Anyone who ever hustled to boost sales, roll out new products and make payroll understands that starting a business can be a monumental challenge.
But when Sen. Rand Paul suggested recently that nine out of 10 businesses end up failing, eyebrows were raised all across the country.
Paul, the Kentucky Republican and a favorite of the Tea Party, made the statement while critiquing President Barack Obama’s efforts to create jobs.
“What (Obama) misunderstands is that nine out of 10 businesses fail, so nine out of 10 times, he’s going to give it to the wrong people. He gave $500 million to one of the richest men in the country to build solar panels, and we lost that money,” Paul said on CNN’s “State of the Union” program.
Paul was referencing Solyndra, the solar panel manufacturer that went belly-up despite receiving all those millions in government loans.
Solyndra was a spectacular failure, a textbook example of how not to go about developing green energy. Nevertheless, Paul has received widespread criticism for exaggerating the rate of business failures in the U.S.
Think about it: If you’re a banker and you know there’s a nine-in-10 chance the owners of a start-up will fail, would you lend money to them? You’d be crazy to.
Paul has also been criticized for providing no perspective with his claims on business failures. Is his time frame one year, five years or 10 years? Aside from that, sometimes a business “closing” is seen a positive event, such as when a small company is bought by a larger company.
The Washington Post referenced a few studies that indicate that Paul overstated the rate of business failure. A 1989 study by Bruce Phillips of the National Federation of Independent Business, and Bruce A. Kirchhoff, director of the technological entrepreneurship program at the New Jersey Institute of Technology, found that new businesses with 500 or fewer employees have a 39.8 percent survival rate after six years.
On its website, the Small Business Administration’s Frequently Asked Questions section suggests about half of start-ups survive five years or more.
Wayne Gardella, Montana District director for the SBA, said another measuring stick for business survival is to compile the number of delinquent SBA loans. For the 2013 fiscal year, the SBA’s 7(a) program had a delinquency rate of 2.3 percent nationwide. For Montana, the delinquency rate was 1.35 percent. For the agency’s 504 program, which is used mainly to buy buildings or land, the default rate is 1.98 percent nationwide, and 0.33 percent in Montana, Gardella said.
Gardella and other experts who have worked with business start-ups say that entrepreneurs who participate in some kind of counseling prior to launching are about five times more likely to succeed.
Rebecca Hedegaard, the former director of the Small Business Development Center at Big Sky Economic Development, said about seven in 10 new businesses fail within five years, but the survival rate improves to about 50 percent for owners who have developed a business plan that gives them a good background on finances, marketing and cash flow. The SBDC provides counseling and helps small businesses develop business plans.
And sometimes counseling demonstrates to a prospective business owner that starting a business might turn out to be a big mistake, Gardella said.
“After looking at cash flows and things like that, a lot of the time he learns that what he has come up with is a hobby, not a business,” Gardella said.
Even though Paul’s pessimistic view of business success isn’t quite true, that doesn’t mean it’s easy to start a business. But make sure to do your homework first.