Top 2 reasons for small business failures, and
how you can avoid them.
Let’s not beat around the bush. First, you MUST have a written business plan. And second, you MUST have adequate funding.
Here’s the good news. There are many free business plan templates and in-person courses that force you into the discipline of planning. Plus, there are a wide variety of alternative funding sources in addition to traditional bank loans. Many of these alternative financing options are good for companies with no prior credit or less than favorable credit. My favorite is invoice factoring.
Hope is not a strategy for success
Anyone who’s thinking of launching a business should read Hope Is Not A Strategy, by Ted Gee. The title speaks volumes. We’d all love for a hobby to magically monetize itself, but business success takes smart thinking and hard work. Business failures happen when founders hope their vision will carry the day, when in reality it won’t. Don’t get me wrong. Vision and mission are critical, but you need to balance dreams with actions to succeed. Choose a business idea that you’re passionate about, and then conduct market research to size consumer demand and competitive advantage.
It’s important to keep reminding yourself that business success is 5% inspiration and 95% perspiration. Our first sweaty task is a WRITTEN business plan.
Written business plans prevent business failures
The small business group at US Bank recently published a study on why some companies succeed and some fail. They found a whopping 78% of business failures did not have a well-developed business plan.
Invest in a structured planning course
I highly recommend a structured planning course that’s several weeks long. It gives you the time to delve deeply into each major component of your plan, because you are forced to spend time each week developing out each individual section with specific detail for your business. Plus, your instructor and class mates are an invaluable source of professional feedback from a fresh perspective.
Remember that marketing drives sales & profits
A key and often overlooked component of the overall plan is the marketing strategy. 64% of business owners minimize the importance of properly promoting their business. We’d all love for new customers to spontaneously beat a path to our door. However, you need to embrace the idea that success is 5% inspiration and 95% perspiration. Yes, you just heard me say that. And yes, you’ll continue to hear me say that.
Here are just a few considerations for your marketing strategy. Studies show that we’re bombarded by thousands of advertisements each day. Which means your headline has 1.8 seconds to stop your prospect and get them to listen. Promotional messages must effectively communicate your product benefits to the right people, in the right place, at the right time. And speak to their unique needs and wants, not the product attributes you’d like to offer. Remember, it’s all about the customer.
A critical starting point is your positioning statement, which is based on your USP (unique selling proposition). It “positions” your product against your competition, giving the prospect a reason to choose you over their other options. It’s important to constantly monitor current and emerging competitors, and make sure you deliver unique benefits. Ideally, that would be a feature they can’t find anywhere else, but often the benefit is more intangible like higher quality, delivery speed, ordering convenience, better customer service, or lower price.
Treat your customers like gold, that’s exactly what they are
It’s 3.5 times more expensive to gain a new customer than to retain an existing customer. So, be sure to include a strong RM (relationship marketing) program in your marketing plan. It will improve customer LTV (lifetime value) and maximize ROI (return on investment). Relationship tactics work to retain, up-sell, and cross-sell your customers. Plus, they deliver friend and family referrals, which is a great source of inexpensive, high-quality leads. Finally, always measure your marketing tactics. Analyze results, glean insights, and adapt your plan to an ever changing marketplace.
Adequate funding prevents business failures
82% of business failures are caused by under capitalization and poor cash flow management.
Conduct sound financial planning and projections before you launch. Start with a clear understanding of the financial dynamics that are unique to the product category and your program. What is your business model? How do you make money? Show your business plan to a financial expert and get their counsel. Don’t hesitate to get a second opinion. Smart business people know when to ask for and take good advice.
Business financing when you can’t qualify for a traditional loan
Lending criteria are tighter than ever, but there are alternative financing vehicles worth considering. One non-bank alternative is invoice factoring, sometimes called accounts receivable financing. This is not a loan. It’s the process of selling your outstanding invoices in order to get paid within 24 hours – instead of waiting 30, 60 or even 90 days.
Here’s how invoice factoring works
First, you issue an invoice to a business client for work already completed and approved. Second, you send the invoice to the factoring company, and they pay you what your client owes within 24 hours. Third, your client’s accounts payable department pays the outstanding invoice directly to the factor.
That’s the simple explanation, but there are some process details to keep in mind. The factor doesn’t pay 100% of the invoice. They advance 80%-95% of the face value, and hold back 5%-20% in a reserve fund. When your client pays the outstanding balance, then they release the reserve to you and keep a small discount fee for themselves. Typical discount fees range from 2.5% to 5.0% depending on the risk assessment.
Invoice factoring is an outstanding option for companies positioned to take on new clients, launch new projects, or lower their operating costs with new technologies. Unfortunately, they can’t move on any of these opportunities, because their working capital is tied up in unpaid invoices.
Here’s why it’s easy to get approved
One reason factoring is so popular is that the factoring companies are happy to work with start-ups as well as established businesses with poor credit. Companies that aren’t always attractive to traditional lenders. Factor’s base their decisions primarily on your client’s credit quality, not your business’s credit quality. Although, they do like to see a personal credit score in the 500s when business credit is poor.
Another reason it’s easy to get approved for invoice factoring is that it’s not a loan. It’s the sale of an intangible asset, so factoring companies don’t get bogged down in onerous lending regulations.