services offered seem to outweigh the competitive advantage of established customer relationships,” the Report said.
Adverse effects
The Survey results of 2009 and 2010 found that recession had its adverse effects on all businesses, irrespective of their size.
However, medium-sized businesses appeared to be doing better.
The study also found that companies were still feeling the effects of the recession, with only 14% of the respondents saying that they had not been affected, compared to 27% in 2009.
Such a trend indicated the extent to which recession had affected businesses and the prolonged effects of businesses, Professor Deakins said.
The Survey asked the participants how the global recession affected them, whether their limited resources, product range and customer base made them more vulnerable than large enterprises and whether their size was an advantage.
