Why Small Businesses Fail
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Why Small Businesses Fail

A Small Business May Fail for Lack of Working Capital

One of the leading reasons small businesses fail is the lack of working capital. I don’t think you’ll ever see a franchise sales brochure or a website that stresses the following, “You had better have 10 times as much money as you think you need on hand to keep you afloat during the first five years when you are bound to lose money hand over fist.” But if you ask almost any franchise owner, there is no statement more truthful than the one I have just made. Yes, I may be exaggerating to make a point, but the fact remains that the primary reason that new businesses, franchises included, fail is the lack of working capital.

Nobody plans to fail but they should, at least for the first few years. Running at a loss for several years, perhaps five or more is normal. It takes time to win over customers who have ingrained consumer habits. It is only when you become established with repeat customers that you will become eventually profitable and that can take years. New business owners don’t understand that it will take 3-10 years to turn a profit on a sustainable basis from a new business in almost every sector. During the early years, you may have to live on a very small salary to keep the business afloat.

Before you even purchase a franchise, you need to have all of your potential sources of capital lined up. Your savings and liquid investments, access to retirement plans and home equity, partnerships or loans from friends and relatives, other business associates that want to invest with you, and as a final source of capital, local bankers. All these sources, and more that you may think of, make up the pool of funds that you can tap into for ongoing working capital.

Don’t fold your business just because you are running at a loss. If you are executing the franchise plan, in a good location, in a decent economy, chances are you’ll eventually turn a profit.