5 Common Reasons Why Small Businesses Run into Financial Problems
It is estimated that 20% of new businesses fail in the first year, and 50% fail before they reach their fifth anniversary. Many of these firms go out of business for financial reasons. The entrepreneur is left with a lot of debt and a sense of disappointment, but what are the common reasons small businesses run into financial problems?
1. Underestimating Costs
Many entrepreneurs underestimate the costs of starting a company. They might have factored in the cost of renting premises and buying machinery. Still, they haven’t necessarily factored in other costs.
Stationery, electricity, coffee, and many other things must be paid for. Suppose there isn’t enough money in the bank to cover the costs of these small, seemingly insignificant items. In that case, a business can quickly run into financial problems.
2. Lack of Insurance
Some entrepreneurs try to cut corners to reduce their costs and think they don’t need to pay for insurance because they are unlikely to make a claim. However, getting this wrong can be costly.
Many wish they had taken out insurance for small business owners when they started up. Costs can run into thousands if a customer wants to sue them or if their equipment gets damaged. Small business owners’ insurance works out much cheaper than the cost of not having it.
3. A Client Stops Using Them
A client that gets into financial problems themselves or takes their business elsewhere can be catastrophic for a small business. Small businesses may not have multiple clients; losing one of their bigger ones can quickly lead to financial problems.
Most small businesses will do whatever is necessary to keep essential clients happy. However, they can still be undercut or left out. If they don’t find another new client quickly, their financial problems can mean they go out of business.
4. They Are Waiting on Payments
Many small companies go out of business while waiting for payments from other companies. They may have been financially solvent, but it only takes a few delayed invoice payments, and the money stops rolling in.
Financial problems occur through no fault of their own. Chasing payments can take up much of an entrepreneur’s time but not receiving payments on time can put them out of business.
5. Market Conditions
Many businesses are set up in booming industries. Still, if market conditions change then, this can leave a lot of small businesses chasing too few opportunities. This can be caused by a market recession, a change in the industry, or even naturally occurring events such as the coronavirus pandemic. The entrepreneurs might not have any control over these conditions, but it can still put them out of business.
Entrepreneurship is not for the faint-hearted. You must be willing to take risks if you want to run your own business. Unfortunately, running into financial problems is one of the most significant risks entrepreneurs face.