Many direct marketers avoid targeting businesses less than three years old, writing them off as unpredictable, risky bets. Perhaps the new company’s credit file is thin, or it has high start-up costs. Or a start-up’s credit file is not considered deep enough.
A new study by Experian reveals that new businesses may be getting a bad rap. While others may shun new businesses, savvy marketers know there’s often good reason to reach out before a fledgling enterprise is inundated with competing offers. New or relocated businesses tend to be highly responsive. They need to make many purchasing or have hiring needs, such as office equipment, furnishings and additional employees. And, notably, they often are flush with start-up capital.
The data that was used for the study was taken from Experian’s National Business Database and analyzed with its Commercial Intelliscore. A new business venture actually has a lower risk of going 90 days past due on their credit payments in its first year than in the third or fourth season.
Businesses considered High Risk that are less than one year old, paradoxically, had the lowest amount of risk of derogatory payment. Only 9% defaulted.
* The majority of new businesses less than 12 months old are in the same risk score band (medium to medium high) as businesses less that five years old, which indicates a brand new business may not be any more at risk for going severely delinquent than a business that was been established one to five years ago.
* Newer businesses have a lower than average risk of going severely delinquent in their first year of operation than in their third and fourth year in business.
The idea that new enterprises are likely to survive their first year or two is supported by figures from the Small Business Association. Two-thirds of new employer establishments survive at least two years after start-up. After four years, only 44% typically survive, according to the SBA.
For some, the initial risk of delinquency is low because many new businesses start out as a side project. The business owner begins while employed full-time elsewhere. Once the business has taken off after a year or two, the small business becomes the primary income generator, bringing with it more stress on the enterprise and a higher risk of default, especially at the two to five-year range.
And most new businesses can survive on start-up money for a certain amount of time. Part of a startup budget might include office furniture or a vehicle or equipment — costs that are predictable and covered. But then the enterprise has to wean itself from burning start-up funds and stand up on its own. Some make it, but many do not, causing default rates to spike after two to five years.
Indeed, while data is encouraging for businesses in their first or second year, the lesson here is not a prediction that they will stay afloat. That’s why it’s critical to monitor the risk of a prospect pool over time.
Armed with this information, marketers should consider taking a fresh look at new businesses as a strategy to help grow portfolios while minimizing loan losses. Expanding a target universe to gain new customers early on, and to plant seeds for growing long-term relationships may well contribute to long-term profitable growth.
A successful campaign is smart about where, when and who it targets. While part of the challenge is weeding out bad bets, it’s equally important to ensure that no solid prospects are overlooked. Often, a business relationship established in the early going is one that will last — and grow into a profitable relationship for years to come.
Denise Hopkins is senior director of business marketing solutions for Experian, Orange, CA.
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