Businesses are cautiously recovering from the pandemic. In the aftermath of widespread lockdowns, customers are steadily returning to the office, restaurants and entertainment venues, albeit in fewer numbers than February 2020.
The pandemic didn’t just shake up consumer habits. More budding entrepreneurs than ever have decided to realise their dreams and start their own businesses. At 365 Business Finance, we’ve seen an increase in the demand for hospitality funding increase by 30% year-on-year.
As an entrepreneur, your first year of business can be a thrilling, terrifying time. Sources of small business finance are often limited. A significant proportion of businesses close within twelve months of trading, and it can be difficult to know how to keep your finances on track.
In this article, we’ll explore what you can expect ahead of your first year in business. We’ll cover how many businesses fail in the first year in the UK, what you need to do now to ensure you’re not one of them, and share sources of small business finance to keep you afloat.
How to launch a successful business post-pandemic
Launching a business has never been easy. Starting a business is regularly cited as one of the most stressful, if rewarding, experiences you can undertake. However, for driven, smart and passionate people, being your own boss is an attractive proposition that’s too good to pass up.
The coronavirus pandemic complicated matters for new entrepreneurs, but thankfully a lot of the same principles apply to starting a business. Now that the immediate crisis has passed, there are also opportunities to take the lessons of the pandemic and apply them to your own company.
For a start, more people are working from home post-pandemic than ever before, even months after lockdowns were lifted in the UK. According to a report released in April 2021 by the Office of National Statistics (ONS), 85% of home working adults said they wanted to continue with a hybrid approach in future. A subsequent and widespread shortage of talent is likely to increase pressure on businesses to provide flexible working options.
As a result, the adaptations many businesses made in the wake of the pandemic are likely to remain popular with consumers. Setting up your company to take advantage of new consumer spending habits will only help to make your first year of business all the smoother.
That isn’t to say that your first year will be without risk.
How many businesses fail in the first year in the UK?
Less businesses fail in their first year in the UK than you might think. A popular, if erroneous statistic, is that 80% of businesses fail in their first year, which would equate to around four in every five. The truth is actually the reverse: 80% of businesses survive year one, although (perhaps unsurprisingly) that number does depreciate with each passing year.
Despite the persistent myth that hospitality businesses are riskier than other industries, their survival rate is almost identical. Pre-pandemic research conducted by the Small Business Administration showed that 79.9% of hospitality businesses survived past their one-year anniversary. The figure is especially impressive given that banks can be reluctant to lend money to restaurants and hospitality companies.
Unfortunately, your first year is often the hardest time to source funding, as you don’t have a transaction history to prove your profitability to traditional lenders. With banks already hesitant to lend to successful businesses with established brand presences, they’re unlikely to lend to hospitality small businesses in their first year. Entrepreneurs have to rely on alternative sources of small business finance to see themselves through.
But what about turning a profit in year one? Is it feasible?
Should I expect to make a profit in my first year of business?
Realistically the answer is no. You should prepare yourself not to make a profit in your first year of business. The best approach is to hope for the best whilst preparing for the very worst-case scenario. That way, you have options if it proves harder than expected to attract customers or unforeseen charges take you by surprise.
It’s crucial to save up enough capital so that you can keep going despite financial setbacks. Every sector is different. But as a rough guide, you should generate enough funds so that you can survive six months without a customer.
Saving up additional capital in advance will ensure you have a sizable buffer in the critical first few months of being in business. We’ve covered some of the most significant startup costs new entrepreneurs face below.
Sunk costs: The truth about startup expenses
However successful your business may prove to be, incurring set-up costs is inevitable.
Starting a company involves upfront investment that you aren’t going to see again. Expenses that won’t be recovered at a later stage are known as ‘sunk costs’.
The industry in which your business operates will determine the specific sunk costs you can expect. But there are some investments which are unavoidable if you’re serious about ensuring the survival of your organisation.
Startup expenses most businesses can’t do without include:
- Branding and marketing: Websites are a must in the modern day, lending critical credibility to your new business. Thankfully, there are website creation tools you can use to generate an eye-catching online presence relatively easily; however, you’ll need to separately account for the price of registering an online domain name.
- Professional services: Hiring freelance accountants or solicitors that specialise in working with small businesses can save you a considerable amount of stress later down the line; for one thing, you’re a lot less likely to fall foul of legislation you might not be familiar with from the outset.
- Company registration fees: In the UK, all companies need to register with Companies House.
Startup costs are, of course, just one aspect of your first year in business. There are numerous other elements of setting up a company that can trip up ambitious entrepreneurs.
We’ve collected some top tips for ensuring you can make your business as successful as possible in the first year.
Top tips for your first year in business
Leave no source of small business finance untapped
Funding is tight at the start of any new business venture, which is why it’s imperative to leave no money on the table. Any source of small business finance you can get hold of can help to keep you afloat during the tough first six months and beyond.
Access to credit is often a constant cause of stress to small business owners. So you should first investigate whether your local council or city provides grants for new businesses. Across England, businesses can access regional ‘Growth Hubs’, which could help with advice, local information and (critically) funding.
It’s also worth investigating whether there are regeneration efforts underway in specific locations. Could you base your business in an up-and-coming area to acquire investment from local authorities?
Banks might not be your best bet
Bank loans might not be your best option, especially as a small business owner. Loans from traditional lenders are not only tough to acquire, but typically come with unfavourable terms and conditions that can be difficult to navigate.
Hospitality, in particular, has historically been perceived as a high-risk industry by banking institutions. Unfortunately, post-pandemic those concerns are only likely to become stronger. The result is higher interest rates for lower borrowing totals.
Instead, hospitality businesses should consider applying for a merchant cash advance. Provided businesses have been trading for at least six months and process at least £5,000 in credit and debit transactions, you can get approved for a merchant cash advance rapidly.
Check out our blog post on why pubs and restaurants are increasingly looking to merchant cash advances for financing, rather than traditional bank loans.
Not all clients are created equal
It might sound counterintuitive early on, but just because someone is offering to pay you does not mean that you need to do business with them.
For service-based companies, it’s critical to know when to work with a fellow business and when to walk away. If you’re being put under pressure to cut into your profit margins, or being asked to do additional work well outside of the remit of your contracted services, it might be better to find a more suitable client.
There is a balance you need to strike. Don’t be so inflexible that you’re turning down every revenue opportunity, but be savvy about the cost-benefit ratio in relation to your service. As a new entrepreneur, time is your most valuable asset. Be cautious with how you choose to spend it.
Revenue versus profit: Don’t confuse the two
If you’re new to the world of business, it can be easy to get revenue and profit confused. It’s critical that you know the difference.
We’ve defined revenue and profit below:
- Revenue: The total income amount created by the successful sale of services or goods serviced by a company.
- Profit: The amount of income left over after other expenses have been deducted, including debts.
How revenue and profit differ
Revenue doesn’t include income made from investments or a subsidiary company. Revenue has to come from the sale of services or goods.
There are different types of profit. Often when people refer to profit what they really mean is net profit, or the total amount left over after all other costs are deducted.
We’ve broken down the types of profit here:
- Gross profit: Your revenue minus the COGS (Cost of Goods Sold), accounting for the costs of the materials used to produce the goods you’ve sold, and the labour needed to produce them.
- Operating profit: Your gross profit figure minus the variable and fixed expenses that keep the business operational (think rent, payroll and utilities).
- Net profit: Any revenue left over once all subtractions are accounted for, including debts, taxes and one-off purchases.
As discussed earlier, it’s not very likely you’ll turn a net profit in your first year of business. But it’s important not to get too disheartened. Even the best businesses have a rocky ride in the beginning.
Know your competitors and own your unique identity
The commercial world is competitive by its very nature. In your first year of business it’s imperative you stand out, which is why you need to know what competitors are doing well and where you can differentiate.
Crafting a unique identity from the beginning is important, as it provides a sense of clarity to customers. No product or service appeals to everyone and with good reason. Consumers respond to brands because they appeal to specific sections of the market. Owning your unique brand identity is crucial to developing your reputation and a loyal customer base.
Don’t try everything at once
You can and should experiment with your product and service offering. Assessing what customers respond to is essential to any small company in their first year of business. But you don’t need to try to do everything at once. Incremental changes over time can ensure you learn about what customers want without putting unnecessary strain on your company.
Set financial goals and check-in points
Regular financial check-ins are a great way to assess your progress, especially if you create goals around desired outcomes.
Ask yourself the following questions at regular, scheduled intervals to ensure you stay on track:
- When are payments due to go out?
- How much of a buffer is there in case payments are higher than expected?
- Is incoming revenue more than outgoing expenses?
You should seriously consider bringing a freelance financial advisor on board as soon as you can afford it. It’s also a good idea to use online tools to track your cash flow.
Post-pandemic hacks to survive as a small business in your first year
The effect of the worldwide pandemic on businesses can’t be overstated. The companies that weathered the crisis the best pivoted rapidly, offering different types of goods and services with maximum convenience.
Some changes have radically altered the operating models of companies for the better and are likely to stay. Therefore, in your first year of business, it would be wise to set yourself up to take advantage of new consumer expectations.
But which changes are likely to persist?
The power of delivery
Lockdown orders meant customers were working from home, if not placed on the furlough scheme run by the UK government.
Home working is much more common than it used to be. As recently as July 2021, 44% of 30-49 year olds were working at home due to the COVID-19 pandemic. Although staff are gradually returning to the office, one in five people still want to work from home. In a competitive hiring environment, there are plenty of reasons to suspect home working options will be offered to attract prospective employees.
If you don’t have some way to get your services directly to your customers, you should. If you’re a store-based restaurant, can you partner with a delivery service to provide takeaway experiences for customers?
Make sure that you provide realistic expectations around delivery times, as demand for delivery services is high and global supply chain challenges are widespread.
Strength in numbers: Supply chain resilience
Supply chain issues caused by the pandemic have kicked off a fundamental reevaluation of the just-in-time economic model that’s been in place since it proved a huge success in Japan in the 1970s.
Small businesses that thrived during the pandemic had contingencies in place to minimise disruption to business-as-usual wherever possible. Although you won’t have much in the way of capital in your first year in business, planning ahead and having backup suppliers in mind is generally a good idea.
Do it yourself trends and the ‘at-home’ experience
The pandemic unleashed our creative side. Customers are more willing than ever to try something new and get involved in the creative process. But building a robust online presence is essential to establishing trust, especially when you’re running a new business. Ensure your checkout system is slick to give customers the confidence to order your goods directly to their door.
If you want to diversify your range even further, consider creating do-it-yourself guides, or sending out assembly kits to transform your product into an activity.
Services that have truly nailed the ‘at-home’ experience rely on simple, smooth and straightforward online journeys. Small businesses in their first year should follow this example to give themselves the best chance of survival.
Out of the office for good?
It’s no longer considered essential for a business to have a physical location. Communication services like Slack, Microsoft Teams, Google Hangouts and Zoom enable small businesses to be more flexible than ever.
Remote meeting services were already in use long before the pandemic hit. But critical software and feature upgrades, coupled with stay at home orders, has forced all businesses to rely on remote meeting software. Small businesses may not need to rent expensive office space at all, reducing overheads.
Tap into your local community
Less commuting means customers spend more time than ever in their home district.
Customers increasingly want to support local businesses, so positioning yourself as a pillar of the local community can help to build customer loyalty in your first year of trading.
We explored the ways that small businesses can integrate themselves into their local communities in a recent discussion with the innovative restaurateurs at South Africa’s Fego.
Setting yourself up for success in your first year of business
Starting a business is a bold adventure that will teach you a lot in a very short space of time. Although it can be stressful, ensuring you’re on as sound a financial footing as possible can help alleviate some of the pressure and make for a strong entry into the market.
Doing your homework is crucial, especially if you plan to set up a hospitality business in the UK. Finding sources of small business funding can provide an extra boost of investment, which is essential to building resilience when the unexpected inevitably happens.
Budding entrepreneurs that are diligent in their financial and business planning, have every chance of a successful first year in business.
We want to help you get there.
Access funds rapidly with merchant cash advances from 365 Business Finance
At 365 Business Finance, we offer merchant cash advances to hospitality businesses across the United Kingdom. If you’ve been trading for six months or longer we can help you quickly access finance when you need it most.
Merchant cash advances are designed as a quick way for any business that accepts credit or debit cards to raise capital without the need for a bank loan or sizable overdraft.
365 Business Finance offers £10,000 to £300,000 in unsecured cash advances for UK SMEs. No APRs, no hidden costs or fixed monthly payments.
Contact us today to see how we could help your business reach its full potential.