Why Small Businesses Fail: Top 8 Reasons for Startup Failure

Why do small businesses fail? Business failure isn’t something you want to think about when you start a business. But if you want your business to succeed, you need to know and avoid these eight common reasons why businesses fail.

According to statistics published in 2021 by the Small Business Administration (SBA), about 32% of business startups fail before two years. A little over half (51.1%) succumb to business failure within five years. By year 10, only 33.6% survive. The 15-year survival rate is 25.7%

Those statistics are rather grim. And in 2022, small business survival is an even bigger worry because of coronavirus-related declines, supply chain disruptions, and inflation.

While there’s a multitude of conditions that can result in a business failing, most years, the reason small companies go out of business is usually that they make one or more common mistakes.

Here are the top eight reasons for business failure and what you can do to avoid them.

Why Small Businesses Fail

1. You start your business for the wrong reasons

The reason for business failure is often tied to the reason the owner started the business. Is your primary reason for starting your own business the desire to make a lot of money? Do you think that if you have your own business you’d have more time with your family? Or maybe that you wouldn’t have to answer to anyone else? While those are benefits some successful entrepreneurs achieve after years of hard work, they aren’t necessarily reasons to start a business.

The right reasons for starting a company — reasons that lead to building a successful company — include these:

You have a passion and love for what you’ll be doing and strongly believe — based on educated study and investigation — that your product or service would fulfill a real need in the marketplace.
You have drive, determination, patience, and a positive attitude. When others throw in the towel, you are more determined than ever.
Failures don’t defeat you. You learn from your mistakes and use these lessons as business tips to help you succeed the next time around. Studies of successful business owners have shown they attributed much of their success to “building on earlier failures” and on using failures as a “learning process.”
You thrive on independence and are skilled at taking charge when a creative or intelligent solution is needed. This is especially important when under strict time constraints.
You like — if not love — your fellow man, and show this in your honesty, integrity, and interactions with others. You get along with and can deal with all different types of individuals.

RELATED: How to Start a Business

2. There’s no market or too small of a market

The best business ideas will fail if there isn’t a market for what you sell, or if the market suddenly disappears because of economic changes or natural disasters. While you can’t predict disasters, before you start a business you need to determine if there’s a market for what you plan to sell and if that market is big enough to be profitable. Keep in mind that “everyone” isn’t a market. The market must be an identifiable group of customers you’ll be able to reach with the marketing dollars and resources you’ll have available.

To avoid business failure after startup, business owners need to keep tabs on their market and customers’ changing needs on an ongoing base, as well.

3. Poor Management

Many a report on business failures cites poor management as the number one reason for failure. New business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling, production, and hiring and managing employees. If the business owner doesn’t recognize what they don’t do well and seek help, the company may fail and go out of business. To remedy the problem, small business owners can educate themselves on skills they lack, hire skilled employees, or outsource work to competent professionals.

Neglect of a business can also be its downfall. It’s important to regularly study, organize, plan, and control all activities of your business operations. This includes the continuing study of market research and customer data, an area that may be more prone to disregard once a business has been established.

A successful manager is also a good leader who creates a work climate that encourages productivity. They have a skill at hiring competent people and training them, and they’re able to delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, and able to confront change, make transitions, and envision new possibilities for the future.

4. Insufficient Capital

A common business money mistake for failed businesses is having insufficient operating funds. New business owners often don’t understand cash flow or underestimate how much money they will need to get the business started. As a result, they are forced to close before they’ve had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.

It’s imperative to ascertain how much money your business will require. You need to know not only the costs of starting your business but the costs of staying in business. It’s important to realize that many businesses take a year or two to get going. This means you’ll need enough funds to cover all costs until sales can eventually pay for these costs. This business startup calculator can help you predict how much money you’ll need to launch your business.

5. The Wrong Location

Your college professor was right — location is critical to the success of most local businesses. If your business requires walk-in traffic or a professional location to meet with clients, a good business location in the right community is essential. A bad location could spell disaster to even the best-managed enterprise.

Some factors to consider:

Where your customers are
Traffic, accessibility, parking, and lighting
Warehousing or equipment storage needs
Location of competitors
Condition and safety of the building
Local incentive programs for business start-ups in specific targeted areas
The history, community flavor, and receptiveness to a new business at a prospective site

If you usually don’t have customers or clients entering your business establishment, the ideal location for your startup could be your own home.

6. Lack of Planning

Anyone who has ever been in charge of a successful major event knows that were it not for careful, methodical, strategic planning — and hard work — success would not have followed. The same could be said of most business successes.

It’s critical for all businesses to have a elements of a business plan. Many small businesses fail because of fundamental shortcomings in their business planning. It must be realistic and based on accurate, current information and educated projections for the future.

Components should include:

Description of the business, vision, goals, and keys to success
Market analysis
Workforce needs
Potential problems and solutions
Financial: capital equipment and supply list, balance sheet, income statement, cash flow analysis, and sales and expense forecast
Competitive advantages of small businesses
Marketing, advertising, and promotional activities
Budgeting and managing company growth

In addition, most bankers request a business plan if you’re seeking to secure additional capital for your company.

7. Overexpansion

A leading cause of business failure, overexpansion often happens when business owners confuse success with how fast they can expand their business. A focus on slow and steady growth is optimum. Many a bankruptcy has been caused by rapidly expanding companies.

At the same time, you don’t want to repress growth. Once you have an established solid customer base and a good cash flow, let your success help you set the right measured pace. Some indications that an expansion may be warranted include the inability to fill customer needs in a timely basis and employees having difficulty keeping up with production demands.

If expansion is warranted after careful review, research, and analysis, identify what and who you need to add in order for your business to grow. Then with the right systems and people in place, you can focus on the growth of your business, not on doing everything in it yourself.

Simply put, if you have a business today, you need a website and a social media presence. Period.

In the U.S. alone, there were 307 million internet users at the beginning of 2022 and e-commerce sales are predicted to reach more than $1 trillion.

At the very least, every business should have a professional-looking and well-designed website that enables users to easily find out about their business and how to avail themselves of their products and services. If you serve local customers, your website should include your address, phone number, and hours of operation, and should be listed in Google My Business so it will show up when shoppers search for what you sell by location (example: “Italian restaurants near me”).

Even if you don’t have customers come to your place of business and/or you get most of your business through networking and referrals, you need a website so potential customers can research your business before they call you. If you don’t have a website and your competitors do, you’ll lose out.

You need to have social media profiles on the services your clientele are most likely to use for the same reason. If you don’t, you won’t look professional and will lose business to competitors who do at least have profiles on popular social media sites.

If you have products that can be sold online, or you can take orders online, that’s an added benefit. But at the bare minimum, you need a website that lets customers know what you offer and how they benefit by doing business with you.

When it comes to the success of any new business, you — the business owner — are ultimately the “secret” to your success. For many successful business owners, failure was never an option. Armed with drive, determination, and a positive mindset, these individuals view any setback as only an opportunity to learn and grow. Most self-made millionaires possess average intelligence. What sets them apart is their openness to new knowledge and their willingness to learn whatever it takes to succeed.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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