There is no greater leap of faith than starting a small business. Even with proper planning, including a well-thought-out business plan and sufficient financing, it’s difficult to get a new business off the ground. It’s even more difficult to keep a small business going and growing, achieving goals and reaching new milestones.
Select Funding helps small business owners secure the financing they need at prices they can afford. We recognize how difficult it is to make a success of your small business. You may be wondering, how many small businesses fail? Here are five reasons that cause small businesses to fail and some ideas on how to overcome them.
What Percentage of Small Businesses Fail?
As a small business owner, you may have heard some alarming statistics about the number of small businesses that fail. It’s important to remember that when the Bureau of Labor gathers information about businesses, any closure is considered to be a failure for the purpose of publishing data. That includes businesses that close because the owner retires, so the numbers are likely to be somewhat inflated.
That said, small business failure rates are still high and illustrate the risk involved with starting a new business:
- 20% of businesses fail within the first year
- 30% fail within the first two years
- 50% fail within the first five years
- 70% fail within ten years
Each number is inclusive of the previous number, but there’s no denying that it’s difficult to start a new business and keep it going for the long haul. That said, small business owners shouldn’t be discouraged by the numbers because many of the things that lead small businesses to close their doors are remediable and avoidable.
5 Causes of Small Business Failure
Small businesses fail for a variety of reasons. Some reasons are a matter of luck or timing while others are foreseeable and preventable. Here are five of the most common reasons that small businesses fail.
#1: Lack of Working Capital
The most common cause of small business failure is a lack of working capital. Even when the business owner is in tune with what it costs to operate their business, they may not have the necessary financing to pay operating expenses.
Of course, a lack of financing isn’t the only reason that small businesses may fall short financially. Another related reason is that small business owners sometimes don’t charge enough for their products or services and end up with a shortage of cash as a result.
When there isn’t enough cash available, businesses may be unable to pay suppliers and vendors and that can lead to production delays. Few suppliers will be willing to continue to fill orders without payment.
It can be difficult for small businesses to qualify for traditional bank loans or lines of credit. Small business owners may not be aware of alternative financing options. In some cases, the lack of financing can combine with other financial issues to make it impossible for a small business to stay open but in many cases, failure can be avoided by exploring alternative financing.
#2: Lack of a Business Plan
Even with proper financing in place and a stream of cash, businesses may still fail if there has been a lack of effective business planning. A business idea may be smart and timely but without a plan in place to ensure the company’s success, it could still become a small business failure.
Before a small business opens its doors, there should be a business plan in place that includes the following things:
- A description of the business
- Capital needs, including a budget and projected cash flow
- Employee and management needs, including projections of future needs
- A market analysis that includes both opportunities and threats
- Detailed competitor analysis
- A marketing strategy
If a business owner waits until after the business launches to address these items, it may be too late. For a company to be successful, there must be an understanding of both its industry and its competitors. There must also be details about estimated revenue streams and a plan for the company’s infrastructure and operations.
#3: Poor Management
When a business fails, it doesn’t necessarily mean that the idea behind the business was bad or that there wasn’t a need for the product or service it sold. It may indicate that poor management led to a collapse that could have been prevented with adequate planning and the right team.
An entrepreneur may have the ability to come up with a stellar business idea but lack the management skills to bring it to fruition. They may not have the skill set to create a workable business plan, hire the right team, manage employees, and make smart business decisions.
The reason that poor management is at the root of many small business failures is that often, the business owner is doing everything in an effort to get the business up and running. They may not recognize gaps in their abilities or they may assume they can learn as they go.
Even established businesses can suffer from poor management as business owners become complacent and lose their way. The best way to avoid management issues is to assemble an experienced team capable of doing the things that aren’t in the business owner’s skill set.
#4: Marketing Failure
We already told you that a marketing plan, including specific tactics and strategies, should be part of your business plan. It should come as no surprise, then, that marketing missteps can lead to small business failure.
Marketing involves more than posting on social media or writing an occasional blog post. In fact, marketing is as much a science as it is an art and a lack of knowledge and proper planning can leave any small business out in the cold when it comes to finding its audience and customers.
Proper marketing requires detailed market and competitor analysis, smart budgeting, and knowledge of conversion ratios and how to project market reach. It’s common for small businesses to trim money from their marketing budgets to make room for other expenditures. However, a lack of marketing can undermine everything else because it may mean there are no customers for the products or services being sold.
A lack of understanding of modern marketing, including consumer behavior as it relates to marketing strategies such as social media, SMS marketing, or email marketing can also contribute to marketing failure. The best way to avoid marketing failure is to partner with an experienced marketing agency that will do the work for you.
#5: Lack of Adaptability and Innovation
Even the best business ideas have a time and a season. A company may experience early success only to find that their idea or product isn’t sustainable in the long term. When that happens, a lack of flexibility can foreshadow the failure of the business.
Entrepreneurship is difficult at the best of times. When early success comes more easily than expected, it’s common for business owners to double down on what they did to attain that success, losing sight of the possibility that innovation is required.
The most successful business owners have the agility to adapt when the situation requires them to do so. For example, Michelin star restaurants that wouldn’t normally provide take-out to patrons pivoted to provide luxury dining experiences at home during the COVID-19 pandemic. Without adapting to the realities of the pandemic, it’s probable that those restaurants would have closed their doors for good.
When circumstances change, take a step back and consider your options. It may be that a little creativity and flexibility is all you need to avoid business failure.
How Can Small Businesses Overcome Failure?
The five common causes of small business failure we’ve listed here are all avoidable with the right team, planning, and financing. Here are some tips to help you avoid failure and achieve small business success:
- Don’t rush. A lack of proper planning can prevent many of the causes of business failure. With a well-thought-out business plan, you can obtain sufficient financing to keep your business afloat, hire the right team, and do the research necessary to match or outperform your competitors.
- Recognize your weaknesses. On paper, you might think you can save money by wearing every hat as you launch your business. In the long run, spending money to hire the right team – specifically people who have the knowledge and experience you lack – can save you money and increase your chances of success.
- Stay flexible. Regardless of your industry, flexibility is always necessary when starting a new business. Stay open to new ideas, read the market, and be prepared to change the way you’re doing things when necessary.
- Consider alternate financing options. Since a lack of capital is such a common cause of small business failure, it makes sense to keep an open mind about financing options. Even if you can’t qualify for a bank loan or line of credit, you can still get the money you need by working with a company that provides small business financing.
Some small businesses fail, but following the tips we’ve included here can help you minimize your chances of failure.
Prevent Small Business Failure with Flexible Financing
Small businesses fail all the time but yours doesn’t need to be one of them. Understanding the most common causes of failure and how to avoid them is more than half the battle.
Is your small business in need of working capital? Select Funding can help! Click here to learn about our small business financing options.
