Will your start-up survive the first five years?
Only four in 10 new businesses will make it to their fifth birthday, according to new research. Does your small business have what it takes to survive?
According to Fresh Books analysis of data from the Bureau of Labor Statistics, small business survival rates are around 80%. However, five years on the situation looks much more bleak with only around 60% still trading.
This highlights just how difficult it can be for young businesses without the right support, and serves as a warning to those starting up to make sure that they do all that they can to ensure their small business survival in the early stages.
What makes a small business fail?
1. The industry it operates in
Surviving in any business is hard, but for those operating in certain industries it can be much harder to make it than in others.
Fresh Books also examined the industries where small businesses are more or less likely to fail.
It found that the industry with the lowest failure rate in the long run was healthcare and social assistance. Small business operating in this sector only showed a 40% failure rate after the first 5 years. In the first year, the arts, entertainment and recreation topped the charts for the lowest failure rate, with only 11.6% of businesses not making it.
At the other end of the scale, the industries most likely to fail were the construction and transportation industries. Both showed failure rates of 25% after the first year, rising to 60% by the fifth year.
With regards to shorter-term success, information and communication-based businesses and retailers had the highest new business survival rates after one year.
Property-based businesses were one of the most likely to fail after one year of trading, but proved a much better long-term option when looking at survival rates over five years.
Improve your chances of success
Just because the sector you want to operate in may prove more challenging to succeed in doesn’t mean you should give up. Likewise, if your business is in an industry that has high success rates, it doesn’t mean you can succeed without putting in the hard work.
Whatever industry you operate in, the key to success is getting to know the sector, your target audience, the size of the market and its potential longevity, as well as your potential competitors.
This information can help you to plan and prepare for what’s to come to give your business the best possible chance of success.
A good place to start is to look at your competitors – both direct and indirect – to see what works in your industry.
What are they doing that works? Can you make improvements to their offering to position yourself as the market leader? Is there something they’ve missed that could solve a problem your customer base has?
Acting on all of these questions could help push your business to the front of the market and ensure your success in the early stages.
2. Late payment
Late payment can have a devastating impact on any business – regardless of how long it’s been trading.
But, for new businesses who may not have adequate funds to cope with the delay or the time, resource and expertise necessary to chase payment, it can be even more destructive.
According to past research from trade body R3, late payment for goods or services was a primary or major cause in 23% of insolvencies in a 12 month period spanning 2015/2016, showing just how big an issue it has become.
Improve your chances of success
One of the best ways to stop late payment from derailing your success is to prevent it from occurring in the first place. This can be achieved in a number of ways.
Firstly, implementing a strong credit control procedure from before the order is placed to after payment is collected can ensure you have a persistent and consistent approach at all times.
And with dedicated touch points throughout the credit control process, your customers will know you mean business and will be more likely to pay within agreed terms.
Another strong preventative measure is getting to know your customer before you offer credit terms.
You can do this via account opening forms, credit reports and by checking resources such as The Prompt Payment Code to make sure the customer isn’t known as a notorious poor payer.
Performing credit checks to assess the creditworthiness of those you trade with has been proven to improve survival rates.
Ormsby Street data analysis in 2015 revealed that, on average, UK small businesses that regularly credit check their customers are around 30% less likely to go out of business in their first 12 months than businesses which don’t credit check.
Armed with the credit score you can then decide how big a risk they pose to your cash flow and take the steps to protect your business.
For example, if their credit score is worse than expected you could request full or partial payment up front to limit any potential damage.
3. Poor cash flow
With rising business costs, late payment and funding challenges all piling on cash flow pressure it’s perhaps not surprising that poor cash flow remains one of the main causes of business failure.
A lack of trading history can mean that traditional funding options are harder to secure, so many new businesses may not have the adequate working capital to meet all of their commitments as their business gets off the ground.
Plus, with so much to consider in the early stages, many business owners will fail to dedicate enough time to managing their cash flow and can be caught out unexpectedly. And, without adequate warning, a cash flow shortage as you’re starting out can be difficult to come back from.
Improve your chances of success
The best way to ensure your cash flow is always as good as possible is to regularly update your cash flow forecasts to spot any upcoming shortfalls and take the steps to protect your position.
It’s also vital to ensure you have funding in place that fully supports your business as it grows.
Whilst it’s true that some funding options will be more challenging to secure without a proven track record, the funding landscape has evolved to offer numerous options for those with a limited trading history.
They are also excellent tools for early-stage businesses as these facilities can incorporate additional services such as a dedicated sales ledger management service or debtor protection to provide peace of mind and important expertise.
The key thing is to do your research and always keep an open mind to increase your chances of securing the most appropriate solution for your requirements.
Our guide to business finance for start-ups explores some of the funding facilities available to new businesses and their benefits to help you find the funding that will support your fledgling company.
Download your free copy
As an independent commercial finance broker, we can help you identify and secure the best funding solution for your cash flow needs to help you start, run and grow your business. Contact us on 0800 9774833 or firstname.lastname@example.org to discuss your requirements with one of our funding experts.