09/ 26/ 2007
by Shannon McRae
When Conventional Wisdom is Wrong
You can't always believe what you read (except, of course, if you read it in MyBusiness). Today's media sources are quick to treat conventional wisdom about small business as fact--and many times those assumptions are inaccurate.
How often have you heard someone say you have to have money to make money? And how many Americans assume only a handful of major corporations are involved in exporting products overseas? Perhaps the most rampant myth is the scariest one of all: the idea that most small businesses in the United States fail. At MyBusiness, we've heard the same myths repeated as fact time and again, too. So we set out to disprove them. Using experts from the NFIB Research Foundation, we uncovered data that sets the record straight about common small-business misconceptions.
Myth: Most small-business owners have little interest in exporting.
Bob Fritz's exporting business took off in 1985, when, for the first time, his Cleveland, Ohio-based company sent its aviation- and airplane-testing systems to China. "Since then, most of the growth in airplane seat miles has been outside the United States, particularly in Asia and Europe," says Fritz, president of Avtron Manufacturing Inc., a business his father started in 1953. "We've adapted our equipment and have been overseas with the American aviation industry for more than 20 years now."
Those unfamiliar with small businesses assume a company with fewer employees means a limited scope. But many of the country's most technologically advanced companies employ just a handful of people (though Avtron's payroll pushes 400). And those same businesses are expanding their sales beyond U.S. borders.
Small-business exporters account for nearly 30 percent of total U.S. exports, which will approach $1 trillion by the end of this year, according to the Small Business Administration. Their numbers are growing, too. From 1987 to 2002, the number of small businesses that sent their products out of the country jumped by 228 percent.
"Despite 9/11 and the increased security, there are many opportunities for small-business owners to become exporters," says Bruce Phillips, senior fellow at the NFIB Research Foundation. "Federal and state government offices have many financing and other informative programs to help small firms get started. Many state programs have sophisticated Web sites that vary by jurisdiction, and many small firms export right over the Internet."
The Internet has been invaluable in securing customers for Avtron, which at any given time has sales representatives in three different countries. "We recently sold $1.5 million worth of equipment to an overseas company that found us on the Web," Fritz says. "Without a good Web site, how does someone in Asia know who you are?"
In addition to keeping site content fresh, Fritz also invests in search-engine optimization, which helps ensure a business' Web site turns up higher in search-engine results. "If someone Googles ‘aircraft test equipment,' we want Avtron to be at the top of the list," he says.
Since the Web is so important to his exporting business, Fritz makes sure to keep talented employees on staff who can devote time to making necessary tweaks to the site. Avtron is fortunate to have a junior college with a reputable IT department just a few miles away. "We always have several people from there who help us in-house," he says.
The Internet isn't the only way technology helps Avtron's exporting business. "BlackBerrys have leveled the playing field for small exporters," Fritz says. "Years ago, when guys from GE visited China, they'd plug into GE's mass communications scheme. Now everyone has a BlackBerry and gets the same kind of service. It's kind of like what the Colt revolver did in the Old West. It made everyone equal--it allowed you to protect yourself from bigger, tougher people."
The biggest challenge of doing business overseas is finding a network of competent people to serve as liaisons, Fritz says. When dealing in foreign countries, Avtron often hires someone locally to be a point of contact. Fritz says they find those contacts by working with local U.S. embassies, attending trade shows to query larger companies about their networks and asking international customers for referrals from their other U.S. vendors.
"In countries like Canada and England, you don't need contacts as much," Fritz says. But having a native serve as a go-between in countries such as South Korea, Thailand and Russia is often the difference in success.
Since 9/11, securing travel visas for customers who want to visit Avtron's Ohio office is another challenge. "The U.S. government puts ridiculous obstacles in place for foreign managers and engineers who want to visit here before they purchase a big system," Fritz says. "We have a big order that's been on hold three months because our Chinese customers have had delays getting their visas."
Though Avtron has been exporting for more than 20 years, Fritz says there are a few things that would have made business easier if he'd known about it before he sent that first shipment to China. "The state of Ohio has competent contacts who have helped us a great deal," says Fritz, who wishes he would have tapped state and federal resources from the beginning.
Myth: You have to have money to make money.
For four years after starting his commercial lighting business, David Bellos lived out of his car. With a home office in Chicago and a manufacturing facility in Cincinnati, Bellos spent his weeks on the road, selling his products to anyone he met. The startup didn't have a lot of cash, and Bellos didn't want to waste money on hotel rooms, so four nights a week, he slept in his car.
"I'd get hotel rooms on the weekends if I couldn't afford to go home," says Bellos, owner of Fairfield, Ohio-based Teron Lighting. "That was my indulgence--and I became stronger for doing without."
"The idea that you have to be wealthy to start a small business is nonsense," says Phillips of the NFIB Research Foundation. "Many small firms begin on a part-time basis with less than $10,000," he says. "Many start with even less than that--about $5,000--the amount needed for a computer, fax/copier machine, a telephone and a small location in your house or apartment. Add in modest amounts for supplies and advertising, and you are in business."
In 1978, Bellos was selling lightbulbs when he got the bright idea to start a commercial lighting business. Working with a partner (whom he later bought out in 1986), they outsourced production to keep overhead low, which was crucial for survival during the first lean years. Though he had little money in the beginning, Bellos knew he'd be successful if he could sell. "Sales in small business cure everything," says Bellos. "I knew that since I wasn't the smartest, I'd have to work the hardest. Your whole life is based on your ability to promote and sell yourself. Learn how to sell, and you can always feed yourself."
For Bellos, working hard meant long hours on the road and away from his family. It also meant taking huge risks--with no assurance he'd be successful. But his scrappy attitude pulled him through the tough times. Bellos refused to give up. "I figured I had nothing to lose," he says. "It comes down to how badly you want something--what you're willing to do."
Bellos was willing to put in 20-hour days to make a go of his business, making sales calls during the day and then returning to the warehouse at night to assemble products when he wasn't traveling. In between the long hours, he fostered a close relationship with his banker--something he recommends to other small-business owners in the startup phase with little capital.
"Having a good banking relationship guarantees your success," he says. "Treat your bank as a vendor--They want to sell you money. People get intimidated, but until they take this point of view, they'll never be successful."
Bellos believes crushing sales goals while keeping close to his banker was the reason he led the bootstrapped business to where it is today: a 60-employee company that ships nationwide.
"It comes down to having good systems in place," he says. "Most people spend too much money on the wrong things."
Myth: Eighty percent of small businesses fail during the first two years.
For years, Vicky Carver worked for someone else. "I was in sales for a major transportation firm that went through managers like water," Carver says. "When they were in between managers, they'd ask me to fill in. After I'd done it about three times, I realized I was capable--and that they were never going to promote me."
All of a sudden, casual conversations with coworker Michelle Ward about venturing out on their own became real. And in April 1992, the two women left full-time jobs (with benefits) to start their own company in an industry heavily dominated by men.
"I remember Michelle asking me, ‘Are we going to be poor? Because I really don't want to be poor,' " Carver says.
Had the pair believed the myth that most businesses don't--or can't--survive the early years, they might still be sitting in their dead-end jobs today. But fortunately, Carver had a knack for sales and Ward had a head for business--a winning combination that has driven their transportation firm to be on track for $13 million in sales this year.
The myth that most small businesses fail during the early years is probably one of the most overstated ones in mainstream media. Starting a small business is hard--but it's not impossible--and at least half of all small businesses last at least four years, says the Research Foundation's Phillips.
"Data from government and private sources indicate that only about one-quarter of new firms last fewer than two years," Phillips says. One major qualification of success that won't surprise you is whether a firm grows during its early years. "Firms that grow rapidly during their first few years of existence rarely fail," he says.
Perhaps that's why Carver and Ward's Stockbridge, Ga.-based PEI Inc. is still around today. In the first three weeks of business, the firm did $18,000 in sales. The following month it did $52,000, and by the third month, it had sold more than $60,000. "It was just Michelle and me," Carver remembers. "We didn't even have a computer. She was keeping track of everything by hand."
Carver believes they've survived well past the infamous two-year mark because of their conservative approach. "It doesn't take a rocket scientist to own a business," she says. "It's all about having enough revenue to pay for your expenses. We kept an eye on expenses and didn't spend money until we had it. We treated it like we do at home. You don't charge $15,000 on your Visa if you're only making $15,000 a year.
"A lot of small-business owners get greedy. They start making money, and they take it," she says. "But I'm more worried about next quarter than this quarter. I never wanted a raise. In my world, taking a raise was just like raising expenses."
The two are also sticklers about paying vendors. Instead of waiting 45 days, which is typical for their industry, PEI aims to pay vendors within 15 days. "It's easy to show a profit if you don't pay your vendors," Carver says. By paying their expenses quickly, they know their books are accurate--not falsely inflated.
Surviving the early years of business didn't guarantee easy street for two women. With a growing business comes greater challenges, such as managing employees, affording health insurance and making a profit despite taxes--headaches that usually don't affect you at first. Each obstacle taught them something about themselves and their business, and also gave them confidence about their success.
"Bankruptcy has never been an option," Carver says. "And although we're pretty optimistic, we're not the risk-takers that some might think we are."
As they strive for their next major goal--$30 million in sales by 2012--they reflect on what surviving in a startup means to them: "Unlike most partnerships, it's not just about the money--but our friendship as well," Carver says. "We remind each other that it would be sad to be successful in business but not in our personal lives."
More Myths Exposed
Bruce Phillips, senior fellow at the NFIB Research Foundation, helps disprove even more common misconceptions about small business:
Myth: Small firms make only marginal contributions to the U.S. economy.
Firms with fewer than 500 employees produce half the goods and services in the economy, according to a U.S. Small Business Administration report on small businesses' share of the GDP. In some industries--such as construction, equipment and machinery repair, dry cleaning and laundry services, and photofinishing--small businesses comprise up to 80 percent of the market. In other sectors, such as real estate and leasing, professional and technical services, health and social services, arts and entertainment, and accommodation and food services, small-business output accounts for more than 50 percent of the overall market.
Myth: Small firms only create a small share of new jobs.
Depending upon the state of the economic cycle, small firms create between 60 percent and 80 percent of net new jobs, according to the SBA Office of Advocacy. The most prolific job creators have fewer than 20 employees. During 2003 (the most recent year for available data), small firms created 1.99 million jobs, while large firms with 500 or more employees lost 995,000 jobs.
Myth: Regulations cost the same per employee for small and large firms.
Complying with government regulations costs about 45 percent more per employee in small firms than in large firms, according to a report prepared for the SBA Office of Advocacy. Regulations have scale economies, meaning that larger firms have more units to spread costs across than smaller organizations. For owners of small firms, regulations are duplicative, high in paperwork costs and--depending on the industry--may require owners to pay consultants to ensure compliance. Environmental regulations, tax-compliance regulations and workplace regulations make up a major part of the regulatory burden. Labor regulations (minimum-wage laws, employment laws, disability laws) also add substantially to the small-firm burden.
Myth: The health-care crisis is created by the media.
Access to affordable health care has been the No. 1 problem of small-business owners since 1982, according to NFIB's Problems and Priorities survey. But the doubling of health-care premiums the past five years has propelled the problem to crisis stages. Small firms have fewer choices in health-care providers, pay greater administrative costs, are unable to save money by being part of large, national risk pools and generally cannot self-insure. The paralyzing results are that 48 percent of owners with fewer than 250 employees are now offering health insurance. NFIB has lobbied long and hard to alleviate different parts of this ongoing burden. Learn more at www.NFIB.com/healthcare.
One of the nation's leading sources of information about small business, the NFIB Research Foundation is a great resource for members. Visit www.NFIB.com/research to find the latest polls, publications and economic trends reports.
