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The reasons behind why so many small businesses fail

14/03/2017 / Comments 0

Small businesses are the ‘lifeblood’ of the economy, a term that is often used and the go-to for former Prime Minister David Cameron. This characterisation could not be truer, and is backed up by the Department of Business, Innovation and Skills with the sheer fact that 99.9% of the UK private sector are made up of SMEs. 

SMEs also account for 60% of total employment through the private sector. However, although sometimes successful, many small businesses struggle to stay afloat.

The ratio of SME failures in the UK stands at four in 10 small companies who do not make it past the first 5 years, according to research by Ormsby Street. This varies from sector to sector, with the highest success rate in the health and education, where over half were still trading after 5 years.

At the other end of the spectrum, property businesses were those most likely to fail after the first year of trading, but proved to be more resilient in the longer term. Those likely to fail in the long term were accommodation, food services and business administration.

So, why is it these business experience such scale of failure?

The primary reason is, of course, cash flow. Stable and reliable cash flow will help businesses to navigate the future, enabling them to forecast ahead and ride out the inevitable bumps along the way.

Yet, many SMEs struggle to keep a handle on this, often due to the regular occurrence of late payment that will, at some stage, affect all businesses. Whether it’s an internal error or a customer simply has not paid, this can damage small businesses and, if prolonged, can contribute to failure.

Small UK companies who regularly credit check their customers have been found to be 30% less likely to experience business failure during their first year of trading compared to those who don’t. However, 96% of SMEs operate with under nine members of staff, and 75% are sole traders, so in-house finance departments are generally uncommon and re-running credit checks for repeat customers is not always on their list of priorities.

Access to finance

Another common barrier is access to finance. Being knocked back by a bank can be demoralising and cause a loss of confidence in a business plan, however knowing that a bank loan isn’t the one and only option can give SMEs fresh hope.

Alternative finance methods such as asset based finance, peer-to-peer lending and crowdfunding are allowing businesses to side-step the rigidity of bank lending decisions by opening up the business to specialist lenders, private investors and the general public.

The use of asset based finance among SMEs has recently grown to record levels (link to other blog), revealing businesses of all sizes are getting more confident with using alternative finance methods such as invoice finance, whereby money is advanced against the value of an invoice raised within 24 hours. For more information about invoice finance, click here.

Fail to prepare…

Another catalyst for failure is a small business’s failure to plan and prepare. This can include the timescales and costs of securing new customers, and also the underestimation of budget allocation for sales, marketing and business development. Effective management and delegation will ensure these problems can be overcome and the business does not suffer, however being strapped for resource will make this difficult for many.

To finish the motto above, failing to prepare will ultimately result in failure, but failure does not necessarily mean the end.

Many would argue that a person learns more from failure then they would success, and with determination and grit learned and honed, entrepreneurs are able to create future success, providing our country with the circulation it needs.

Would you agree? We’d love to hear your views, or perhaps your personal business triumph. You can leave a comment in the box below.

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