Do 8 out of 10 businesses really fail within a year?

Max Chmyshuk. Fleximize
- Leadership - May 23, 2016

Within the European start-up sector, there is a common myth that 80 percent of businesses will fail within the first year.

Every year more and more publications take this statistic as fact, citing a report produced by Bloomberg as evidence. Yet this ‘report’ cannot be located anywhere within the public domain.

The earliest trackable citation of the statistic is an article produced by Forbes in 2013 - which also references Bloomberg as a source. According to Forbes, 8 out of 10 European businesses ‘crash and burn’ within 18 months and the remaining 20 percent are unlikely to survive past year five.

The issue with this statistic is that it is, in fact, entirely incorrect and it unfairly undermines the reputability of Europe’s 26 million Small and Medium sized enterprises (SMEs).

According to the latest Eurostat report, the one-year survival rate for European enterprises actually lies around the 83 percent mark. Likewise, recent research undertaken by Fleximize, entitled The Real Rates of Business Survival, reveals that an average of 8 out of 10 businesses can expect to survive their first year, and half will still be in business at the end of year five. This is a far cry from the 80 percent percent failure rate announced by Forbes.

We shouldn’t however be surprised. Despite the tough economic conditions of recent years, entrepreneurship is thriving. Indeed, small businesses are key drivers of economic recovery, through their ability to stimulate innovation, creativity and alleviate unemployment. According to Eurostat for instance, Europe’s small businesses now employ in excess of 141 million people – and this is predicted to rise, because SME birth rates are now exceeding death rates.

Therefore, whilst statistics vary by geographical location and the industry within which the business is located, the general prospects of success for Europe’s businesses are incredibly high.

Of course, this is not to dismiss the inevitable complexities involved in starting up a business.

As Fleximize’s report highlights, businesses have to overcome numerous obstacles through their lifespan, from taxation to dealing with bureaucracy and red tape. Moreover, one challenge essential to European business survival - from year zero and beyond - is financing. Particularly in terms of fundraising, cash flow and growth.

This issue is particularly prominent given that banks now refuse loans to a large percentage of SME applicants and startups. For example, in 2013, the number of bank loans to SMEs fell by a substantial €232m, peaking with figures such as the €99bn drop in loans in Spain to non-financial corporations decreased likewise by €50bn in Italy.

With a wane in the ability and willingness of conventional European banks to fund small and new businesses since the financial crisis of 2007-8, alternative finance platforms, including crowdfunding, alternative lending, and peer-to-peer platforms have emerged as viable alternatives for companies seeking funding. With the UK’s alternative finance market topping £3.2bn in 2015 and Europe’s €1.3bn, it’s clear how this represents a poignant resource for alleviating some of issues surrounding start-up and growth stage funding.  

Crowdfunding, for instance, can provide access to capital for early-stage businesses with high-growth potential. In this case, businesses in need of finance ‘pitch’ their ideas and business plans to a platform of online equity investors, who then choose how much they are willing to contribute in exchange for equity and/or rewards, such as early access to company’s products or lifetime discounts. Equity crowdfunding now accounts for €82.56m in transactions with further €130m in donations-based and reward-based crowdfunding in Europe (excluding the UK). Leading European crowdfunding platforms are, according to a report by Accaglobal, doubling the size of their books every six months.

Peer-to-peer business loans, on the other hand, accounted for over £2bn in the UK in 2015 and are suitable for more established businesses as they operate much like bank loans rather than a cash injection. These are funded by a “crowd” of individuals choosing to directly lend to businesses rather than keep their money in a bank; it is  a process similar to equity or rewards based crowdfunding.

There are also alternative lenders, like Fleximize, which offer flexible small business loans directly from their balance sheet.  They leverage data and modern technology to make quick 24-48 hour lending decisions putting their own capital at risk. Assuaging the problems posed by a lack of bank funding for business growth, flexible business loans are a great option for SMEs seeking up to 24-month money to fund working capital or new investment, but are not able or willing to wait for weeks to get a decision from their bank or have already been turned down.

We can learn many lessons from the emergence of the alternative finance industry post 2008 crisis.  First of all, where there is unmet demand – there will be supply.  With banks pulling away from the SME market, a number of alternative providers emerged to fill in the gap.

Secondly, SMEs are more resilient and are able to adapt to unforeseen obstacles, tackle them head on and win. With new forms of finance available, small and medium sized businesses are turning to these innovative solutions and leverage them to overcome the challenges they face.

Surely, therefore, it is time to scrap that cautionary tale of how 8 out of 10 European businesses fail in the first year and recognize their success and contribution to economic recovery.

Max Chmyshuk is Founder and MD of the alternative business lender Fleximize and has had a long-standing career within the banking industry. He is an expert in funding and hedging solutions, derivatives, bilateral loans, bonds and notes for companies of various sizes and industries. Launched in 2014 as the UK’s first revenue-based finance provider, Fleximize offers small business loans from £500 to over £1 million, and has supported a wide range of SMEs across the UK. 

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Read the May 2016 issue of Business Review Europe magazine.

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