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10 May 2016 | By Max Chmyshuk Community

Change the narrative on business survival rates

Why it's time to scrap the cautionary tale of how “8 out of 10 businesses fail in the first year”

There’s a common myth in the startup sector that “8 out of 10 businesses fail within their first year”. 

The “statistic” first appeared in Forbes in 2013, and despite lacking any identifiable statistical source, it has subsequently been taken as fact and increasingly quoted in various media publications.

Specifically, the article in question revealed that 80 per cent of businesses “crash and burn” within 18 months whilst the other 20 per cent would probably not survive to see their fifth year.

It is high time however that we start to look at the facts in a bit more detail, and challenge this statement. And new research from Fleximize has revealed that in fact, 8 out of 10 companies survive the first year, and half of them are still in business at the end of year five.

While statistics vary by geographical location, general economic conditions and the industry within which businesses are located (along with factors such as marketing influences, including the number and size of competitors), the report shows that for industries such as retail and education, the prospects of success after year one can reach the 90 per cent mark. Likewise, healthcare and education businesses have the most stable five year trajectories with a 60 per cent survival rate after five years.

Of course, there are sectors with far lower survival rates. The financial, hospitality and food sectors are notoriously difficult to navigate, and in these instances only around half survive the first five years.

The financing challenge

Starting a business is not easy. There are many challenges that businesses face along the way. However, one of the key challenges essential to business survival – from year zero and beyond – is financing.

Since the financial crash, support for small and growing businesses has faced a barrage of challenges. Until 2007, the traditional business bank was the only significant avenue for SME finance, providing most SME loans. Yet in the aftermath of the financial crash, research by the Department for Business Innovation and Skills and HM Treasury found that around half of all loan applications by small businesses were being rejected by banks.

Small businesses therefore turned to alternative financiers in a bid tackle the issue. Alternative business funding accounted for £2.2bn in 2015, up from £1bn in 2014, with more than 20,000 SMEs raising debt and equity funding from these new sources. The likes of equity crowdfunding and peer-to-peer lending platforms, as well as alternative lenders like Fleximize offering flexible loans to SMEs directly from their balance sheets, are helping to alleviate the challenges posed by a lack of startup funding and growth capital.

With alternative lending experiencing explosive growth in the UK, more businesses now have access to flexible loans, which help maintain cashflow and fund growth initiatives. These loans, which typically range in value from £10,000 to £200,000, can be a lifesaver for many small businesses and make a massive difference to their likelihood of success. The traditional hurdles to SME survival are no longer insurmountable.

When starting up a new business, sceptics talk of a leap of faith and terrible odds, but being an entrepreneur does not have to be akin to playing a roulette.

Having a vision, a plan, a team able to execute, and knowing how to fund your business through its various growth stages makes your odds of success much higher than common wisdom tells you. The key is to take challenges one at a time and seek the best route to building a profitable and operationally solid company able to attract customers and serve them well. Each time one obstacle is conquered, a business’ prospects of survival and success improve, meaning after 5 years, it is still going strong.

So might it be time to scrap the cautionary tale of how “8 out of 10 businesses fail in the first year”? It certainly seems like it’s time to change the narrative.

Read more on the Fleximize report here