There’s a widespread myth that half of all companies fail in their first year of business. The truth, according to the Small Business Administration, is that half make it to the five-year mark — and the longer a business’s doors stay open, the less likely they are to ever close.
But another myth persists: Seasonal businesses suffer most of all. SBA’s data doesn’t bear this out, showing companies across varied industries tend to follow similar patterns in terms of failure. Manufacturing-based businesses, for example, are no more protected from failure than seasonally driven businesses like restaurants and retail stores, meaning other factors determine companies’ likelihood of long-term success.
That doesn’t mean, however, that there aren’t real risks inherent in seasonal businesses. An Ohio State University study indicated that 60 percent of restaurants don’t make it past the first year. Another 2005 study amended that, saying that the 60 percent figure applied to the first three years. The likely reason? Restaurants have a hard time getting startup loans from banks, putting these businesses in a catch-22: They’re taking a big risk without sufficient funds, but they aren’t able to obtain funding because they’re seen as too risky.
Here’s what seasonal businesses striving for sustainability need to keep in mind.
The money coming in has to last all year.
Much like teachers’ salaries, seasonal businesses that endure peaks and valleys have to spread their income across an entire year. A landscaping business flush with cash through the spring and summer months has to weigh that against the relatively barren fall and winter months. With CB Insights finding that 29 percent of small business failures can be attributed to cash flow problems, it’s imperative that seasonal business owners find ways to “spread the wealth.”
Kabbage, an online lending platform, recommends two ways to do this: by diversifying a small business’s income streams and getting cash flow management help. Diversifying income streams is a smart move, bringing money in during the off season and creating a bulwark against industrywide slumps. Tax preparation accountants, for example, can take on payroll work the remainder of the year; lawn care companies can add snow removal to their list of services. As Kabbage warns, however, businesses need to test their second revenue arm out before committing to it to ensure they don’t overextend themselves or invest in an area without market demand.
Cash flow can be hard to sustain, particularly when seasonal businesses struggle to obtain loans or lines of credit from traditional lenders. But having a backup plan — i.e., credit — available is essential to a seasonal business’s survival. Alternative financial institutions, such as online lenders, often have lower thresholds for young businesses to meet, enabling them to gain access to short-term or replenishing credit without having been in business for a decade or making millions in cash each year. Kabbage, for example, ties its line of credit to a small business’s live data, allowing the company to adjust lines of credit in real time to match a business’s seasonal needs.
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