Business ownership goes to the very heart of the American dream alongside getting an education and owning a home. Almost two-thirds (66%) of Americans dream of owning a small business, according to UPS Stores’ latest Inside Small Business Survey. Top motivators include being your own boss (38%), believing in the power of their own idea (17%), and creating their next career path (15%).
But small business owners aren’t just living the dream, they are also its engine. Small businesses create seven of every ten new jobs and they employ just over half of the country’s private sector workforce. In the past 15 years, small businesses have generated 62% of net new jobs.
Yet, this dream is often killed by financial concerns. 45% of Americans are held back from pursuing their dreams by fears of financial security (45%), the financial commitment required to open a business (39%), and the fear of failure.
There are many reasons why the American dream of small business ownership unravels for so many entrepreneurs. The lack of a well-thought out business plan is one, but often the greatest challenge is keeping the money flowing to operate or grow the business over time. A lack of cash flow kills more than 50% of small businesses annually.
Data from the SBA corroborates these high failure rates. Approximately two thirds of employee-based small businesses survive the first two years of living the dream, while only half make it to the five year mark. More gravely, only one-third of establishments make it through to 10 years of business ownership.
Late paying customers are a major cause of cash flow issues. 64% of small businesses wait on late payments, making it hard to just keep the lights on. These late payments are often made worse by the need to extend trade credit and net terms. Currently, 60% of small businesses use either formal or informal systems of trade credit to finance their operations, making this the second most popular form of small business financing (traditional financial institutions are first).
Though a large chunk of B2B transactions rely on trade credit for financing, such payment options require business owners to act like banks—extending credit terms to customers to facilitate transactions. No matter how prudent a business owner’s cash management strategies are, they are not immune to intermittent cash flow struggles.
To solve these cash flow management issues and fund projects that drive growth, small businesses have traditionally turned to banks. After all, small businesses often don’t need huge amounts of cash to fund growth. Some of the top expenses that small businesses encounter include supplies and equipment, advertising and marketing, and basic operating costs. Many of these costs can be covered by financing products like a business line of credit or even a small loan. Yet, traditional loans and lines of credit can be difficult to obtain and require lots of documentation to support the application.
The reality is that commercial lenders have made access to credit incredibly challenging for small business owners by requiring good to great FICO scores and loan thresholds that are higher than what most small businesses need or want. Both issues create major stumbling blocks for most business owners, which is part of the reason why bank approval rates for small businesses are a lowly 24%.
Living the American dream as a business owner is a romantic idea. But to be successful, you need to equip yourself with a solid business plan, understand how to overcome the financial hurdles that can dent cash flow (such as trade credit and late paying clients), while investing in growth. In the past this meant turning to friends and family or battling with traditional banks.
Today, thanks to new advances in financial technology (fintech), there is another option. Using artificial intelligence and sophisticated risk models, financing and credit is now more widely available to business owners who have been previously shut out or underserved by traditional funding options. Modern fintech platforms are increasingly allowing business owners to apply for and access credit online, sometimes in just minutes, with no paperwork.
Small businesses owners are asserting their independence and pursuing the American dream on their own terms. Cheers to a happy and productive 4th of July.