At a Glance:
Owning a business comes with risks, and the chances any business will survive declines over time. In fact, most will eventually fail. Some businesses have better luck than others, but there are some common reasons why certain ones fail.
Small businesses are vital to the economy, employing the majority of workers in the U.S. Unfortunately, many small businesses fail. This is why soon-to-be small business owners embarking on a new venture oftentimes want to know what the small business failure rate is.
The chances any one business will make it through the first year is 80 percent, according to the U.S. Bureau of Labor Statistics. However, as time goes on, the likelihood of failure climbs. An estimated 20 percent of businesses fail in the first year, 30 percent within the second year, 50 percent within the fifth year, and 70 percent will fail within the 10th year.
Success Often Depends on Industry
General small business failure rates can be discouraging, but these trends do vary by industry.
For example, restaurants generally fare well in their first year, with only a 17 percent chance of failure. In the second year, about 30 percent of restaurants fail, while 50 percent fold by the fifth year.
Healthcare and social assistance businesses are more likely to survive, with about 85 percent surviving their first year, and an estimated 60 percent of them surviving by the fifth year.
In contrast, only 75 percent of businesses in the construction, transportation, and warehousing businesses will make it past the first year, with only 40 percent of construction businesses and 30 percent of transportation and warehousing businesses making it making it to their fifth year.
Why Do Small Businesses Fail?
There are a variety of reasons a small business may fail. More often than not, it’s due to a combination of factors. Here are the main reasons businesses struggle:
- Cash flow. According to data gathered by CB Insights, 21 percent of small business owners say cash flow is being a significant issue, ultimately leading to closed doors.
- No market. Success is largely based on demand. Without it, problems like cash flow arise. Market research and an understanding of consumer need are essential. In fact, about 42 percent of business owners cited a lack of consumer interest or demand when identifying factors that lead to closure.
- Poor personnel. Be it the wrong choice for leadership and management or the wrong staffers engaging with customers, 23 percent of business owners site employee practices or hiring the wrong personnel as contributing to their failure.
- Failure to stand out. In many industries, competition is high. An inability to show authenticity and allure, or making your product or service stand out, can lead to failure of a product by helping consumers understand what sets a product apart from the competition.
Funding Options for Small Businesses
Cash flow is crucial for many businesses. Tight budgets can affect marketing, hiring/payroll, product development, and more. Those operations all rely on the availability of funds, and so securing funding can go along way in avoiding closure.
About one-third of small business owners are unable to access funds to properly operate their business, according to one National Small Business Association study. Of those, many indicated that lack of funds prevented them from growing their business, properly staffing, or meeting demand due to an inability to procure inventory.
The good news is that business funding is available in a variety of forms. Many owners, particularly women, minorities, and veterans, can benefit from SBA lending. In 2018, the SBA is expected to extend over $18 billion in funds to small businesses, a $6 billion increase over the last five years. Minority-run businesses are slated to receive $5.9 billion, and women business owners should see $5.2 billion. Veteran-run businesses are expected to get $688 million in SBA funding.
Of course, the SBA is not the only source of funding for small businesses. Other sources include small business loans, investors, crowdfunding, peer-to-peer lending, and grants. To increase your chances of success, design a business plan around common failure factors, and secure adequate capital.
Small business success statistics can be discouraging, but many small businesses survive and play a crucial role in our economy.