Small Business Investment Trends

If your area is working to spark more investment by smaller companies, then the results of this recent National Federation of Independent Business survey will be of interest. Here are the main findings

• Forty-seven (47) percent of small-business owners made the largest share of their business investments over the last 12 months in replacement and maintenance. However, 23 percent made theirs primarily to expand into another business area while 21 percent made theirs primarily to extend existing products or services. Four percent directed most of their business investments to safety or environmental improvement. While relatively few businesses grow substantially, investment patterns suggest that many owners are trying to make them do so.

• Thirty-five (35) percent of small businessmen and women report that they invested in a technology or process in the last 12 months that was new to their business.

• Eleven (11) percent invested in another, privately-held business in the last year. About two-thirds of those invested in a business in which they were the principal and about one-third were “business angels.”

• Small-business owners are over three times as likely to replace business equipment as needed than to replace it on a schedule. The ratio is somewhat smaller for the procurement of business vehicles among the 74 percent who report owning one. The vast majority prefer to procure new equipment and vehicles rather than used ones.

• Overwhelming majorities believe that purchasing is usually a better option when procuring business equipment and vehicles than leasing. Those preferring to purchase most frequently cite lower overall cost (36%), the ability to alter or treat an asset as the owner wills (29%), and the ability to hold and use an asset for an extended period (23%) as the
primary reason for their view. Those who prefer to lease most frequently cite improved cash flow (38%), tax advantages (25%), and the ability to have the most up-to-date assets (21%) as their primary reasons.

• The sophistication of methods used to assess the financial viability of a potential investment varies enormously. The most frequently used technique is the rate-of-return (32%). The second most frequently used is “gut feel” (25%).

• Almost 70 percent make cash flow projections prior to making a major business investment. But only 31 percent have a written business plan projecting near-term major capital expenditures.

• There are tax implications when reinvesting. Fifty-nine (59) percent say that they “consider” the implications prior to making a major investment while 17 percent actually “calculate” them. Twenty-one (21) percent “ignore” tax implications.

• Many small-business owners approach investing in their business very cautiously. About one in five (22%) say that it is not appropriate to borrow to make a business investment. Almost twice that number would postpone making a profitable business investment if they did not have the cash on hand to make it.

• The most significant long-term concern about business investment is neither over-investment (23%) nor under-investment (19%). Rather, it is investment in the wrong things (42%). Thirteen (13) percent have no long-term concerns with their reinvestment.

Download the report here.