How many business fail in the first 2 years?

How many business fail in the first 2 years? 

Business failure refers to a situation in which a company or business ceases operations because it is unable to generate sufficient revenue to cover its expenses[1].

There are a lot of statistics in regards to the small business failures rates, many of them will scare and discourage you to continue in business. Some of the statistics that you may be confronted with are:

  • One-third of total businesses will fail during the first 2 years [2]
  • Roughly 20% of new businesses survive past their first year of operation[3].
  • Approximately 50% of businesses survive more than 5 years[4].

So, should we rely on the statistics? I must say that the statistics will change depending on the variables that are being studied. However, business failure is a real possibility that can’t be overlooked and your job as entrepreneur is to foresee all the barriers that you will have to overcome in order to succeed in business. The faster you identify your obstacles, the faster you will find solutions that suit your business and help you not only to survive but to grow.

Many conditions can affect the performance of a company, but the primary reason for a business to fail is to run out of cash. Businesses take several years to be profitable and this means that necessity of funds to cover not only the cost of starting, but the cost of staying in business is a top priority.

Moreover, to have enough funds to cover all cost, you will have to take into account that small and medium sized companies usually end up financing their clients by giving them from 30 days to 6 months to pay while their vendors only give 30 days or less.

Without enough cash and a less convenient pay cycle, you cannot pay your bills or be able to fulfill large customer orders, leading you to a default position with your vendors and clients.

You must make decisions about your financing to have a real expectation of incoming funds and to project your cash flow.  In a dynamic and highly competitive environment, a financing strategy is vital to plan how the company will finance its overall operations and achieve the targeted levels of organizational performance. Don’t be part of the failing rate, be part of the successful rate.

Fortunately, there are options that are available to small and medium sized businesses: investing your own cash, get financing from family and friends, traditional bank financing and factoring among others.

Investing your own cash and getting financial help from family and friends can be a good idea, but it can also put your and their personal financial status at risk. Likewise, a traditional bank loan will impact your balance sheet and you will have to face an additional debt.

On the other hand, factoring is a flexible tool that will allow you to use your accounts receivable to obtain the cash that your company needs to pay operating costs, salaries, materials, and other expenses, without compromising your personal assets or generating new debt. The benefits of factoring can be huge for your business and should be considered when establishing your company’s strategic plan.

Some of the benefits include:

  • Immediate access to cash – usually, you can get the cash you need the same business day.
  • Professional collections – The factor will collect the receivables while you concentrate your efforts on sales.
  • Terms to customers – You can offer flexible or extended terms to your customers.
  • Credit Analysis: This tool will help to determine the creditworthiness of your customers.
  • Good Use for Growth– you can accept larger orders and set big goals to keep growing.

The list of options is broad but choosing the right tool will help your business to build a positive cash flow and to reduce financial stress. Despite the statistics that can be confusing and overwhelming, the reality is that many businesses discontinue operations because of lack of profits or financial funding. Take advantage of the variety of possibilities, especially, consider financing your accounts receivables, as it is one of the best solutions that you can find to reduce risk, stay in business and keep growing.

Fortunately, there are options that are available to small and medium sized businesses: investing your own cash, get financing from family and friends, traditional bank financing and factoring among others.

Investing your own cash and getting financial help from family and friends can be a good idea, but it can also put your and their personal financial status at risk. Likewise, a traditional bank loan will impact your balance sheet and you will have to face an additional debt.

On the other hand, factoring is a flexible tool that will allow you to use your accounts receivable to obtain the cash that your company needs to pay operating costs, salaries, materials, and other expenses, without compromising your personal assets or generating new debt. The benefits of factoring can be huge for your business and should be considered when establishing your company’s strategic plan.

Some of the benefits include:

  • Immediate access to cash – usually, you can get the cash you need the same business day.
  • Professional collections – The factor will collect the receivables while you concentrate your efforts on sales.
  • Terms to customers – You can offer flexible or extended terms to your customers.
  • Credit Analysis: This tool will help to determine the creditworthiness of your customers.
  • Good Use for Growth– you can accept larger orders and set big goals to keep growing.

The list of options is broad but choosing the right tool will help your business to build a positive cash flow and to reduce financial stress. Despite the statistics that can be confusing and overwhelming, the reality is that many businesses discontinue operations because of lack of profits or financial funding. Take advantage of the variety of possibilities, especially, consider financing your accounts receivables, as it is one of the best solutions that you can find to reduce risk, stay in business and keep growing.


[1] https://financial-dictionary.thefreedictionary.com/Business+Failure
[2] https://www.sba.gov/sites/default/files/Business-Survival.pdf

[3] https://www.usatoday.com/story/money/business/small-business-central/2017/05/21/what-percentage-of-businesses-fail-in-their-first-year/101260716/

[4] https://www.fundivo.com/stats/small-business-survival-rates/#

 

 

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