Did you know that approximately 30 million entrepreneurs make up the base of small business owners in the United States and provide 7 out of every 10 jobs in the US. This is according to the SBA Office of Advocacy. In fact, over 99% of US businesses can be classified as small businesses, which is defined as a firm with fewer than 500 employees.
On average about 627,000 new businesses start each year according to the Small Business Association (SBA). Yet sadly not all of those businesses make it their first year in business. So what are the reasons why small businesses fail?
Before we get into the why, let review some business failure statistics.
Small Business Failure Rate / Success Rate
According to the U.S. Bureau of Labor Statistics, 21.7% of startup businesses fail their first year of operation. Less than 50% survive through year 5 and only a third of businesses make it 10 years.
The data below is from the U.S. Bureau of Labor Statistic. It shows how many new businesses survived over the years. Each year the number of surviving companies is pretty consistent.
Which Small Business has the Highest Survival Rate
The Healthcare and Social Assistance industries succeed the most out of any business. 85% of new businesses in Healthcare and Social Assistance will be closed after their first year in business. This is higher than the overall average of 78.3% survival rate for all small businesses. And through five years the rate of success is still high at 60%
Which Small Business has the Lowest Survival Rate
The Transportation industry is the most difficult to break into. The survival rate in the first year of operation is only 60%. And that number drops to 30% success through five years. So 70% of transportation startups will not be around after their fifth year.
Why Small Businesses Fail Infographic
Reasons Why Small Businesses Fail
There are various reasons why small businesses fail, here we concentrate on the top five.
Cash Flow Problems
To start let’s be clear, cash flow is not the same as profits. You may have a very profitable business but if you don’t have a strong cash flow, you can go under. Cash flow is your cash received minus your cash out. It’s what you have available to pay your financial obligations.
Problems occur when you are waiting for payment from a product or service and yet you have bills which need to be paid.
No Market Need
A common miscalculation that a new business owner makes is assuming there is a need for your product or service. Or they fail to help the market understand how their product/service offer will make their life better. This is why market research is important to both new and existing businesses.
Run out of Cash
Running out of cash, as opposed to lack of cash flow, is when your account payable are greater than your account receivables. Basically, you are spending more then you are making.
Don’t have the Right Team
A bad employee(s) can negatively impact your business by being a cancer within the workplace, misrepresent your brand, or making mistakes that could affect your bottom line.
Competition is good for consumers but it can also be good for businesses, if you know how to use it to your advantage. However, if you can’t find a way to differentiate yourself from the competition, you may find yourself out of business.
What Makes a Small Business Successful
Now let’s review what makes a small business successful. Many businesses owners who survive past the 5 and even 10-year threshold cite one or more of the following reason for their success:
This sounds obvious but you’d be surprised how many business owners fail to put their customers at the forefront of their business decisions.
Focus on Marketing
You have a great product or service, but without a strong marketing strategy how will your potential customers know what you have to offer. Eventually you will need to begin making an investment in your marketing efforts, but early on there are some low-cost marketing strategies you can implement.
Hire the Top Employees
Just as a bad employee can negatively impact your business, hiring a top employee can catapult your business to new levels of success. So take the time to learn how to find and hire the right employees.
How Small Business Funding Helps With Small Business Success and Failure Rates
We recognize that small businesses are the driving force to grow our economy and there are many factors that affect small business success and failure rates. In good times, as well as the challenging times, business owners need a fast cash flow solution to make payroll, purchase new equipment, expand inventory, pay taxes, etc.
The average time to break even is 12 to 18 months. Most small business have a desire to grow and need guidance and assistance to achieve this from a lending partner like Small Business Funding. We are associated with the nation’s top alternative lenders and can get you access to fast capital regardless of time in business, credit score, or type of business. We specialize in high risk business loans.