When it comes to accessing working capital at market rates, there has become a greater division between larger and smaller firms – not to mention those in the middle. In today’s environment, investment grade companies have no challenge borrowing at extremely low interest rates. Whether printing commercial paper or accessing the long-term debt markets, it’s a good time to be big – and highly rated.
But on the opposite side of the coin, it’s a bad time to be small. This is one of the observations we make in a recently published study, Reducing Costs By Optimizing the Financial Supply Chain, authored by Pierre Mitchell, chief research officer for Spend Matters, and Paul Lee, director of research at ISM. In their analysis, the two note that:
“Small businesses face two primary challenges related to working capital. First, there are limited funding sources available to them. Second, the limited sources that are available charge high borrowing rates. Large firms, in contrast, can access capital through numerous means, and often with very favorable rates. For many large corporations, the challenge actually lies in having too much working capital, which often earns paltry returns.
A look into the capital markets presents a striking example of how availability of funding options differs by company size. For small businesses with less than $25 million in revenue, only around 1% are able to access debt and equity markets. Meanwhile, more than 90% of firms with over $1 billion in revenue can reach these markets."
Our own analysis (in the sample in the survey) supports these other findings. Specifically, “For small businesses, alternative financing and leasing options are also limited … Procurement leaders at smaller businesses reported 'poor' access to low-cost financing, while those at larger firms said they have 'good' to 'very good' access to such funding.”
As we continue to highlight coverage from the study, we will consider the impact of higher cost capital on small business – and how this translate to additional cost, risk and liabilities for larger buying organizations.