This week we ask, why small businesses fail.

As a follow up to my last blog about why big businesses go under, I thought I would write up a companion blog about why small businesses fail.

Here at Wholesale Clearance UK, our business relies on the health of small and medium enterprises, so we have a stake in seeing small businesses prosper. I’m keen to chat with small business owners to see how things are going, and obviously I can tell how healthy a business is by the size of their repeat orders, and the kind of quantities they’re requesting. So it was sad to hear recently of one customer who is struggling badly. There are a variety of reasons why small businesses fail, and often when incomes are tight, just one of the following factors can be the final nail in the coffin.

Reasons why small businesses fail

High street rents
Recently we have seen the House of Fraser and New Look asking for big rent reductions from their landlords, in some cases up to 60%. If big businesses can’t handle their rental loads, what chance do small businesses have?

This week, in conversation with the customer I mentioned above, he told me that the landlord of his gift shop has asked for a £3k rent increase – up from £15k pa. When he told the landlord it wasn’t feasible, the landlord said he’d been told in ‘his club’ he could ask £20k pa for the space. Around the corner, a similar size shop has a rental value of £6k pa, but the landlord there intends to put this up to 14k. When a small business is only making £20k profit pa, this hike in rent will kill the business stone dead.

Rates
High business rates are a problem for some small high street businesses. While certain small shops are exempt from business rates, those that are above the size requirement for exemption have seen a hike in the amount they have to pay. There is a huge inequity in business rates. A small shop with a high turnover, can pay far less in rates (if anything at all) compared to a shop with just a few square metres more space, but that has a low turnover. A double fronted shop, with little depth, can pay far more than a narrow fronted shop with a deep depth.

These crippling business rates are based on high pre-recession property valuations in some cases, and the system is not fluid enough to recognise or rise to the challenge.

As Bill Grimsey, author of the Grimsey Review notes, the high street is under siege, “there’s a downward spiral taking place. The cost pressures are rising faster than turnover. The biggest cost is business rates … 20,000 small retailers are in the danger zone.”

At the time of writing the Grimsey Review, he said, “the government has delayed the 2015 re-evaluation of business rates to 2017. This means that the big five supermarkets will benefit to the tune of £1.3 billion because their property assets are increasing in value. But because of vacancies on the high street, the value of small retail properties has fallen. The last valuation took place in 2008, at the top of the market. The government has given local authorities the chance to give business rate relief, but only 18 out of 320 have done so.”

Consumer habits
Just as we suggested when we look at why big businesses fail, small businesses have found that quite simply consumer habits are changing. Several customers have told me that they regularly see people taking photos of stock on their phones and then searching online for the best deal.

With everybody living their lives vicariously online these days, it seems like there is less call for bricks and mortar store.

No plan for the future
Anyone starting a business these days is well advised to have a business plan that examines the strengths, weaknesses, opportunities and threats of their idea in the real world. Who are the competitors and how can your business continue to develop in the future?

Where does the cash flow come from? Will you be able to borrow extra finance from a bank? Can you cope in the ‘off season’? If you’ve had a business for several years, or even longer, have you considered creating a new business plan that looks at exactly the same areas? In short, can you adapt and survive?

Entrepreneurs that are just not cut out for it
With cuts to unemployment and fewer long-term jobs with secure work, pensions and benefits available, more and more people are creating their own businesses. In some cases, they have no choice – they either have to work for themselves or risk having no income at all. But many of those who start up a business, in their back bedroom, on a market, or on the high street, quickly run into difficulties if they do not have the requisite skills and abilities required. What do they know about marketing? Accounting? Paying VAT and personal taxes? Are they paying their National Insurance? Do they have a pension plan?

Competition
No matter what business you are in, someone somewhere will be undercutting you. In essence, competition is great – it can be very healthy. But as more businesses struggle to survive and cut their margins deeper and deeper, it can backfire spectacularly. In fact, sometimes competition creates a race to the very bottom. It can be great for a consumer to buy an item at virtually cost price, or for next to nothing, but that’s not so good for a legitimate business genuinely paying taxes and VAT, or for anyone truing to survive on an ever-decreasing income.

The high street is an outdated model
Controversial perhaps, but is the high street as we know it, an outdated model? As more and more towns turn into a mirror image of the next one, when high street chains populate every town centre, kitted out in exactly the same way and selling the same branded products, perhaps we are developing the town centres we deserve. Do we want to be carbon copies of each other?

When we ask why small businesses fail, are we really asking whether it matters or not? Who does it matter to?

Is it all doom and gloom?
Looking at all the reasons why small businesses fail may seem overly negative. There are ways to pull a business out of the doldrums, but in these challenging economic times, it can be tough. Next time I’ll have a look at some of the ways you can try and improve your small businesses’ performance.

Over to you
Do we want high streets full of pound shops, empty shops and charity shops? What’s your view? Do you have any reasons why small businesses fail that we haven’t mentioned here? Leave a comment below, or come and chat on our Facebook page 🙂 .