How Many Small Businesses Fail? Is There a Common Reason? (2023 Update)
If you’re looking into starting a small business, you’ll get a lot of well-intentioned, sometimes misleading, advice. People claim that anywhere from 50%–80% of new businesses fail, and they’ll give you a myriad of reasons why they think this is the case.
But while the failure rate of a small business can be a bit high, there are a lot of potential reasons for this. So, keep reading and we’ll break down the exact failure rate of a small business according to the U.S. Bureau of Labor Statistics, give some reasons for these failures, and highlight why you can’t just blindly trust the stats.
How Many New Businesses Fail?
There are a bunch of scare statistics out there for new businesses to look at, but there are a few things you need to keep in mind when looking at the numbers. For instance, while a business might “fail” between years 5–10, there are a ton of potential reasons for this.
The business could fail because of a lack of finances, or it could simply no longer exist because the owner chooses to move on to something else. This isn’t a true “failure,” but according to the U.S. Bureau of Labor Statistics, they count just as much as a failure.
With that caveat in mind, let’s look at the official business failure rates for new businesses.
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Common Reasons a New Business Fails
With so many businesses failing to get off the ground over the first 2 years, it’s worth taking the time to figure out why so many new businesses fail in the first place. Below, we’ve highlighted six common reasons a new business can fail.
In the Wrong Market
You don’t want to see ice in the Arctic and you don’t want to sell heaters on the beach. If you’re trying to run a successful business, you need to fill a need. It doesn’t matter how great your idea is if the area is saturated or just isn’t interested in what you’re selling. Adjust your business to the market, don’t try to force the market into the business.
Before you get your business off the ground, you need to come up with a viable and realistic business plan. Too many businesses come up with plans that have unrealistic expectations, or they try to wing it without a plan at all.
Do your homework and develop a solid business plan for your business and you can significantly reduce the chances of failure.
Not Enough Startup Money
Starting up a new business the right way takes a little time and money. You need to invest in the initial setup, marketing, and everything else that goes into it. If you’re cutting costs right from the jump, you can’t give the business the push it needs to get off the ground, dooming it from the start.
If you’re starting with a physical location, it’s all about location, location, location. And if it’s a digital business, marketing, and internet presence play a big role. Nobody will purchase your stuff if they don’t see it in the first place.
Failing to Adjust
Mike Tyson’s famous quote that, “everyone has a plan until they get punched in the mouth,” holds true here. You can have all the plans you want, but when things don’t start to go your way, what will you do?
While you can stick to the plan no matter what, sometimes you need to make some adjustments as you learn things. Adapting and overcoming are big parts of running a successful business.
Expanding Too Quickly
Early success leads to higher ambitions and more plans. But while early success can be a good thing, you can turn it into a negative if you try to expand too rapidly. Often, early success stems from new customers trying out the new business for the first time.
To stay successful, you need repeat, long-term customers. And you’ll only know if you have them if you give it time. Don’t push the limits too quickly, master the smaller market first.
If you’re starting a small business, do your research first and you can greatly reduce your chances of failing. From there, keep in mind that while the statistics can be a bit daunting—about half of small businesses make it to the 5-year mark.
And from there, there are a lot of potential reasons a small business can “fail,” and it’s not always because they run out of money!
Featured Image Credit: Supamotion, Shutterstock