Congratulations! You have decided to follow your dream of opening your own frozen yogurt shop! Clothing boutique? Pet hotel? No matter what your pursuit, you have chosen to be your own boss, stimulate the economy and be a job creator by becoming an entrepreneur. Everyone is going to have an opinion and try to give you advice and statistics…how do you know what it valid and what should be taken with a grain of salt?
We have all heard the various statistics (usually rather frightening ones) regarding the success versus failure rates of small businesses, yes? Over 50% of new restaurants fail. The majority of small businesses never turn a profit. You will never get a loan, because banks see small businesses as too risky; you will have to self-finance if you want to be an entrepreneur. Only technology start-ups will be successful. In a time of fake news, statistics surrounding small businesses are often times not accurately reflected, either. However, there are many statistics of which small business owners should be aware, so here’s to helping you sort through the real statistics.
First Things First
Just so everyone is on the same page, let us make sure that we are defining the term, “small business” the same way. While, yes, it does apply to the mom-and-pop bakery down the street, it can also apply to companies quite a bit larger than some may expect. The Small Business Administration (SBA) defines a small business as a company that employees fewer than 500 people. So, while Google and Facebook are certainly no longer considered small businesses, at one time they were. And, for now, companies such as Stitch Fix and Birch Box had to start somewhere!
Think everyone you know works for Apple, Viacom or Sony? Well, if you live in Los Angeles or New York City, perhaps. But, the reality is that over 50% of the working population (which is 120 million men and women) work for small businesses. As such, as an entrepreneur, you have the ability to be a job creator and part of the lifeblood of the economy. Questioning just how much influence you may have as a job creator? Well, don’t! Because since 1995, small businesses have created 65% net of the new jobs in the United States.
While it is true that embarking on opening your own business can be somewhat risky, it may not be as precarious as one would believe. In actuality, 70% of small businesses remain open at least 2 years, 50% survive past 5 years and 25% keep going beyond 15 years.
And, if your small business is a restaurant (often considered the riskiest endeavor of them all), not all of the statistics that we hear about the failure rate of dining establishments is true: only 20% of new restaurants close within the first year. The reason for that? It is often not lack of customers or poor quality. Rather, it is often because of the misconception that restaurants are risky that result in banks not providing the loans needed for start-up costs. Fortunately, for the next generation of Mario Batali’s and Tom Colicchio’s, many alternative lenders are now much more willing to lend to restaurant entrepreneurs.
With 99.7% of employers being small businesses, there is no doubt that entrepreneurs play a significant role in the economy. As such, rest assured that if you are following your entrepreneurial spirit, you will be among good company.
Go With the Flow
We may as well go ahead and address those fears of not being a successful small business. So, what is the primary reason for a small business having to close? It’s perhaps quite obvious: cash flow problems. Now, that does not necessarily refer to the amount of revenue the small business is generating, but the timing of those funds in relation to when money goes out. For example, if you have business that utilizes an invoicing system, then you may run into the issue of not receiving payment on those invoices until after you have bills such as loan payments or rent, coming due. This can create a cash-flow problem.
Some small businesses, particularly those that are seasonal in nature, are more susceptible to this. A landscaping company or swimming pool service will see the bulk of their revenue being generated in the spring and summer, causing for leaner months the rest of the year. Good ways to go about keeping a balance in your small business, financially, is to hire a bookkeeper or utilize the services of a Certified Public Accountant to help you analyze your books and keep things flowing, smoothly. Additionally, there are a variety of software programs, such as Quickbooks, which can help you stay on top of things, as a small business owner.
Show Me the Money
One of the biggest fears that many prospective small business owners have involves funding, as they are concerned they won’t be approved for traditional bank loans. Unfortunately, those fears are based in reality, at least when referring to big banks such as Bank of America or Wells Fargo. Only 24% of large banks approve the loan applications submitted by small businesses. However, smaller, community banks and local credit unions have a higher rate of approval.
Meanwhile, alternative lenders approve nearly 60% of small business loan applications. As such, fear not. Even if a large financial institution won’t provide you with the start-up capital that you need, there are plenty of other options available to you. This is especially good news for women and minority-owned businesses, 24% of whom reported being unable to receive the start-up funding needed to grow their businesses effectively.
Much as we hear that banks won’t provide loans to small businesses, we then in turn hear that an entrepreneur must provide their start-up costs, themselves. Well, there is some truth to this rumor, as well. 75% of small business owners did provide at least some of their own start-up costs, with about 6% receiving funds from friends or family members. So, yes…you will probably need to pony up some of your own funds to get your small business up and running, but through creative marketing, patience and quality products and services, you should be able to pay yourself back in no time.
You have a loan, you have dipped into your savings, you have the support from some family members, so that begs the question: well, how much money to you actually need? The numbers vary, some reports citing $10,000 as the amount needed for start-up costs, but perhaps a more realistic number, to ensure you that you aren’t having to go back to the well, is more in the ballpark of $80,000.
Given all of the costs that go into starting your own small business, it should come as no surprise that 96% utilize social media marketing, which is both an inexpensive (sometimes free) and effective way to start reaching out to clients or customers. Although, at a time in which the word, “Google” is a verb, it may surprise you that only 72% of small businesses have websites (perhaps using a Facebook business page as a free option rather than paying for a domain name and web design). While social media will probably never replace traditional media (and, therefore, it is important to have a balance of the two), it is an invaluable tool with which to get the marketing ball rolling.
If you are looking for ways to be ahead of the marketing curve, then you may want to strongly consider mobile apps and mobile marketing for your small business, as only 25% and 22%, respectively, currently utilize those efforts. Allowing your small business to invest some funds into those marketing initiatives can both set you ahead of your competitors and generate both revenue and attention.
Social media has proven to not only be an effective marketing too, but a highly utilized job search tool. Between posts on sites such as Facebook, and websites like LinkedIn and Indeed, 79% of job searches are utilizing social media to find and apply to jobs. Any savvy small business owner should be leveraging those platforms to find the most qualified staff.
Yes, starting ones own small business is not for the faint of heart. However, with the potential funders besides large banks becoming more commonplace and innovative ways of marketing oneself, continuing to expand, it is a far less scary endeavor than it once was. So, find yourself an angel investor, contract with a developer to build you a mobile app, and welcome to the world of entrepreneurship, you little job creator, you!