A primary reason why small businesses fail is a lack of funding or working capital. In most instances a business owner is intimately aware of how much money is needed to keep operations running on a day-to-day basis, including funding payroll; paying fixed and varied overhead expenses, such as rent and utilities; and ensuring that outside vendors are paid on time; however, owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a small business out of operation.
A second reason is business owners who miss the mark on pricing products and services. To beat out the competition in highly saturated industries, companies may price a product or service far lower than similar offerings, with the intent to entice new customers.
While the strategy is successful in some cases, businesses that end up closing their doors are those that keep the price of a product or service too low for too long. When the costs of production, marketing, and delivery outweigh the revenue generated from new sales, small businesses have little choice but to close down.
Small companies in the startup phase can face challenges in terms of obtaining financing in order to bring a new product to market, fund an expansion, or pay for ongoing marketing costs. While angel investors, venture capitalists, and conventional bank loans are among the funding sources available to small businesses, not every company has the revenue stream or growth trajectory needed to secure major financing from them. Without an influx of funding for large projects or ongoing working capital needs, small businesses are forced to close their doors.
To help a small business manage common financing hurdles, business owners should first establish a realistic budget for company operations and be willing to provide some capital from their own coffers during the startup or expansion phase.
It is imperative to research and secure financing options from multiple outlets before the funding is actually necessary. When the time comes to obtain funding, business owners should already have a variety of sources they can tap for capital.