In Australia, 19 out of 20 is an often-cited rate of failure for small businesses in their first three years, and the most commonly cited cause of those failures is finance related. Given recent news, this might seem surprising. After all, according to the Australian Bureau of Statistics and the independent advisory firm HLB Mann Judd, 90 per cent of small businesses who sought financing were successful in 2017.
Of course, all failed businesses ultimately close their doors due to a lack of funds, but many still do so in their first few months or years, usually before the market has had a real chance to accept or reject what they theoretically have to offer. Startups need financing that gives them the cash flow they need to give their idea a fighting chance. Today, SMEs have more and better financing options than ever, with banks, alternative finance institutions, investors, and private crowdfunding all providing a wide range of financing opportunities. So how is it that so many are still failing to establish themselves?
Startup owners aren’t aware of their options
Entrepreneurs are often innovators with a technical background in a specific field, such as computer science, logistics, or design. Many of these new business owners know relatively little about business itself, and aren’t aware of the breadth of financing options that are available to them. Worse, they may not even be aware that they need them, and that using them well can free up time and keep them in business longer.
For example, business owners commonly spend many hours every week attempting to personally chase down late payments, often without success. This interferes with their ability to pay suppliers and employees, resulting in higher turnover and lower quality work, all while taking up theentrepreneurs own valuable time. Cash flow management tools like invoice financing, supply chain finance, or even a simple business line of credit can address these issues, but some new business owners may never consider that these even exist.
Entrepreneurs lack of financial literacy and guidance
In recent years, larger financial institutions have increasingly begun to offer more and better financing opportunities for SMEs. These have become available even as cash flow solutions by alternative finance institutions have improved and become increasingly accessible. This wide and nuanced range of financing options has been a boon to financially literate business owners, who have access to a very wide range of financing options to deal with very particular situations, but it presents a barrier to others.
All this choice can be confusing to people who don’t already have a lot of relevant knowledge. Worse, the more complex the system is, the more time and energy a business owner needs to invest to become competent at navigating it. Because of this, some entrepreneurs might avoid using these kinds of financing tools altogether, or misuse them in ways that actually harm their business in the long term.
Alternative finance institutions like Fifo Capital help to directly address this problem by providing direct support through its representatives. Instead of being left to decide which products are most appropriate to them, entrepreneursbuild a long term relationship with an expert who gets to know their business and their specific needs. As cash flow issues arise, they provide the expert guidance and knowledge that business owners need to make choices that consider both their immediate and future needs.
The missing 95 per cent represent an opportunity
Financing options for SMEs have improved significantly in the last several years, but the businesses benefiting from these changes don’t seem to include new startups, whose rate of failure doesn’t seem to have been impacted. This isn’t just odd, it’s tragic. Startups play a vital role in innovation. Entrepreneurs are highly flexible by definition, and are constantly pushing boundaries to create new products, new systems, and entirely new ways of doing business.
Unfortunately, entrepreneurs very rarely have the broad range of skills and external support they need to realise their startup’s full potential. Financial institutions today primarily wait for customers to reach out to them to help manage their cash flow issues, but many entrepreneurs will never do so, whether it’s because they don’t have the time, or they don’t understand the benefits of doing so. This passive approach is bad for business, and is one important factor in the paltry startup success rate in Australia and elsewhere. It’s difficult to determine how many great new ideas, and potentially disruptive businesses, are lost among the 95 per cent of startups that don’t find their way quickly enough to establish themselves.
Financial institutions of all sizes need to find better ways to reach out to these businesses and build mentoring relationships to help guide them. Business owners need to be aware of the financing options that are available to them, and just as importantly, need guidance on how to use those tools to successfully overcome the challenges that face them. Building these critical relationships doesn’t just promise to improve that success rate, it reinforces the innovative potential of the entire economy.