The small business failure rate is high ─ even when there is not a pandemic. In fact, 50% of small businesses fail after only five years. And as you can imagine, in this new world we find ourselves in, that failure rate is now even higher. This means it’s more risky to extend credit to small businesses these days.
What makes a business risky? To answer that, let’s review the top reasons businesses fail:
- 42% fail because of product/market fit – when a company creates a product or service that isn’t needed in the market
- 29% access to capital – ran out of cash
- 23% leadership – don’t have the right people running the company
- 19% outcompeted – better competition out there
- 18% due to pricing and cost issues
- 17% lack of a proper business model
- 17% poor product offering
- 14% failed because of poor marketing
So, how can you better determine if a business is going to fail? First, to properly evaluate risk you must know the type of business it is and the industry it’s in. For example, for compliance reasons, many companies can’t do business with cannabis companies today. Sometimes these cannabis businesses try to mask that they are in that industry by their names, making it difficult for companies to determine which industry they are in.
There are essentially two ways to evaluate businesses to get to the heart of what they actually do:
- Use industry codes to determine the industry classifications. NAICS codes are generally the industry standard today but don’t cover every type of business. They only scratch the surface.
- Use keywords in models to help better understand business entities. A keyword is anything searched on a search engine, whether a single word or a phrase. Here is an example of how using key words can work:
Burger & Bowl Company – If you just use NAICS codes, you will see categorizes such as bowling, entertainment, and venues. However, if you expand that out and do a keyword search, you will get much more information about this business – you will see sports bar, wine, spirits – and see that it serves food as well.
Keyword searches help paint a better picture especially for smaller companies that don’t have a lot of information – in fact, a keyword search can increase your data classification by over 200%.
There are two primary areas where online searches can produce informative results:
- Social media: Over 84% of businesses use social media. You can review as many as 70 social media attributes – such as are they trending, the rating/satisfaction as a business, looking at reviews, years in business, hours of operation, licensing, etc.
- Company websites: While not every company has a website, 48% of them do. Conducting keyword searches on company websites can yield a lot of information.
Diving deeper into your customers’ online presences gives you a better understanding of their businesses and industries. It’s a great way to gain significant new information on new and small businesses where traditional credit data is thin. Our research gives you insights on the direction of a business and helps turn that information into predictive attributes. Learn more about how Social Media Insights and Keyword research can help your business. Email email@example.com for more information.