Small Business Failure Rate: Why Do Small Businesses Fail?

There’s a lot that small business owners can learn from the failures of other businesses, particularly when those businesses were very successful previous to their demise. While statistics aren’t always the final word (or number), they definitely help to paint a clearer picture of how businesses perform. If you’re looking to discover some of the main causes of business failure and how to avoid them, you’ve come to the right place. Keep reading for insights into business failure statistics, and more.

Small Business Failure Statistics

When speaking about business failure statistics, there are several angles to look at the topic. Are you interested in business failure statistics according to how long a business has been around? Maybe you’re interested in small business failure rate according to industry. Below, we provide small business success rate statistics according to both of those factors, and then dig into the causes of business failure.

Small Business Failure Rate by Age

*Statistics sourced from Bureau of Labor Statistics.

Small Business Failure Rate by Industry

*Statistics sourced from Census Bureau’s Business Dynamics Statistics.

Top 5 reasons why small businesses fail

There are too many reasons for small business failure to list in one place, but there a number of reasons that small business fail which are reported more frequently than others. It should also be noted that business owners almost never attribute a failure to one factor; more often, there are several causes for a small business’s downfall. Here, we’ll touch on a few of the more common causes of small business failure.

Top 5 causes of business failure:

1. No market demand
2. Not enough money
3. Lack of effective marketing
4. Being out of touch with customers
5. Poor leadership

1. No market demand

It’s all good and dandy to be confident in the usefulness and attraction of your business’s product or service. But if there isn’t a real demand for what you’re selling, your business is bound to fail. In fact, 42% of failed businesses site this as the reason for their crash. The service may have an objectively positive impact on one part of a market, but if it’s too niche and doesn’t address a more widespread demand in that market, there simply won’t be enough people out there spending their cash on your concept.

What can be done?

Study the state of the market, research where the demand exists, and come up with a plan to fill an existing gap. Is there enough of a customer base? Is your product or service scalable (learn more about scaling up)? Is it profitable? The answer should be yes across the board.

2. Not enough money

In the last year alone, more than 44% of businesses that have applied for funding did so because they needed help meeting operational expenses. Add to that the fact that 29% of startups reportedly fail because of a lack of cash and it becomes clear that a shortage of money has a serious impact on small business failure rates.

What can be done?

Statistics illustrate just how hard for many small businesses to get approved for business loans. In recent years though, fantastic innovations have been made in the field of fintech. Those developments have opened up financial possibilities that were out of reach for small businesses just a few short years ago.

One example of the power of fintech is the LendingScore™ technology developed by Become. LendingScore™ provides small business owners with a level of transparency that allows them to see how lenders see them.

 

The advanced algorithms that Become uses also connect business owners with the optimal financing solution tailored to their precise needs and unique profiles. All in all, Become makes the entire lending process faster, easier, and more likely to end in funding.

 

Plus, it’s completely free to use!

3. Lack of effective marketing

The days of spinning signs and sticking flyers underneath windshield wipers are gone (or at least one can hope!). While those are effective strategies to market a lemonade stand or a hotdog cart (not to knock either one of those), they’re not effective when it comes to marketing a business that you want to grow into a real money-maker. According to CB Insights, a whopping 14% of small businesses fail as a result of a shoddy marketing strategy.

What can be done?

First and foremost, any and every small business will want to incorporate social media marketing into their overall marketing strategy. That in-and-of-itself will help business owners avoid becoming part of small business failure rate statistics. The reasons to use SMM are abundantly clear:

• It’s free
• The audience is humongous
• Connect with customers organically
• Develop trust and reputation
• Market insights directly from customers

4. Being out of touch with customers

Developing a successful business plan means addressing the needs of your customers. If you can’t or don’t identify where your customers place their value, you’ll be taking shots in the dark. And, even if you’re lucky enough to score a couple of hits, chances are they’ll be few and far between (and likely won’t be bullseyes).

What can be done?

Communicate effectively with your target customer base to gain a deep understanding of what they want, why they want it, and the best way to meet those desires. You can do that by conducting surveys, encouraging customer reviews, or simply engaging in dialogue with existing customers. This is an ongoing process – as the market changes, so will your customers, and so must you and your business.

5. Poor leadership

Long-term business success relies not only on a strong workforce but also (and maybe even more so) on competent leaders. It happens too often that early success can go to a business owner’s head, and as a result they become too relaxed in their role as leader. As the owner of a business, losing concentration not only can have a negative impact on how finances are managed, but also on employee morale. This is a cause of a business failure that should not be underestimated.

What can be done?

Resolve whatever issues are causing your distraction. Yes, it’s easier said than done. But, if you truly desire to see your business succeed, you’ll do whatever it takes to get your priorities in line. Whether you have a hard time communicating with employees, spend too much time ‘playing’ and not enough time working, have troubles at home, etc. – there’s always a solution that will help you meet your responsibilities as a strong and capable leader.

Which industries have the highest failure rate, and why?

The two industries that have the lowest success rates of all are construction and retail, with global failure rates exceeding 20% and 13% respectively. Those numbers are eye-openers, that’s for sure. But what explains those double-digit failure rates?

For construction, one of the strongest factors that raises the rate of failure is the unpredictability of the housing market. Since so many small and medium-sized construction businesses work in the residential sector, the ups-and-downs in the housing market are reflected in the survival rates of construction business owners.

Regarding retail, the most likely explanation for such high failure rates is a combination of two parts: big corporations taking over along with the booming trend of online shopping. Despite the imbalance of resources and power, small retailers can compete with big corporations if they play their cards right.

Which industries have the highest success rate?

The two industries with the lowest failure rates are mining and manufacturing, with success rates exceeding 51 and 48% respectively. Advancements made in manufacturing technology are partially responsible for the strength of that particular industry.

Women-owned business: Failing or thriving?

All of the statistics seem to point towards great success for female small business owners over recent years. Approximately 40% of all firms in the U.S. are female-owned, and they make up roughly 20% of all firms that earn over $1 million in revenue. Additionally, more than 4% of all female-owned businesses earn more than $1 million in revenue, and close to 8% of all American employees work at female-owned businesses.

Even so, there still are drastic differences between how well female business owners are doing when compared with their male counterparts. If recent trends are a signal of what’s to come, then the world of business will continue to move toward make gender equality a reality. For the time being, we’ve got a ways to go before we reach the goal of complete fairness between genders in business, and indeed in society more broadly.

How to ensure your small business survives

Smart business owners learn from their mistakes. Smarter business owners learn from the mistakes of others. There’s no point in suffering needlessly – why try to reinvent the wheel only to crash and burn? See how other businesses succeed, study why other businesses have failed, and be sure to stay open to new information.

For continued survival, your small business will need to learn how to adapt to new technologies, keep on improving customer experience, tweak SEO practices, and much more. There’s no perfect equation that will guarantee survival, and that’s why a responsible and knowledgeable small business owner will remain flexible. Since the business ‘ecosystem’ is constantly changing, small businesses must be able to change as well in order to stay in the game.

Access to capital: How to ensure your small business has the funds it needs

Step-by-step guide for applying for a business loan:

1. Choose your desired loan amount and select ‘Get Loan Offer’
2. Fill in the requested information (including time in the industry, revenue, business, etc.)
3. Submit your business’s checking account information for analysis
4. Wait for offers. You can also review your status by clicking ‘Access Your Loan Application’
5. Review offers and select your preferred lender and terms
6. Receive the funds to your business checking account
7. Review your tailored LendingScore™ dashboard to improve your funding options
8. Improve your rates – if your LendingScore™ is insufficient, follow the personalized plan (8-12 weeks to unlock funding)