Hey, Are You Going to Pay for That?
A growing number of customers have apparently found a way around tighter economic times—pay late or just sometimes not at all. The latest Kauffman Firm Survey shows an alarming increase of young firms who claim their primary business challenge is customers paying late or simply not making payments—jumping from 2 percent in 2008 to 14 percent in 2010. That may not be as big of a problem for larger established firms, but for startups it can mean the difference between failure and survival.
The survey finds that while the most pressing challenge continues to be slow or lost sales and unpredictable business conditions, those concerns are easing somewhat, dropping from 53 percent to 44 percent.
Regardless, the entrepreneurs seem undeterred and continue to innovate—either through passion or positioning for future profit (or a combination of the two). Roughly two-thirds of the respondents said they had introduced a new product or service during the same period.
According to the survey, only about 5 percent of young firms named credit access and the terms or cost of credit as their main business challenge. But that may just be a case of lowering expectations. The number of firms submitting new external credit applications dipped a few percentage points—from 13 to 11—while 19 percent indicated they had avoided applying for funding at some point when they needed credit because they feared their application would be denied.
“Young firms’ are facing challenging financial conditions due to difficulty in receiving payments and limited access to credit to grow and thrive,” said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. “The cost to our economy of highly restricted credit from banks and other debt providers is that young businesses are prevented from adequately investing in their companies to fund growth and create jobs.”
Other key findings from the most recently compiled data include:
- More than 45 percent of firms made investments in intangible assets meant to show future-year gain, compared with just 12 percent of firms investing in research and development.
- About 33 percent of firms had revenues greater than $100,000 by 2010, compared with just 21 percent in 2004. Eleven percent had revenues of more than a million dollars.
- About 52 percent of surviving firms had employees. Surviving firms with employees increased average employment to 7.5 employees in 2010.
The KFS is the largest and longest survey of young businesses in the world. It provides insights into new U.S. businesses, providing an understanding of how businesses are organized and operate in their early years, and shedding light on survival and growth indicators. Its baseline study started with a cohort of 4,928 firms that began operations in 2004. This group of companies is tracked annually and principals are asked an extensive set of detailed questions that cover a range of topics, including the founders’ backgrounds, their sources and amounts of financing, firm strategies and innovations, and outcomes such as sales, profits and survival. The project has one more year of collection planned and is currently being used in research by hundreds of scholars around the world. A full bibliography of KFS research is available at kauffman.org/kfs/KFSWiki/Related-Research.aspx.