How often do businesses fail? For years, the quick answer to that question was that four out of five new businesses fail within the first five years of opening.

But now, U. S. Small Business Administration Office of Advocacy economist Brian Headd, takes a new look at business failure and challenges that commonly accepted failure rate – and the notion that business closure and business failure are one and the same.

In an article called "Redefining Small business Success," Headd says that the practice of using business closings as an indication of business failure can distort the rate of business failure.

The reason is that not all businesses that close are failures. Sometimes businesses close because the owners lose interest, or because they realize they would prefer to work for someone else. And, more businesses now include an exit strategy as part of their initial business plan. In fact, US Census Bureau data shows half of new employer businesses survive more than four years, and about one-third of closed businesses were successful at closure.

The key predictors of success haven't changed, though. Businesses that have employees and that have good financing tend to survive longer.

Headd's article, which was originally written for Small Business Economics, can be read in full on the Office of Advocacy web site: http://www.sba.gov/advo/stats/bh_sbe03.pdf.

Where Do Businesses Find Funding?

Cash is king, but when businesses go looking for lenders to provide that cash, they quickly find that funding sources are finicky princesses that are mighty difficult to please. So, where do small businesses get financing?

Financing Patterns of Small Firms, a report published this fall by the Office of Advocacy, takes a detailed look at that question. The report features over 400 statistical tables drawn from the Federal Reserve’s Survey of Small Business Finance comparing the borrowing patterns of various small business subgroups.

Among the key findings:
Over 80 percent of the small businesses surveyed used some kind of credit and had outstanding debt on their books at the end of 1998. Fifty-five percent of small firms had some kind of traditional loan, while 71 percent obtained credit from non-traditional sources, mainly owners’ loans and credit cards.

The most frequently used kinds of credit were personal and business credit cards, lines of credit, and vehicle loans. Forty-six percent of small firms used personal credit cards, 34 percent used business credit cards, and 28 percent used lines of credit.
The most frequent suppliers of credit to small firms were banks; 38 percent of small firms had credit outstanding from commercial banks in 1998. Owners’ loans were next in popularity (14.2 percent of small firms used them), followed by finance companies (13.3 percent).
Loans from owners are an important source of small business finance. The survey did not collect data on their use by sole proprietors, so the extent of their use is understated. For small corporations, borrowing from themselves and banks were the two most common sources of financing, far exceeding borrowing from any other source. Some 30 percent of small corporations borrowed from owners as compared with 14 percent for all small businesses.
While the majority of small firms used some financing, most small firms’ reliance on credit in business operations is limited in scope: 47 percent of firms had no outstanding debt, and another 25 percent had just one loan outstanding.
The percentage of small firms using credit normally increases with firm size. The percentage of firms using any credit increased from 70 percent to 99.6 percent as the employment size of the firms increased from 0 to over 100. This rising trend is most evident in small firms’ uses of credit from loans supplied by depository institutions (banks, thrifts, etc.). For example, only 22 percent of firms with no employees used credit from depository institutions, while 78 percent of firms with over 100 employees used depository institutions.
The use of owners’ loans and personal credit cards leveled off or diminished as firm size increased.

To conclude, two distinct patterns between firm size and the type of credit used were observed. The positive relationship between firm size and the percentage of credit from depository institutions seems to reflect the availability of credit to larger small firms—credit becomes more available as firm size increases. A flat or inverse relationship between firm size and the use of owners’ loans and personal credit cards reflects a different phenomenon. Very small firms tend to use these alternative sources because other sources of financing, which are usually cheaper, may be unavailable.

For the complete report, see www.sba.gov/advo/stats/ssbf_98.pdf

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About the author
Janet Attard is the founder of the award-winning Business Know-How small business web site and information resource. Janet is also the author of The Home Office And Small Business Answer Book and of Business Know-How: An Operational Guide For Home-Based and Micro-Sized Businesses with Limited Budgets. Follow Janet on Twitter at http://www.twitter.com/JanetAttard.

Small Business Failures and Financing – The Real Story

Where Do Businesses Find Funding?