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Infants. They’re new to the world, lack know­ledge and take time to grow. In the mean­time they can be unpre­dict­able and over-​reliant on their eld­ers or carers. This could be the view of some estab­lished com­pan­ies and banks who are increas­ingly reluct­ant to deal with Young Small & Medium Size Enter­prises (YSME’s) and Start-up’s.

Key to the future?

Par­don the ana­logy, but it illus­trates the real pre­ju­dice that such busi­nesses face. Lack of fund­ing, poor or inad­equate credit rat­ings, unknown repu­ta­tions and lack of proven track record as good busi­ness part­ners or cus­tomer are some of the per­cep­tions of young businesses.

Its not sur­pris­ing that, in these eco­nomic times, estab­lished insti­tu­tions are recon­sid­er­ing who they do busi­ness with in order to limit their increased expos­ure to risk and bad debts. Yet these busi­nesses are vital to eco­nomic recov­ery as almost half the com­mer­cial rev­enue gen­er­ated in the UK is through SME’s, a sig­ni­fic­ant pro­por­tion of which are Start-up’s and YSME’s.

But is this a short­sighted and overly-​cautious approach, or reas­on­able busi­ness prac­tice? Lets look at some real examples.

Google and Face­book are global lead­ers in their mar­kets. They share some start-​up char­ac­ter­ist­ics — investors saw their ‘obvi­ous’ poten­tial (‘obvi­ous’ with the bene­fit of ²⁰⁄₂₀ hind­sight) — and rapid suc­cess for both is not meas­ured in years. Google ‘innov­ated’ search at a time when the mar­ket was dom­in­ated by Yahoo and Nets­cape. Increased ‘com­pet­i­tion’ has no doubt changed the way we use the internet.

Face­book has sur­passed Myspace to become the num­ber one Social Net­work in record time. Its pop­ular­ity has helped to drive the evol­u­tion of the ‘Smart­phone’ mar­ket. So, in both examples these rel­at­ively young busi­nesses at that time helped to ‘Innov­ate’ their mar­kets, increase ‘Com­pet­i­tion’ and drive ‘Growth’ not only in their own busi­nesses, but also those of their com­mer­cial part­ners and clients.

The other side of the story? Its fair to say that YSME’s and Start-up’s are per­ceived as less fin­an­cially stable. The reas­on­ing is obvi­ous — they’ve yet to estab­lish them­selves as a fin­an­cially depend­able entity through a strong record of trade. Put simply, there is a fear that YSME’s/Start-up’s will not pay their debts.

‘Factor­ing com­pan­ies’ are often used to limit this risk — they’ll pay a client’s bills upfront at a dis­count and bear the risk of chas­ing the full invoice pay­ment from the debtor when due. How­ever, the com­prom­ise of lower profits in exchange for decreased risk is not always sus­tain­able, espe­cially in times where estab­lished busi­nesses are fail­ing and every penny counts.

So busi­nesses will simply trade with com­pan­ies that seem to be more likely to pay their bills in full — whether this is true or not in real­ity. Take the example of Ports­mouth Foot­ball Club which cre­ated his­tory in being the first Premier League club to fail due to its inab­il­ity to pay its debts, includ­ing its web­site host­ing bill.

Is the point being missed? Risk is inher­ent in busi­ness and there are cer­tainly no guar­an­tees. The effect of the reces­sion offers numer­ous examples of estab­lished busi­nesses that have fallen by the way­side — think Wool­worths and MFI. Some­times our trust in these busi­nesses is mis­placed. The Leh­man Broth­ers bank in the USA failed spec­tac­u­larly and is being invest­ig­ated for deceiv­ing investors and cred­it­ors in its fin­an­cial reporting.

How­ever, time has proven that reces­sions are water­shed moments for busi­nesses, with the bet­ter ones learn­ing to diver­sify in order to sur­vive and grow. Man­aging a good busi­ness rela­tion­ship with a good Start-​up or young com­pany can facil­it­ate this. Simply​busi​ness​.co​.uk sug­gests some incent­ives to work­ing with YSME’s including:

• Small busi­nesses make good long term contacts;
• Dir­ect com­mu­nic­a­tion with decision makers;
• ‘Start-​up’ or ‘YSME’ does not mean “no money”. These busi­nesses can be well funded;
• New busi­nesses often bring novel ideas to a mar­ket. This can become a Unique Selling Point for exist­ing businesses.

So to re-​cap, there are reas­ons to be cau­tious when deal­ing with young busi­nesses and Start-​ups but tak­ing cal­cu­lated risks to work with such busi­nesses can yield big dividends. This blog pon­ders — what is the best approach? What works for your busi­ness? And, would you do busi­ness with a one year old?

Update 13.07.10 — Young Busi­ness Fails

A case in point was covered by The Guardian’s report­ing of the demise of the Cool-​er elec­tronic book reader. It seems that Cool-​er, which claims to have sold thou­sands of E-​readers in its first three months of trad­ing, was wound up for being unable to pay its debts to a PR company.

But inter­est­ingly, the under­ly­ing reason for their fail­ure seems to be the lack of fin­an­cial back­ing from their Bank, HSBC, in order to facil­it­ate their expan­sion. An employee of the firm revealed that:

On a month-​by-​month basis we were trad­ing prof­it­ably … We were look­ing to hit break-​even within the first year fol­low­ing the trad­ing cycle that we’d been fol­low­ing. We had the orders but we didn’t have a bank that would fin­ance them for us.

Cool-​er was touted as a real chal­lenger to the Amazon Kindle, par­tic­u­larly in the UK. And the E-​book reader mar­ket still shows signs of growth. So why did the bank pull their support?

The obvi­ous reason seems to be that they simply did not want to take the risk. And, although the com­pany must also share the blame of per­haps being overly ambi­tious in their fin­an­cial pro­jec­tions, it seems that the under­ly­ing busi­ness was viable.

Who knows? Maybe the Cool-​er could have become a mar­ket leader if it had the right support.

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