High Small Business Failure Rates: Fairy Tale or Reality?
edited: Sunday, January 15, 2012
By Beth Fowler
Rated "G" by the Author.
Posted: Sunday, January 15, 2012
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Small business entrepreneurs have a better chance at success than many people think.
A SCORE client who is thinking of starting her own business said, “Everyone is warning me about starting a business because they say most new, small businesses fail anyhow. If this is true , then why do I see so many businesses that started several years ago still thriving?”
Well, maybe it’s not true that most new small businesses flop. Let’s do a reality check. Let’s look into this commonly held belief.
Some well-meaning family and friends who care about the hopeful entrepreneur’s welfare will discourage him or her with scary stories. Fear of failure is an understandable concern that can give even the most capable of prospective business owners cold feet about starting a new venture. Those doubts are amplified with every news story heralding the number of failed or closed small businesses.
But a look at the numbers reveals that small business entrepreneurs have a better chance at success than many people think.
A large chunk of business-closures statistics that readers assume to be failures aren’t really failures at all. These businesses were considered a success by their owners who simply sold their business or closed them to start another enterprise, to retire or to pursue other activities.
Here’s the truth of the matter. Data from the U.S. Small Business Administration indicates that seven out of 10 new employer firms survive at least two years. Put another way, 70 per cent of new businesses make it to their second anniversary. About half survive five years, a third at least 10 years, and a quarter stay in business 15 years or more.
The more resources a new business has to start with, the better its chances. Resources include money, of course, but other assets such as market savvy and having the right people on board are also critical. Here are five factors that improve the odds of new business survival:
1) People. If you can afford to hire employees, do it. Well-staffed businesses have better survival rates than solo operations.
2) Startup capital of at least $50,000. Not easy, perhaps, but businesses that start with less have higher failure rates.
3) A college degree for the owner. Better yet, enroll in a college-based entrepreneurship program.
4) Home beginnings. To keep costs low, start initial stages of your business from a home office.
5) Getting expert help from unbiased, experienced mentors such as your local SCORE counselors.
So why do some small businesses fail in the first years? The most common reasons include competition, mismanagement, high rent and insurance costs, high debt, inability to get financing, loss of clients and difficulty with collections. Most of these factors can be addressed early on.
Even so, unforeseen and uncontrollable factors that lead to business failure can still crop up. Entrepreneurs who do good research and planning, prepare a thorough, realistic business plan, and get advice from trusted, objective sources boost their odds of business health and longevity. Doing one’s homework definitely puts the odds of success in the business owner’s favor.
This leads us back to the question raised at beginning of this article. The SCORE client’s hunch was correct: High small business failure rates are a fairy tale.
How’s that for a reality check?