The appeal of being your own boss has led many people with an entrepreneurial spirit to start their own business. The thought of increased income potential, working in a field or industry that they are passionate about or simply having a great idea to fill a need with their product or service motivated many to leave the comfort and security of their 9 to 5 life and strike out on their own.
It is a big step that carries with it a great deal of planning, investing and struggling in many cases. But the potential rewards are enough to motivate the birth of almost half a million new businesses each year in the United States. And not a single one of those people ever think that they will become simply another statistic in the small business failure rate.
The Overall Number
To cut right to a real number, the Bureau of Labor Statistics state that the across the board small business failure rate for all types of businesses is 20% in the first year. An additional 14% will not survive the second year of business. And by the fifth year in business, a full 50% of small businesses have closed their doors. At the 10 year mark, only 30% of those businesses are still in existence. These rates appear to be relatively consistent with historic data and indicate that the fluctuations in the economy play a very small role in the success or failure of a small business.
The Highs and Lows
Looking at specific industries, healthcare and social assistance industries tend to have the highest survival rates. 85% will make it through the first year, 75% will survive the second year and 60% will see year five. On the low end of the spectrum, in construction only 75% make it past year one and that number drops to only a staggering 35% making it to year five. Transportation and warehousing are not far behind with a one year survival rate of also 75% and a five year rate of only slightly better at 40%.
The Leading Cause of Death
According to a 2007 study, over 80% of businesses fail due to cash flow problems. They simply ran out of money. This fact again shines a bright light on the importance of planning in a new business venture. Having capital and having a realistic idea of how much operating capital will be needed is crucial. Being able to sustain a business in its infancy can be more costly and take longer than expected. Having cash on hand as well as a way to get a loan can be the difference in success and failure. And as a small business, being creative in finding funding could make all of the difference. 77% of small business owners who applied for a bank loan from a major bank reported being rejected.
Options for Funding
Many small business owners will rely on personal savings and credit to fund their business. This is great if you have the money and resources but it can lead to personal financial issues if the company struggles for a long period of time or fails. Family and friends can be an option to offer funding but this can tent to be awkward if the business does not take off quickly or there are issues with repaying the loans. Angel investors are people who invest in small businesses usually for a stake in the business ownership or seat on the board of directors to ensure a strong return on their investment. Cloud funding is a system which allows you to pitch your idea via the Internet to a large number of potential investors. This can be a great way to generate donors but beware of the restrictions on the specific site that you use. Crowdfunding is a means of soliciting a vast number of people via a website. You pitch your idea or project and individuals can choose to donate based on the potential of the idea or the merit of the plan. Again, there are many different sites and each has their own rules so do your research before committing to a format.
A Traditional Ally
Even before you have officially started your small business, you will want to explore all of the information and services provided by the Small Business Administration (SBA). Not only is the SBA a great source for loans but it offers a wealth of additional financial information for small business owners. They aid, counsel and provide mentorship programs for small business owners to help make the first few years in business as easy to navigate as possible. They are not a lender and will not be able to give you a loan but they do work with many lenders who offer special rates and terms to emerging small businesses. The SBA is an agency of the federal government but there are local offices throughout the country. This is a great first stop for anyone who is considering starting a business or who has questions about their new endeavor.
It’s Just a Number
Just as with any other part of life, it’s how you choose to look at it that determines the outcome. It is a fact that the small business failure rate is 20% after just the first year. But the other side of that fact is that 80% of small businesses make it beyond their first year. And half of all new businesses are still around after 5 years. That is not a bad number. What is really important is that you plan carefully, complete exhaustive research and know precisely what you are getting yourself into before you start a business. There are no guarantees but it is pretty certain that you will get back out whatever you are willing to put into your business. So if you are looking to be your own boss, do something that you enjoy and are not worried about trying to get rich quick, then you have a great chance of being in that 80% next year.