What are the reasons behind small business failures?

Common Reasons Why Small Business Startups Face a High Risk Failure

“My business is in trouble with debt spiralling out of control and I simply don't have enough cash to make payments on time. I've read that most small business startups have problems similar to mine, but why?”

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This concern is common amongst the directors, managers, and owners of small business startups in the UK, and for good reason – about 2/3 of startups fail within their first 3 years of operation. Usually the failure is brought about by a number of factors that work together synergistically to make business progression difficult. Here are the 4 most common reasons why small business startups don't do well:

1. Inadequate Preparation

Starting a successful startup is all about planning – analysing your market conditions and competition. Some of the things you'll need to know and have planned for: 

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2. Lack of Help or Too Much Help

Operating a startup all by yourself can be a recipe for disaster. Things happen that we don't expect, and when there's absolutely no one else to fall back on it can be easier to become stuck in predicaments that result in missed deadlines and unsatisfied clients.

At the very least you should have a professional accountant on call and/or a general helper to assist with medial duties so that you can focus on the business.  At the same time, hiring too many employees prematurely can drain your cash flow and hinder your company's ability to invest and progress. 

3. Borrowing Too Much Money From the Start 

Most startup founders are a bit overzealous and as such have a tendency to overestimate their funding needs. The prospect of getting a £50,000 business loan definitely sounds tempting, but realistically you don't even know if your company is going to be profitable yet.

Borrow only what you need to get started, and never borrow more than you'll be able to pay back in the event that the business fails. If you've recently realised that you have too many debt obligations, you may want to consider debt consolidation or a company voluntary arrangement (CVA) as potential solutions. 

4. Inexperienced Founders

Unless you've actually set up and managed a business before, there's no way to know how it feels to deal with such pressure and responsibility on an ongoing basis. When you think about it, the entire endeavour is a learning process, as essentially everything you do is a new experience. For this reason there's a much higher chance of making mistakes that could lead to the failure of the company in the long-term.

If you feel as though you won't be able to recover from the current debt situation but you'd like to salvage some of the company's assets before it is dissolved, you may want to contact a licensed insolvency practitioner (IP) to arrange a pre-pack administration sale. 

If your startup is not doing as well as you had planned there are still many recovery options that could put you in the 1/3 of those that succeed. Give us a call on 0800 644 6080 or send us an email and tell us about your situation. We're trained and certified in business rescue so there's no problem that we can't help fix.