The Truth About Small Business Failure Rates [2024]
Ezra Cabrera | August 13, 2024
Starting a small business is a dream for many aspiring entrepreneurs. The excitement of building something from the ground up, being your own boss, and potentially achieving financial independence are powerful motivators. But the reality is that starting a business involves significant risks, and the possibility of failure is a constant concern for new business owners.
The statistics around the small business failure rates can be confusing and conflicting. Some sources claim that a vast majority of small businesses fail within the first few years, while others suggest a more optimistic outlook. These inconsistent numbers can be overwhelming and discouraging for those considering entrepreneurship.
Our goal in this article is to provide an accurate picture of small business failure rates, explore the common reasons behind these failures, and offer actionable tips to help you succeed.
Understanding Small Business Failure Rates
Small business failure typically means that a business stops operating because it can’t make enough money to cover its expenses, leading to financial problems. Failure can also happen when a business can’t pay its debts or the owner decides to close it because of low profits, market changes, or personal reasons. This includes bankruptcy, voluntary closure, or being bought by another company.
About 20% of small businesses fail within their first year. As time passes, these rates increase, with around 45% failing within the first five years and about 65% not making it past the ten-year mark. Common reasons for these failures include lack of capital, poor management, and not enough market demand for their products and services.
Industry-Specific Failure Rates
According to the U.S. Bureau of Labor Statistics, as of March 2023, 34.7% of U.S. private-sector businesses that started in March 2013 were still operating, highlighting the challenges of long-term survival.
Industries with the highest 10-year survival rates include agriculture, forestry, fishing, and hunting (50.5%), utilities (45.7%), and manufacturing (43.6%). On the other hand, the sectors with the lowest survival rates were mining, quarrying, and oil and gas extraction (24.5%), information (29.1%), and wholesale trade (32.1%).
These statistics reveal the varying stability and risks across different industries.
| Industry Sector | 2013 (0 Years) | 2014 (1 Year) | 2015 (2 Years) | 2016 (3 Years) | 2017 (4 Years) | 2018 (5 Years) | 2019 (6 Years) | 2020 (7 Years) | 2021 (8 Years) | 2022 (9 Years) | 2023 (10 Years) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Agriculture, Forestry, Fishing, and Hunting | 100 | 87.5 | 81 | 75.7 | 70.7 | 66.2 | 62.5 | 59.1 | 57.2 | 53.2 | 50.5 |
| Utilities | 100 | 80.7 | 72.7 | 65.8 | 62.9 | 56.6 | 53.1 | 50.7 | 47.5 | 47.5 | 45.7 |
| Manufacturing | 100 | 82.6 | 73.9 | 67.4 | 63 | 57.7 | 53.4 | 49.7 | 47.1 | 45.5 | 43.6 |
| Real Estate and Rental and Leasing | 100 | 83.9 | 75.9 | 69.4 | 64.1 | 58.7 | 54.4 | 50.4 | 48 | 45.5 | 42.2 |
| Retail Trade | 100 | 84.2 | 75.7 | 68.8 | 63.3 | 58.3 | 54.1 | 49.8 | 46.8 | 44.1 | 41.7 |
| Construction | 100 | 76 | 68.1 | 62.8 | 58.2 | 53.9 | 50.6 | 46.7 | 44.6 | 42.4 | 40.1 |
| Other Services (except Public Administration) | 100 | 82.5 | 74.2 | 67.1 | 61.9 | 56.9 | 52.5 | 47.2 | 44.3 | 42.3 | 39.6 |
| Educational Services | 100 | 81.8 | 72.9 | 65.9 | 60.9 | 56 | 52 | 47.1 | 43.1 | 41.1 | 38.9 |
| Accommodation and Food Services | 100 | 82.5 | 72.5 | 65.6 | 60.3 | 55.3 | 51.2 | 46.6 | 42.9 | 41.2 | 38.2 |
| Finance and Insurance | 100 | 80.9 | 71.7 | 64.2 | 58.2 | 53.2 | 49.4 | 45.6 | 43.4 | 40.5 | 37.5 |
| Health Care and Social Assistance | 100 | 82.7 | 73.6 | 66 | 58.3 | 55.1 | 51.2 | 48 | 44.1 | 41.2 | 35.7 |
| Arts, Entertainment, and Recreation | 100 | 80.6 | 71.3 | 63.8 | 57.9 | 52.9 | 49 | 44.3 | 39 | 37.6 | 35.4 |
| Total Private Sector | 100 | 79.6 | 68.9 | 61.4 | 55.3 | 50.6 | 46.7 | 42.8 | 39.9 | 37.6 | 34.7 |
| Administrative and Waste Services | 100 | 76.9 | 67.4 | 60.1 | 53.9 | 48.9 | 44.7 | 41.2 | 38.3 | 36.4 | 34.2 |
| Transportation and Warehousing | 100 | 79.4 | 69.6 | 61.4 | 55.1 | 50.1 | 46.3 | 41.9 | 38.8 | 36.9 | 34 |
| Management of Companies and Enterprises | 100 | 81.4 | 70.5 | 62.1 | 55.7 | 50.3 | 46.1 | 41.1 | 38.8 | 35.3 | 33 |
| Professional, Scientific, and Technical Services | 100 | 77 | 66 | 57.8 | 51.6 | 46.3 | 42 | 38 | 36.8 | 33.7 | 30.9 |
| Wholesale Trade | 100 | 78.2 | 67.1 | 58.3 | 52 | 46.5 | 41.9 | 37.5 | 34.4 | 32.1 | 30.1 |
| Information | 100 | 74.9 | 63.5 | 55.7 | 49.5 | 44.3 | 40.1 | 36.8 | 33.7 | 31.5 | 29.1 |
| Mining, Quarrying, and Oil and Gas Extraction | 100 | 79.4 | 65.9 | 50.6 | 44.3 | 40.2 | 36.6 | 33.1 | 28.2 | 26.3 | 24.5 |
Business Survival Rates by Location
According to the U.S. Bureau of Labor Statistics, new businesses' one-year survival rates vary significantly by year and location.
In 2021, businesses born in the Pacific division had the highest survival rate at 84.6%, while those born in 2008 in the South Atlantic division had the lowest survival rate at 71.4%. Economic recessions, such as those in 2001 and 2008, led to lower survival rates, with the Mountain division most affected in 2001 and the South Atlantic in 2008.
Recently, businesses that started in 2020 showed increasing survival rates, but those that began in 2021 and 2022 saw declines.
| Birth Year | New England | Middle Atlantic | East North Central | West North Central | South Atlantic | East South Central | West South Central | Mountain | Pacific |
|---|---|---|---|---|---|---|---|---|---|
| 1994 | 80,9 | 80,9 | 79,4 | 79,9 | 79,7 | 79,5 | 80,7 | 80,3 | 77,4 |
| 1995 | 82,2 | 79,3 | 80,7 | 80,2 | 78,8 | 79 | 80,2 | 77,9 | 75,3 |
| 1996 | 81,2 | 79,9 | 81,4 | 80,6 | 76,3 | 78,8 | 80,7 | 78,2 | 73,8 |
| 1997 | 79,4 | 79,9 | 80,1 | 82,2 | 76,9 | 78,9 | 79,9 | 78,5 | 75,9 |
| 1998 | 83,2 | 81 | 81,8 | 82,3 | 82 | 79,6 | 79,3 | 78,2 | 76,8 |
| 1999 | 82,9 | 76,3 | 82,8 | 81,6 | 81,1 | 79,5 | 78,4 | 78,1 | 76,6 |
| 2000 | 80,5 | 79,1 | 79,4 | 80,7 | 80,7 | 76,5 | 78,1 | 76,4 | 75,4 |
| 2001 | 78,1 | 74,8 | 77,5 | 79,5 | 75,7 | 76,3 | 76,1 | 74 | 74,2 |
| 2002 | 78,5 | 79,2 | 79,8 | 80,5 | 77,5 | 78,6 | 78,1 | 76,8 | 77,9 |
| 2003 | 80,4 | 80,1 | 80,3 | 81,8 | 78,8 | 79,6 | 78,7 | 78,5 | 78,4 |
| 2004 | 79,2 | 81,4 | 79,3 | 80,8 | 78 | 79,2 | 79,3 | 78,8 | 77,7 |
| 2005 | 80,3 | 82,4 | 79,7 | 83,7 | 79,1 | 79,5 | 79,3 | 79,8 | 79,4 |
| 2006 | 79,2 | 80,2 | 78,7 | 79,2 | 77 | 78,3 | 79,1 | 78,1 | 77,5 |
| 2007 | 79,5 | 79,8 | 77,2 | 79,4 | 75,9 | 78,4 | 78,4 | 75,5 | 76,4 |
| 2008 | 76,8 | 78 | 75,3 | 76 | 71,4 | 75,9 | 77,1 | 72,5 | 76,9 |
| 2009 | 77,3 | 79,3 | 76,5 | 80 | 75,9 | 76,9 | 77,4 | 74,2 | 75,5 |
| 2010 | 82,5 | 80,9 | 78,9 | 79,8 | 77,3 | 77,1 | 78,1 | 76,6 | 78,2 |
| 2011 | 82,9 | 79,5 | 78,5 | 81,2 | 78,3 | 78,8 | 79,3 | 77,7 | 80,5 |
| 2012 | 80,7 | 77,9 | 79,8 | 78 | 77,5 | 78 | 79,8 | 77,9 | 81,9 |
| 2013 | 80,4 | 79,2 | 80 | 79,8 | 78,6 | 78,4 | 80 | 78,6 | 80,8 |
| 2014 | 81,2 | 79,9 | 79,5 | 79,9 | 78,8 | 79,2 | 80,8 | 78 | 80,3 |
| 2015 | 80,3 | 79,6 | 81 | 78,8 | 79,1 | 79,1 | 79,5 | 78,2 | 80,2 |
| 2016 | 81,5 | 79,8 | 78,8 | 81 | 77,7 | 79,7 | 79,3 | 78,5 | 81,5 |
| 2017 | 78,9 | 79,5 | 79,9 | 75,1 | 78,3 | 79,5 | 79,3 | 78,9 | 80,3 |
| 2018 | 79 | 79,5 | 79,4 | 77,8 | 79,2 | 79,9 | 79,5 | 78,2 | 80,5 |
| 2019 | 80,7 | 77,7 | 78,4 | 77,4 | 76,7 | 80,6 | 79,3 | 77,7 | 82,9 |
| 2020 | 80,9 | 80,2 | 82,1 | 79,1 | 80,6 | 80 | 81,5 | 80,9 | 81,6 |
| 2021 | 77,9 | 79,6 | 78,4 | 75,7 | 76,7 | 78,3 | 78,4 | 77,2 | 84,6 |
| 2022 | 77,6 | 78,6 | 77,3 | 75,6 | 76,1 | 77,6 | 77,8 | 74,4 | 77,1 |
Key Factors Contributing to Small Business Failure (And What You Should Do)
Understanding the common reasons behind business failures can help new entrepreneurs avoid these pitfalls and improve their chances of success. Here are some of the key factors that often contribute to the downfall of small businesses.
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Lack of Market Research and Understanding of Customer Needs
Many business owners must properly investigate the market before jumping into their ventures. Without thorough research, businesses might not grasp market demands, fail to spot key competitors or miss out on potential opportunities.
Understanding customer needs goes beyond just knowing what they want; it involves understanding their preferences, habits, and problems. Without this insight, small businesses risk creating products or services that don’t attract or keep customers, leading to their eventual failure. Taking the time to understand the market and genuinely listening to customers can significantly contribute to small business success.
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Insufficient Capital to Cover Operational Costs
Another common reason small businesses fail is insufficient capital to cover operational costs. Many entrepreneurs need to pay more attention to how much money is needed to keep their business running smoothly. Expenses like rent, utilities, salaries, and inventory can add up quickly. With enough capital, businesses can stay afloat and avoid resorting to cutting corners, which can compromise quality and customer satisfaction.
You need more money to invest in marketing, product development, and other growth opportunities. It’s important to plan your finances carefully and ensure they have enough funds to cover both expected and unexpected differences in your business’s ability to survive and thrive.
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Poor Financial Management and Budgeting Practices
Business owners often lack the necessary financial skills and knowledge to manage their finances effectively. This can lead to overspending, misallocating resources, and failure to track income and expenses accurately. Without a proper budget, it’s easy to lose track of where the money is going, and business owners can quickly find themselves in financial trouble.
Effective budgeting involves setting realistic financial goals, monitoring spending, and making adjustments as needed. Regularly reviewing financial statements and keeping a close eye on cash flow are essential for maintaining a healthy business.
It also helps to seek professional advice when needed and continuously educate yourself on financial best practices.
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Ineffective Marketing and Sales Strategies
Without effective marketing, even the best products go unnoticed. Many business owners underestimate the importance of a solid marketing plan and believe that simply having a good product will attract customers. They often need help identifying their target audience and crafting a message that resonates.
An effective marketing strategy involves understanding where your customers are and how to reach them. This means using the proper channels—whether social media, email marketing, or traditional advertising—and delivering a message that speaks to their needs and desires. A robust sales strategy ensures that potential customers are guided smoothly through the purchasing process once they are aware of your product.
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Difficulty Adapting to Changing Market Trends and Competition
The business landscape is constantly evolving, with new technologies, consumer behaviors, and industry standards emerging regularly. Some business owners struggle to keep up with these changes, resulting in outdated practices and offerings that no longer meet market demands.
Being adaptable means continuously monitoring market trends and being willing to pivot strategies when necessary. This could mean adopting new technologies, refreshing product lines, or changing marketing tactics to stay relevant.
Competition also plays a significant role. New competitors can quickly emerge with innovative solutions, making it essential for businesses like yours to differentiate themselves and maintain a competitive edge. Failing to do so can result in losing market share to more agile and forward-thinking competitors. Flexibility and a proactive approach are key to long-term success in a competitive market.
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Operational Inefficiencies and Management Challenges
Running a business involves coordinating many moving parts, and when those parts don’t work together, it can lead to major problems. Inefficiencies in operations, such as poor inventory management, slow production processes, or ineffective use of technology, can waste time and resources.
Management challenges, such as unclear leadership, poor communication, and lack of strategic planning, further exacerbate these issues. Without strong leadership, your business can struggle to make important decisions, set clear goals, and motivate employees.
To overcome these challenges, you need to focus on streamlining your operations and improving management practices. This could mean implementing efficient systems and processes, investing in staff training and development, and fostering a positive and communicative work environment.
Strategies for Reducing Small Business Failure
Building a resilient small business requires careful planning and strategic actions. Here are some actionable steps to help small business owners minimize risks and increase their chances of success.
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Planning and Preparation
Start with a comprehensive business plan that outlines your goals, strategies, and financial projections. This plan is a roadmap for your business journey, detailing your objectives, target market, marketing strategies, and operations. It should also include financial projections like income statements, cash flow statements, and balance sheets.
Thorough market research is equally important. It helps you understand customer needs, identify your competition, and stay updated on industry trends. This research can include surveys, focus groups, and analyzing industry reports to gather valuable insights.
Actionable Tip: Regularly update your business plan and market research to adapt to changes and ensure your business remains aligned with its goals.
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Financial Planning
Securing enough startup capital and effectively managing cash flow are crucial to avoid financial problems and ensure smooth business operations. Developing financial literacy helps you understand and apply critical financial concepts to your business. Good bookkeeping practices, such as tracking expenses, monitoring income, and keeping accurate financial records, are essential for maintaining your business's economic health.
Actionable Tip: Regularly review your financial statements to stay updated on your business's financial status. Consider using accounting software to simplify bookkeeping tasks and enhance financial oversight, making it easier to manage your finances and plan for the future.
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Marketing and Sales
A strong marketing and sales strategy helps you reach your target audience and convert leads into customers. Start by developing a data-driven marketing plan that uses insights to attract and engage your audience. This could include tactics like social media marketing, email campaigns, and content marketing. Implement effective sales funnels to guide potential customers smoothly from initial interest to final purchase.
Actionable Tip: Use analytics tools to track the performance of your marketing efforts and adjust your strategies based on the data. This approach ensures you continuously improve your marketing and sales processes to achieve better results.
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Embrace Agility and Adaptability
Agility and adaptability are your keys to staying relevant in a fast-paced industry. Continuous learning and adapting to changing market dynamics help you stay ahead of the competition. Keep yourself informed about industry trends and competitor strategies, and foster a culture of innovation and calculated risk-taking within your organization.
Actionable Tip: Encourage your team to embrace change and be open to new ideas. Regularly review industry reports and competitor activities to identify opportunities for innovation and improvement. This proactive approach can position your business to respond quickly to market shifts and stay competitive.
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Building a Strong Foundation
A strong foundation is crucial for your business's long-term success. Focus on building a competent, reliable team that shares your vision and values. Establish strong relationships with vendors and suppliers to ensure a smooth supply chain and trustworthy partnerships. A positive, customer-centric company culture can set your business apart and drive customer loyalty.
Actionable Tip: Invest in employee training and development to enhance skills and maintain high performance. Regularly communicate with your vendors to strengthen relationships and address any issues promptly. Promote a positive work environment where customer satisfaction is a top priority, encouraging employees to go above and beyond.
Government and Community Support for Small Businesses
A strong network of support systems is available to help you survive and thrive in a competitive market. Government and community organizations offer valuable resources and assistance to help small businesses like yours overcome challenges and grow.
A small business loan can provide the necessary capital for starting or expanding your small business. Banks and online lenders offer several loan programs for specific needs. For example, online lenders provide equipment financing specifically for purchasing or leasing business equipment or invoice financing for businesses looking to exchange their outstanding invoices for immediate working capital.
Additionally, the Small Business Administration (SBA) offers several loan programs that provide guarantees to lenders, incentivizing them to help small businesses. You can visit the SBA’s website to learn about different loan options and find a lender near you.
Success Stories: Learning from Businesses That Overcame Challenges
Success stories from businesses that have overcome significant challenges can provide valuable lessons and inspiration for new entrepreneurs. These stories show that small businesses can thrive despite initial setbacks with determination, creativity, and strategic planning.
Jessica Alba’s Honest Company provides a compelling case study in overcoming the challenge of limited initial funding. When Alba co-founded the company in 2012, focusing on non-toxic household and baby products, securing substantial financial backing was initially difficult.
Alba’s celebrity status and strategic partnerships proved essential in overcoming this challenge. Her public persona and strong social media presence helped generate significant buzz around the Honest Company, attracting the attention of potential investors. Strategic partnerships with retailers like Target and Amazon gave the company a more comprehensive distribution network and access to a larger customer base.
While Jessica Alba's celebrity status certainly contributed to the Honest Company's success, her ability to build a strong brand and form strategic partnerships is a valuable lesson for entrepreneurs facing similar funding challenges.
Key Takeaways:
- Use your personal connections and social media to build brand awareness and attract potential investors.
- Develop a clear and compelling brand story that resonates with your target audience.
- Collaborate with complementary businesses to expand your reach and resources.
The Bottom Line
Knowing why small businesses fail can help you avoid common pitfalls and improve your chances of success. By understanding these insights, you can plan more effectively and create strategies that work.
Share this article if you found it helpful. Your support can help more entrepreneurs succeed. If you have any tips or experiences to share, leave a comment below. We’d love to hear from you! Together, we can build a stronger community of thriving small businesses.
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