Two Common Reasons For Small Business Failure

Dated: March 5 2014

Views: 1048

The two most common reasons for small business failure are the lack of a good business plan and financial backing. A sound business plan shows potential investors or lenders that a prospective business owner understands their market and what steps need to be taken to make the business a success. Nearly half of all small businesses fail in the first five years. It's easy to underestimate the amount of money that is required to keep a business financially viable during the start up phase. At the same time, debt can be the enemy of any business if debt service prevents you from showing a profit.
Two major sources of start up cash are debt and equity financing. Debt financing is borrowing money that must be paid back over time with interest. These loans are often secured by company or personal assets. Usually the borrower makes a personal guarantee in the event of default creating a financial stake in the business. Historically, the banks were the source of small business funding. However, they have become reluctant to offer long-term loans to small firms in recent years. The Small Business Association SBA have a program that encourages banks to loan up to $1 million for small businesses that are unable to find financing on terms that they can accept.
Another source, equity financing, or equity capital raises money for a company through the sale of company stock or a share in the interest of the venture. It's all too common to reach out to family or friends for the source of these funds.  This can cause serious interpersonal problems if the business is unable to make good on these investments. Even when the risk is fully explained, permanent damage is usually the result to relationships. Running your own successful small business is hard work and not without risk but the rewards that come with success are many.

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