Before you start your new business, you need to be aware not only of the local market for your startup, but the current national economic stats and trends.
Knowing what the risks are, the reasons why most startups fail, and the financial investment involved in entrepreneurship can help you make better decisions when you establish your new business.
1. Small businesses are an integral part of our economy. They generate $7.8 trillion in revenue, employ 42.7 million people, and comprise 98.2% of all firms in the US. Furthermore, up to 80% of all new jobs are created by startup companies.
2. The financial recession caused a 12% decrease in the number of new startups established – from 844,000 in 2007 to 742,000 in 2010. In 2008 the startup establishment rate dropped below 3% for the first time since the early 1990’s. It remained at a low 2.7% through mid-2011, the latest rate for which data is currently available (SBA).
3. We all know this one: according to the Small Business Administration, approximately 30 percent of all new businesses fail within the first two years and about half do not survive five years.
4. 46% of startup failures are caused by incompetence, specifically: emotional pricing, living outside one’s means, nonpayment of taxes, lack of pricing, financing, or record-keeping knowledge, and lack of planning. A further 30% of failures are caused by unbalanced experience or lack of managerial experience (University of Tennessee).
5. The top five mistakes that entrepreneurs make that lead to the failure of their startup are: going into business for the wrong reasons; poor advice from family and friends; bad luck (being in the wrong place at the wrong time); mental and emotional burnout; and family pressure on one’s time and money commitments (University of Tennessee).
6. The businesses with the best rate of success after five years are: religious organizations, apartment renters, vegetable farmers, medical offices, and day care services. Those types of businesses with the worst success rates are: HVAC services, single-family housing construction, grocers, eateries, security brokers, and local trucking. It is imperative that you perform a market analysis of your chosen industry to ensure that there is neither a glut in the market nor a lack of demand for that business (University of Tennessee).
7. The IRS has rules about whether an activity is a hobby or a business. Incorrect classification of a business activity as a hobby causes up to $30 billion in unpaid taxes each year, according to the IRS. If the activity makes a profit for three of the past five years, including the current year, then it qualifies as a business activity and must be taxed as such.
8. Outside equity such as angel investment and venture capital make up only 6% of funding for startup businesses. The vast majority of startup funding – approximately 75% – come from personal and business bank loans, credit cards, and lines of credit (SBA).
Related: Startups Tuesday: Securing Funding
9. Until your business has an established credit history – bank accounts, credit cards, and cash flow history – lending banks will utilize your personal credit history in order to determine whether to grant you a business loan.
10. The amount of startup capital accumulated for small businesses averages to approximately $80,000 a year per business (The Kauffman Firm Survey).
Starting a new business can be a risky process. However, knowing the important facts, stats and data about the current economy can help you take preventative measures and positive action while you plan your startup.