It's often reported that more than half of small businesses fail during their first year in operation. However, Small Business Administration (SBA) data on business failure shows that only 30% of new businesses fail during the first two years of operation.
From there, the failure rates increase. Businesses in operation five years have a 50% failure rate and 66% during the first 10. The SBA goes on to state that only 25% make it to 15 years or more. About 75% of U.S. venture-backed start-ups fail, according to Harvard Business School research.
These labor statistics reflect all businesses in the private sector. Looking at the numbers industry by industry gives more information.
Breakdown Per Industry
You can break down business failure more by looking at specific industries. Finance, insurance, and real estate are the industries with the highest success rate and 58 percent of these businesses survive after operating 4 years. The Bureau of Labor Statistics shows that health care and social assistance businesses also have high survival rates and growth projections.
For a breakdown of strong industries, review this slideshow from Entrepreneur: The 15 Most Profitable Small-Business Industries. Interested in what types of business you should avoid? Check out this article from The Balance: 7 Small Businesses You Don't Want to Start
Why Businesses Fail
Starting a business can be risky but rewarding if done right. There are a multitude of things that can crush a business. A CBInsights analysis interviewed founders of 101 startup businesses that didn’t make it. Here are the top reasons they discovered for business failure.
- 42% of small businesses fail because there’s no market need for their services or products.
- 29% failed because they ran out of cash.
- 23% failed because they didn’t have the right team running the business.
- 19% were outcompeted.
- 18% failed because of pricing and cost issues.
- 17% failed because of a poor product offering.
- 17% failed because they lacked a business model.
- 14% failed because of poor marketing.
- 14% failed because they ignored their customers.
How to Avoid Business Failure
There’s not one tried and true way to keep a business thriving. But there are solid steps you can take to avoid becoming a sad statistic. Here are three ways to set yourself up for success.
- Have a Business Plan A well thought out business plan is the bedrock for business success. A business plan is a formal statement of goals, reasons they are attainable and plans for reaching them. Often, a business plan is required when applying for a small business loan. (Note: SmartBiz does not require a business plan when seeking an SBA loan). Even if you’re already running a business, a business plan is a good idea. You don’t need to hire a professional. Check out this post for step-by-step instructions: How to Write a Business Plan for Your Small Business (Without Going to Business School)
- Know Your Industry Have you done research? You’ll need to know the ins and outs of your industry to carve out your unique niche. BPlans has a comprehensive article outlining how to do an industry analysis: Know Your Industry Before You Start Your Business.
- Get a Loan Taking on debt might not sound like a solid business strategy. However, low-cost funds can help strengthen your business in a number of ways. A popular use of a loan is to refinance or pay off high cost debt. This can drastically reduce your monthly obligations, putting you in a stronger financial position. Loans can also be used for a number of business building initiatives like hiring, equipment purchases, buying inventory, increasing marketing and more. If you’ve been in business two or more years and have good credit, consider an SBA loan. With low rates, long terms, very low monthly payments, and no pre-payment penalties, SBA loans are known as the “gold standard”. Visit the SmartBiz Loans website here to discover if you’re prequalified with no impact on your credit score. For a list of documents you’ll need to apply, visit the SmartBiz Small Business Blog: Application for a Business Loan: What You Will Need.
Have you had a business failure? The good news is that you're more likely to succeed if you've failed than if you've never tried. Entrepreneurs who have failed at a prior business have a 20% chance of succeeding versus an 18% chance of success for first time business owners.
As Thomas Edison famously said, “I have not failed. I've just found 10,000 ways that won't work.” Entrepreneurs learn from failure and can come out the other side stronger and ready for their next venture.