There are approximately 30 million small businesses in the United States. Around 350,000 new companies are started or registered with secretary of States each month. That’s a lot of people deciding they are going to drive the bus and pursue their destiny. The bulk of job creation in the US comes from small businesses contributing approximately 60 percent of the net new jobs. Small firms in the 20-499, employee category typically lead job creation. The State tax of successful small businesses helps fuel the funds necessary to support community priorities. Building indigenous businesses should be a highly desirable thing for any local economy. Given small business is the engine of private employment in the U.S. its clearly important to the community to support small business creation, sustainability and paths to success.
Consider some of the most popular reasons to start a business, including having a unique business idea, setting your own schedule, making a living doing something you love, tailoring a career that has the flexibility to grow with you, developing financial independence, and betting on yourself. At some point most people flirt with the idea of being their own boss. Establishing a business and realizing a dream is obviously a rewarding and liberating experience. It’s no surprise that small businesses are everywhere.
Unsurprisingly there are many great organizations and Government sponsored agencies doing their best, on a tight budget to promote and support new businesses. A vast Global Industry exists, dedicated to deliver value to businesses at all stages of their life cycle. An entrepreneur and small business owner has access to more material and help than they can possibly consume. All business start-ups can be the culmination of thorough research, impeccable preparation and planning. While building a business requires thorough planning, creativity and hard work, it does not necessarily equal success. Looking at the titles on the shelves of the business section at the local bookstore it seems patently obvious how universal the elusiveness of business success is.
The numbers tell the story. The majority of entrepreneurs and business owners are sadly doomed to fail. Statistically speaking a new company has less than 70% chance of remaining in business. CPA’s will tell you, the actual figure is much higher. Most start-up businesses never make it to the stage where they register with local authorities, so their statistics aren’t recorded. Maybe a more realistic number is that about 80% of all new enterprises never make it through the start-up phase. Those that win the fight and become viable mostly lose the battle(s) in the next round(s).
Lavan Financial Group is committed to help change the numbers for the better. We believe entrepreneurs and small business success rates can be increased to positively impact local economies and employment. We know active Community engagement can help develop a better environment conducive to small business success. By empowering business communities with reliable tools, knowledge, resources, and strategic enhancement services - the odds of business success can be improved. We feel sharing pertinent information - common issues for failure and best practices to ameliorate them, revealing less known steps successful business owners complete - locally with start-ups and small businesses has a demonstrable impact on the numbers. We are committed to developing the conversation, advocating for small businesses, fostering real engagement of like-minded people and encouraging community members to become more involved to help themselves and others.
Let’s take a look at what some successful businesses do particularly at the early stages, with some sound bites from industry experts.
How Successful Businesses Do It?
Acclaimed business authority and expert Les McKeown the author of “Predictable Success” identifies three precepts that drive business success regardless of the business tenure. He purports there is a code that unlocks success, predictably and consistently in any organization. He contends the path to predictable success progresses through each of seven life cycle stages leading up to and away from predictable success. All companies are in one of the seven fluid stages transitioning somewhere on a spectrum of “early struggle” to “failure” Predictable success can be reached and maintained once you are there if the 3 precepts are managed and adapted as the business matures.
1. Numbers; a well-funded business, balance sheet and financial management.
2. Talent (people)
3. Structure (organization)
The numbers - a well-funded company, and the people (talent) have to work within a vibrant, organic, dynamically changing organization. Importantly and maybe somewhat obvious, a structure that works for a start-up does not necessarily apply or work as the company choses to grow.
Capital Structure is how a firm finances its overall operations and growth by using different sources of funds. It includes equity, debt and hybrid equity/debt. Awareness of the value, upside and downside each type of funding source brings to a business, an investor or lender is vitally important. Owners have to consider the reasons to use equity and the reasons to use debt, balancing both in order to reach goals with the company’s overall capital structure. Many business owners elect to start and grow their business using debt, preferring not to dilute equity ownership. If the dilution of equity is accretive earnings per share is the real benchmark. Among many other variables the amount of equity in a business has a significant impact on access to and cost of capital.
For any startup owner it appears there are so many unknowns they are dealing with from name, logo, which phone carrier, website, marketing, supply chain…
The reality is there are only two questions they should be focused on answering and directing all their energy towards solving.
1. Are there enough people out there who will buy the product or service at a profit?
2. Does the business have enough cash (capital) to cover costs until you find the people?
Most start-up companies are in a race against time to switch dependence on external funding to that generated from business revenue. It’s a simple problem to understand, but a difficult one to solve bearing in mind most businesses are significantly undercapitalized from inception. Initially funded by a combination of capital from the owners’ personal savings, credit cards and other personal debt, retirement rollovers, investments accounts, begged and borrowed cash from friends and family. For most the precept of a well-funded business is let’s say ironic.
Every venture is not the same, each business has its own unique set of variables-the skills, knowledge and experience of the founding entrepreneurs, how established the product and market is. What generally all businesses do have in common is drastically more capital is required than expected and planned for. They don’t have nearly enough to stay in the race let alone win it. Most companies need 2 to 3 years to reach viability, which typically represents the need for 3 times the capital they budget for. Most are underfunded and typically close to a bootstrapped launch, which can be very effective, but not for most. How much capital at inception, the difficulty a business has to access additional external funding, and how effectively it is used to prove the market, obtain a consistent flow of clients, get the pricing structure right and win sustained market traction is the essence of a business startup and company in its infancy. Remember the statistics on failure for start-ups – 80%. The importance of maximizing access to external funding cannot be overstated. Having the talent and optimal structure in place is not enough. If the fuel (capital) is cut off or too expensive just like a car it does not work. There is a binary outcome, win or lose, survive to get ready for the next race or fail.
Small Business Access to Capital Conundrum
Contrary to many opinions Banks want to lend. They prefer minimal risk, and larger sized transactions for profit. Within reason it costs a Bank similar expense to underwrite like category loans regardless of size. Smaller loans are not generally appealing to banks as fees are commensurate. Wealthy individuals and companies with fortress balance sheets are the ideal client for a bank. Banks want to lend to client with depository relationships where attractive high global ratios exist, LTIs are healthy and assets are multiples of loan sizes. Risks are almost entirely mitigated. Client assets and cash remain at the Bank. The Bank supports the client with other services they collect fees, interest or commissions on. They like to lend to companies and people that don’t need it, but request a loan for leverage to optimize their capital structure. It’s a great business for Banks. Of course small business can become large business and to incentivize Banks to lend to a start-up, small and fledgling businesses the Government guarantees a portion of a 7a or 504 SBA loan, on which the small business pay a guaranty fee. Of course they are riskier entities. Small businesses have to pay for the increased risks a lender or investor takes. The question is how can they accelerate a process, if there is one and become less risky entities with better access to capital.
Banks typically sell originated loans to multiply their returns by reusing their balance sheet over and over to generate fee income. Perhaps only one bank presently retains SBA loans on balance sheet. It’s a great business if the default rates are low. Notes sold must meet regulatory standards to protect buyers. If not Banks are severely punished. The latest credit crisis precipitated by the subprime mortgage fraud was a result of well, fraud, poor underwriting and poor regulation. Banks, Credit bureaus and Regulators were partly to blame, but frankly so were the people borrowing money they could not afford. They have to be protected from themselves and unscrupulous lending practices. A mess that Washington dined out on and many politicians were reelected on. Thereafter, regulations introduced ironically hindered the flow of money to small business. Perhaps changes that appear to be slated in those rules may swing the pendulum back some.
Bank underwriting criteria then and now is designed to reduce the risk of a loan default. Loans are approved for companies that meet the underwriting standards imply a low risk of default. Most businesses do not meet those underwriting standards so their loan applications are declined. In fact a very small percentage of the 30 million businesses in the US and the 350,000 new companies each month meet those standards. Most business owners do not know what is required to make their business Bankable and to meet the underwriting standards. They apply, and as many as 80-90% of small business loan applications are declined.
How do you qualify and quantify talent and link it to results?
In Jim Clifton’s & Sangeeta Bharadwaj’s book “Entrepreneurial StrengthsFinder” they identify ten talents of successful entrepreneurs. As one might expect there are common characteristics, skills and strengths associated with successful entrepreneurs offering insight into their propensity to succeed. There have been exhaustive studies linking talent to business outcomes. Research has clearly established positive significant relationships between different personality characteristics – the need for achievement, risk propensity, passion, creativity, autonomy, and self-efficacy – and entrepreneurial outcomes such as sales and profit. Studies have shown the correlation between self-efficacy and business success was as high as the correlation between the weight and height of adults in the US - one of the highest medical correlations. High self-efficacy motivates an individual to take initiative, persevere in the face of resistance, and have self-confidence and a hopeful outlook for the future – behaviors that lead to venture success.
Over the past several years Gallup’s assessment of 2,500 U.S. entrepreneurs found that higher levels of entrepreneurial talent significantly increase one’s odds of business success. In another study it was found these behaviors caused the highly talented entrepreneurs to outperform others by 22 % in year over year business growth. Business Focus, Confidence, Creative Thinker, Delegator, Determination, Independent, Knowledge-Seeker, Promoter, Relationship Builder, Risk-Taker are traits that drive success. While you can try to learn them it’s more productive to focus on your innate talent(s). Gallup’s research suggests that you would have to do a considerable amount of work and might still achieve only average. Education, and study can help. Business support programs can teach basic management, accounting and finance, or marketing skills. They can provide technical assistance. Mentors and coaches can give you advice, share their own experience and be a support system through the entrepreneurs’ journey. But support programs and coaches cannot teach you to recognize opportunities or to become a risk-taker. Nor can they teach you how to best use social networks to further your business interests.
Clearly talent is a key driver of success, helpful to identify for an investor who may choose to incorporate certain parameters into their due diligence and decision process. Most business owners, and entrepreneurs are probably not evaluating themselves. But they should. Well-Funded businesses fail when they lack talent or the structure to harness and lead their people through evolving business phases. Remember the dot coms, many took too long to capture a viable market and didn’t monetize soon enough.
The team that accomplished the feat of surviving and achieves viability is relatively small and tight. Typically followed by a fast early stage of growth and often characterized by frantic focus acquiring and satisfying customers.
This is a distinct shift from will we survive and grinding it out to growth. With more liquidity, a target audience identified and the ability to invest more money there is a positive momentum and energy. Now the focus is selling and capitalizing on the marketplace. The organization is still in its infancy and relatively simple, and therefore so is the structure. Everything will most likely revolve around sales. Through this stage as the business develops the structure will need to evolve to facilitate sequential stages on the road to predictable success. We will touch on these stages in our next article.
For new companies the most likely path to success or failure is often set in motion at the beginning. Many entrepreneurs may or may not be aware of the 3 precepts. They may not know what innate talents they possess or the best way to obtain funding, or that the structure people operate within needs to be fluid and adaptive to enhance and harness talent as the business matures. If they are instinctively in command of the precepts they are more likely to succeed. Others simply do not have the knowledge or experience, talent or ability to harness them.
What can be done to help improve the odds of success?
Empower owners with the tools, knowledge and best of breed services readily available, but rarely comprehensively delivered, to enhance their chances of success. Educate, deliver simple easy to understand success maps mirroring the habits and paths of successful business owners. Collate and share best practices. Offer proven solutions to the hurdles that drive small business failure. Execute within the local community, with the community and gain buy-in at the grass roots level. Demonstrate a compelling value that increases local small business success rates. Build a local business community purpose and entrepreneurial belief. Easier said than done, but we are passionately pursuing.
Here are some specific actions that can be taken by entrepreneurs. We will make a habit of publishing more and touching on key steps and actions businesses take as they progress through the stages leading to predictable success.
1. A company mission. It is important to be clear why you are in or starting a business beyond the obvious. What was the visceral catalyst that drove the idea? If enough people relate to your purpose, they are more likely to desire what you do to accomplish your mission because they believe in it too. People don’t buy what you do, they buy why you do it. Why you are solving a problem is important to the sustainability and success of a business as it creates an identifiable passion in like-minded people. They are your people. They buy for themselves not for you.
2. Talents.Self-awareness of entrepreneurial talents, both strengths and weaknesses are essential. Understanding weaknesses enables an entrepreneur to put strategies or partners in place to manage them and to focus on their innate strengths they can ride to develop the company.
The reality is not everyone has the talents they desire or required to be a successful business owner. The degree of natural ability in each entrepreneurial talent will determine where they will be successful and where they will fall short in their entrepreneurial journey. There are a myriad of tests that can provide people with an appreciation of their natural strengths and weaknesses. Be prepared to seek opinions ask for honest feedback to provide a good sounding board and barometer.
3. Funding. Take advantage of free education on how to maximize access to external funding. Remember the statistics on failure for start-ups – 80%. The most important reason for obtaining adequate access to capital is to facilitate a laser focus on achieving a viable market.
All small businesses, entrepreneurs and startups should be aware of how to build a corporate identity with optimal access to capital. A business should be setup optimally to become bankable and appropriately funded. Most small business owners are not aware how to setup a Bankable business with access to cost effective capital in a relatively short timeframe. Very often they create a compounding problem by raising funds the wrong way and damaging their personal credit. This in turn impacts the ability and speed they can do things properly. Establishing a business entity separate from their SSN# and developing a credit identity and asset from inception is achievable and within reach for most businesses. Interestingly the majority of small businesses are structured as DBA’s where they do not have a separate corporate identity and cannot build a Bankable business and the owner has liability. They like many other companies rely on personal credit and guaranties and don’t give themselves the best chance of success.
There are a myriad of reasons small businesses fail to establish a bankable entity. Taking early simple steps, an entrepreneur can quickly access capital to start a business while simultaneously building corporate credit, making future funding easier. Similarly those already in business can maneuver the business rapidly into a Bankable entity Banks want to lend to and achieve the same benefits. A business owner can setup a corporate foundation and then focus on the talents and structure to optimally operate and not the headache of capital.
Lavan Financial Group offers business owners and entrepreneurs help to remove the barriers that prevent access to capital. As a strong business advocate we empower a business with tools, knowledge and resources to access and manage the Capital essential to success. We provide free access to a Business Finance and Credit education system. Using the same databases lenders use to grant approvals we identify which type of financing structure you qualify for now, where you might fall short, items you need to address before applying and what is required to qualify for more in the near future.
To maximize your business funding opportunities we provide a step-by-step system that takes your business through the process of optimizing your business credit reports and owners' personal reports before applying with business lenders.
Becoming bankable is completing lender compliance, having at least 10 reporting trade-lines, building strong business credit scores, and having a good bank rating. Access the system to accelerate your path to Bankability it’s free and will help you obtain funds now and in the future access to cost effective capital while building equity value.