Common reasons for startups going under during the first five years
The UK economy grew 2.2% in 2016, its seventh consecutive year of growth since the recession. However, in spite of being one of the fastest growing economies of the group of seven leading industrial economies last year, the UK remains a tough environment for small businesses to thrive and grow. It’s a well known statistic that just four out of ten businesses are still trading after five years, but what comes as more of a surprise is that there are still entrepreneurs out there who aren’t deterred by this statistic.
For those of you who are running a new business, let’s take a look at what you need to do to avoid your business falling by the wayside within the first five years?
Lack of financial acumen
Your business is most likely based on specialist knowledge that you may have gained in a specific area, which most probably has very little to do with finance. If this is the case, it’s vital that you quickly get to grips with financial matters, such as financial indicators, resources, budgets, markets, etc. This is all crucial stuff if you want to know how well your business is doing and how to move it forwards.
Financial acumen can come from learning from your mistakes. For example, when things go wrong, you take a look at the problem, solve it and learn from it. Equally, financial skills can be strengthened through training and professional courses that will make sure you’re equipped to take your business to the next level. Financial acumen in business is complex, yet crucial. Ideally learn from other people’s mistakes and get experienced advice it is always cheaper in the long run.
Failing to keep track of expenses
For business owners, staying on top of expenses frequently comes second place to the immediate demands of running the business. That said, monitor cash flow is crucial to create a stable platform for future growth. This can be done via new technology, which is having a huge impact on small businesses, particularly in terms of daily expense management.
There are many tools and apps available that have been specifically designed to keep track of businesses expenses. All you have to do is input the details and the app or online service does the rest for you. Once you are on top of cash flow, you’ll be more informed and in a much better position to grow the business.
Since the financial crisis, traditional lenders have been forced to tighten their purse strings due to banking reforms. The shortage of available cash has meant that many business owners have missed out on growth opportunities. Nonetheless, this gap in business funding has been the key driver of growth in the alternative finance sector and business owners wanting to scale up are increasingly turning to a range of alternative finance options.
In the last ten years, asset-based finance (invoice finance and asset-based lending) has gone from strength to strength and is playing a crucial role in filling the funding gap for businesses. Around 80% of asset-based finance is made up of invoice finance, which is factoring and invoice discounting where businesses sell outstanding invoices to a third party for a cash injection. The remaining 20% represents asset-based lending, where businesses raise funding against assets, including inventory, machinery and property.
Another form of alternative finance is equity crowdfunding, where businesses raise funds by selling equity in the business via a crowdfunding platform. In the past, investors paid thousands of pounds to buy a stake in a business, but now this can be done with far less cash, which has opened up the possibilities for business owners and investors.
Peer-to-peer lending is another way of raising finance, which works in a similar way to a business loan, The borrower (business or individual) decides on the amount needed and the repayment terms, which is paid back much in the same way as a bank loan. The main difference to a regular loan is that the platform matches up a large number of savers or individual investors with borrowers. One of the major benefits of this type of lending is that it’s often cheaper than you would find on the high street.
No one said surviving and thriving in today’s business environment was going to be easy. It takes hard work, determination, confidence and passion, but most of all focus and diligence to help your business get beyond those first perilous five years.