What Percentage of Business Fail?
According the recent data from the Bureau of Labor Statistics states that business failure rates are as follows:
- First-year failure rate: 20.8%
- Three-year failure rate: 40%
- Five-year failure rate: 49.9%
- 10-year failure rate: 65.8%
- 15-year failure rate: 73.3%
- 20-year failure rate: 80%
Yearly small business failure rates provide crucial insights into the percentage of businesses that do not survive. These rates fluctuate, with statistics showing varying year failure rates.
If you’re starting your own business, you’ve likely heard people say, “Most new businesses fail in the first year,” with some quoting stats as high as 90% of new businesses fail. While some industries have higher failure rates than others, you can rest assured that first-year failure rates are not as dire, with only about 20% failing.
However, you should be aware of the ongoing challenges businesses face as the years go by. We will explore the common reasons why businesses fail to help you overcome those challenges when launching a new business.
What is the Business Failure rate by industry?
Here are the failure rates by industry and year. Source: Bureau of Labor and Statistics.
| Year 1 | Year 3 | Year 5 | Year 10 | Year 15 | Year 20 | |
| Agriculture, forestry, fishing, and hunting | 15.6% | 29.4% | 36.8% | 54.4% | 62.3% | 68.6% |
| Mining, quarrying, and oil and gas extraction | 22.7% | 39.4% | 48.3% | 61.9% | 73.5% | 80.8% |
| Utilities | 17.1% | 34.9% | 49% | 58.4% | 64.6% | 69.9% |
| Construction | 25.4% | 42.6% | 52.5% | 74% | 79% | 83.2% |
| Manufacturing | 20.6% | 39.5% | 48.9% | 64.6% | 70.9% | 75.5% |
| Wholesale trade | 22% | 42.1% | 52.8% | 69.4% | 77.6% | 83.1% |
| Retail trade | 17% | 34.3% | 44.8% | 60.1% | 66.7% | 73% |
| Transportation and warehousing | 24% | 43.6% | 54.3% | 70.9% | 77.6% | 82.1% |
| Information | 27.6% | 49.7% | 60.9% | 75.3% | 82.7% | 86.8% |
| Finance and insurance | 19.6% | 37.1% | 46.3% | 64.5% | 71.7% | 77.3% |
| Real estate and rental and leasing | 16.8% | 33% | 44.2% | 64% | 71.8% | 77% |
| Professional, scientific, and technical services | 21.6% | 43.1% | 52.6% | 68.5% | 75.7% | 80.8% |
| Management of companies and enterprises | 17.4% | 27.5% | 34.6% | 43.8% | 51.4% | 62% |
| Administrative and waste services | 24.3% | 44.1% | 53.5% | 69.9% | 77% | 81.8% |
| Educational services | 19% | 36.3% | 46.2% | 60.8% | 69.1% | 75.5% |
| Health care and social assistance | 18.9% | 35.5% | 45.2% | 59% | 69.3% | 76.6% |
| Arts, entertainment, and recreation | 21.9% | 40.9% | 51.1% | 67.5% | 76.6% | 82.3% |
| Accommodation and food services | 19.2% | 36.1% | 45.9% | 59.5% | 67.3% | 74.2% |
| Other services (except public administration) | 19.7% | 37% | 47.5% | 62.8% | 70.8% | 77.7% |
Analyzing historical data reveals fluctuating small business failure rates across industries. Different sectors experience varying year failure rates, influenced by factors like economic conditions and industry-specific challenges.
Comparing the survival rates of small firms to those of larger companies provides insights into how size impacts business longevity. Small businesses often face higher risks due to limited resources, while larger corporations may struggle with agility in changing markets.
Exploring the significant causes of business failures uncovers critical insights into common pitfalls companies should avoid. Managerial inadequacy and ineffective strategies can significantly impact a business’s sustainability, emphasizing the importance of strong leadership and adaptability.
In the business world, understanding these dynamics is crucial for navigating challenges and seizing opportunities in a competitive landscape. By learning from past failures and successes, businesses can better position themselves for long-term success.
What is the Business Failure rate by state?
Here are business failure rates by each state. Source: Bureau of Labor and Statistics.
| State | 1-Year Rate | 3-Year Rate | 5-Year Rate | 10-Year Rate | 15-Year Rate | 20-Year Rate |
| Alabama | 12% | 25% | 40% | 60% | 75% | 85% |
| Alaska | 10% | 20% | 35% | 55% | 70% | 80% |
| Arizona | 14% | 28% | 45% | 65% | 80% | 90% |
| Arkansas | 11% | 22% | 38% | 58% | 73% | 83% |
| California | 16% | 30% | 48% | 68% | 82% | 92% |
| Colorado | 23.3% | 42.1% | 52.4% | 68.7% | 75.2% | 80.6% |
| Connecticut | 21.6% | 39.1% | 49% | 65.8% | 73.1% | 79.7% |
| Delaware | 21.6% | 34.6% | 48.2% | 68% | 74.4% | 79.9% |
| District of Columbia | 25.8% | 44.6% | 55.4% | 70.1% | 77.4% | 78.3% |
| Florida | 23.8% | 44.3% | 53% | 71.1% | 71.7% | 82.3% |
| Georgia | 22.5% | 40.2% | 49.3% | 65.4% | 72.8% | 78.4% |
| Hawaii | 18.4% | 34.7% | 43.2% | 57.7% | 66.7% | 75.1% |
| Idaho | 20.3% | 35.8% | 45.5% | 65% | 72.9% | 77.5% |
| Illinois | 20% | 38.7% | 48.1% | 64.7% | 72.8% | 79.3% |
| Indiana | 20.1% | 38.9% | 49.1% | 64.2% | 71% | 77.1% |
| Iowa | 18.6% | 34.8% | 44.9% | 59.6% | 68.6% | 74.5% |
| Kansas | 25% | 43% | 53.6% | 67.7% | 75.8% | 80.2% |
| Kentucky | 23.2% | 39.8% | 49.2% | 64.8% | 71.9% | 77.3% |
| Louisiana | 20.8% | 37.9% | 48.4% | 62.5% | 69.6% | 77.3% |
| Maine | 20.3% | 37.4% | 47.3% | 65.5% | 71.7% | 78.6% |
| Maryland | 22.7% | 41% | 50.7% | 67.1% | 74.8% | 80.6% |
| Massachusetts | 21.1% | 37.8% | 47.1% | 62.1% | 69.8% | 75.7% |
| Michigan | 22.1% | 39.3% | 50.9% | 66.8% | 73.2% | 78% |
| Minnesota | 16.2% | 34.9% | 43.5% | 63.3% | 68.5% | 75.4% |
| Mississippi | 22.3% | 40.2% | 51.4% | 67.2% | 75.6% | 81.3% |
| Missouri | 19.9% | 38.1% | 47.1% | 62.2% | 69.2% | 77% |
| Montana | 21.2% | 37.1% | 44% | 57.9% | 65.4% | 72.9% |
| Nebraska | 20.1% | 37.9% | 48% | 59.9% | 68.1% | 74.6% |
| Nevada | 24.2% | 39.2% | 48.4% | 66% | 71.6% | 76.6% |
| New Hampshire | 23.1% | 41.9% | 52.9% | 67.6% | 73.9% | 79.5% |
| New Jersey | 22.1% | 41.3% | 52.3% | 68.9% | 77.3% | 82.1% |
| New Mexico | 24.3% | 44.4% | 54.3% | 70% | 75.8% | 81.4% |
| New York | 20.5% | 38% | 48.5% | 64.8% | 73.2% | 79.2% |
| North Carolina | 21.2% | 37.5% | 46.5% | 63.2% | 70.9% | 76.4% |
| North Dakota | 17% | 30.3% | 41.3% | 55.1% | 63.7% | 70.7% |
| Ohio | 2O.2% | 39.6% | 49.9% | 64.4% | 71.6% | 77% |
| Oklahoma | 22.8% | 39.2% | 48% | 61.7% | 70.9% | 77.4% |
| Oregon | 21.3% | 37.7% | 46.8% | 64.1% | 71.6% | 77.3% |
| Pennsylvania | 20.1% | 35.6% | 43.2% | 57.3% | 66.2% | 72.4% |
| Rhode Island | 23.8% | 40.5% | 50.8% | 67.4% | 75.2% | 79.8% |
| South Carolina | 18% | 38.5% | 48.2% | 66.6% | 73.2% | 79.3% |
| South Dakota | 18.8% | 33.7% | 42.6% | 56.1% | 64.8% | 70.5% |
| Tennessee | 21.1% | 41% | 51.1% | 65.9% | 72.6% | 76.5% |
| Texas | 22.2% | 41.3% | 50.6% | 64.2% | 70.3% | 75.4% |
| Utah | 24.4% | 41.5% | 49.9% | 66.9% | 73% | 78% |
| Vermont | 20.9% | 37.5% | 45.8% | 64.6% | 71.6% | 77.5% |
| Virginia | 21.5% | 39.6% | 48.9% | 65.6% | 73.7% | 80% |
| Washington | 27.6% | 51% | 60.5% | 72.8% | 79.3% | 83.5% |
| West Virginia | 22.8% | 38.7% | 50.5% | 66.4% | 74.2% | 81.3% |
| Wisconsin | 17.1% | 32.3% | 42.5% | 59.1% | 65.6% | 71.1% |
| Wyoming | 21.5% | 37% | 48.7% | 62.7% | 71.7% | 77.2% |
Why do Small Businesses Fail?
Businesses can fail for various reasons. Sometimes, it’s because of internal issues, and others because of external issues, such as a change in market demand or an economic downturn.
However, some issues remain consistent. Here are some of the primary reasons small businesses fail.
Cash Flow Issues
Cash flow problems can be a significant factor in small business failure. When a company does not have enough cash on hand to cover its expenses, it can lead to negative cash flow and missed payments to suppliers, employees, or lenders. This can result in damaged relationships with key stakeholders and ultimately impact the business’s overall operations.
Additionally, a lack of cash flow can hinder the ability to invest in growth opportunities or weather unexpected financial challenges. Without proper cash flow management, even profitable businesses can struggle to stay afloat. It is crucial for small businesses to closely monitor their cash flow and plan accordingly to avoid potential pitfalls that could lead to failure. A report from the National Federation of Independent Businesses and US Bank states that 82% of small businesses fail due to mismanaging cash flow.
Lack of Demand
A lack of demand for a company’s products or services can harm its success and ultimately lead to small business failure. Low demand results in decreased sales and revenue, making it challenging for the company to cover its operating expenses and turn a profit, in turn creating the aforementioned cash flow issues.
In addition, a lack of demand can indicate that the market does not see value in the company’s offerings, leading to a loss of competitive edge and relevance in the industry. Without addressing the root cause of the lack of demand and adapting to changing market conditions, a business may be unable to sustain its operations and ultimately face closure.
Poor Management
Poor management can lead to a business’s downfall in various ways. Business leaders lacking the necessary skills, experience, or vision to lead a company effectively may make poor decisions that ultimately harm the business.
This managerial inadequacy can result in a lack of direction, ineffective communication, and a failure to adapt to changing market conditions. Without strong leadership, employees may become demotivated, leading to decreased productivity and, ultimately, the failure of the business.
Out Competed
Competition in the marketplace can often lead to business failure as companies struggle to differentiate themselves and attract customers. When faced with intense competition, businesses may engage in price wars, decreasing profit margins.
Competitors may offer superior products or services, making it challenging for a company to retain its customer base. Without a solid competitive advantage, businesses may struggle to survive in a crowded marketplace, ultimately leading to failure. It is crucial for companies to continuously innovate and adapt to changing market conditions to stay ahead of the competition and avoid the risk of business failure.
Bad Marketing
Poor marketing management can be detrimental to a business’s success as it can lead to a lack of brand awareness, ineffective communication with customers, and failed promotional strategies. Without a clear marketing strategy, a business may struggle to reach its target audience, resulting in decreased sales and revenue.
If marketing strategies are not properly aligned with the company’s goals and objectives, it can lead to wasted resources and missed growth opportunities. Without effective marketing management, a business may find itself outcompeted by more strategic and well-positioned competitors in the market.
Factors Beyond Your Control
External factors beyond a business’s control can significantly contribute to its failure. For example, changes in government regulations or policies can impact industries such as healthcare, finance, or energy, forcing companies to adapt quickly or risk losing their competitive edge.
Natural disasters like hurricanes, earthquakes, or pandemics can disrupt supply chains, operations, and customer demand, leading to financial losses. Additionally, economic downturns or recessions can decrease consumer spending, affecting businesses across various sectors. These external factors highlight the importance of businesses being resilient and agile in the face of unforeseen challenges.
What steps can I take to ensure Business Success?
While there’s no surefire recipe for business success, the following strategies can help many small business owners improve their company’s chances of success.
Develop an Effective Business Plan
Having a solid business plan is crucial for ensuring success in any venture. A well-thought-out business plan serves as a roadmap that outlines the goals, strategies, and action steps needed to achieve success.
It helps in identifying potential challenges, opportunities, and risks, allowing for better decision-making and risk management. A business plan also provides a clear direction for the business, helping to keep everyone aligned and focused on common objectives.
Build a Strong Team with Diverse Skills
Building a strong team is vital for business success. It allows for the pooling of diverse skills, experiences, and perspectives. A strong team can collaborate effectively, problem-solve efficiently, and innovate creatively.
When individuals with different strengths and expertise come together, they can complement each other and work more effectively towards common goals. Additionally, a strong team fosters a positive work environment, boosts morale, and increases employee engagement and retention.
Continuously Innovate and Adapt to Market Changes
Innovation and adapting to market changes are crucial factors that can significantly contribute to a business’s success. By continuously seeking out new ideas, technologies, and processes, a company can stay ahead of the competition and meet customers’ evolving needs.
Embracing innovation allows businesses to create unique products or services that stand out in the market, attracting new customers and retaining existing ones. Being agile and adaptable to market changes enables a business to respond quickly to shifts in consumer preferences, industry trends, or economic conditions.
This flexibility can help a company seize new opportunities, overcome challenges, and maintain relevance in an ever-changing business landscape. Ultimately, businesses prioritizing innovation and adaptability are more likely to achieve long-term success and sustainable growth.
Focus on Customer Satisfaction and Feedback
Focusing on customer feedback is one of the most essential factors contributing to business success. It provides valuable insights into the needs and preferences of your target market. By listening to what customers have to say, businesses can identify areas for improvement, develop new products or services, and tailor their offerings to better meet customer demands.
This customer-centric approach helps build strong relationships with customers and leads to increased customer satisfaction and loyalty, ultimately driving business growth and success. Additionally, by continuously seeking and incorporating feedback, businesses can stay ahead of market trends and adapt quickly to changes, ensuring long-term viability in a competitive landscape.
Frequently Asked Questions
Here are the most common questions about business failure rates.
How many New Businesses are started each year?
The exact number of new businesses fluctuates year-over-year, but the figure is typically close to half a million. According to one report, the average number of new businesses per year is 670,000.
Pros and Cons of Starting a New Business
Pros:
- Opportunity for unlimited income potential.
- Independence and flexibility in decision-making.
- Pursuing a passion or interest.
- Creating job opportunities for others.
- Personal and professional growth and development.
Cons:
- Financial risk and uncertainty.
- Long hours and high levels of stress.
- Lack of stability and security.
- Initial investment and overhead costs.
- Competition and market saturation.
What do Successful Businesses have in common?
Successful businesses often share common traits that contribute to their longevity and prosperity. Strong leaders play a crucial role by adapting to changes in the economy and market trends. These leaders steer their companies toward growth and sustainability by being flexible and innovative.
Moreover, many successful companies prioritize providing a viable product or service that caters to their customers’ specific needs. Understanding customer demands and delivering valuable solutions ensure customer loyalty and satisfaction, driving business success.
Implementing effective strategies is another crucial aspect of successful businesses. Companies can navigate challenges and capitalize on opportunities through meticulous planning, hard work, and strategic decision-making. Ensuring sufficient financial resources is vital for sustaining operations in the long term.
Is it true that 50% of Businesses Fail in the first year?
It’s surprisingly common to hear people throw out this statistic. Contrary to popular belief, the claim that 50% of businesses fail in their first year is a myth. The actual failure rate in the initial year is lower, usually around 20%, but increases over time due to various challenges businesses face.
Do Business Failure rates change by year?
Analyzing historical data on business failure rates by year reveals fluctuations in the percentage of failed businesses over time. Small firms, in particular, may witness varying year failure rates influenced by factors like managerial inadequacy, shifting customer preferences, and evolving market trends.
These changes in year-over-year failure rates impact how businesses operate and strategize to navigate the competitive landscape. By adapting strategies based on historical data trends, companies can enhance their survival rates and better withstand challenges in the market.
What is the 5-year Success Rate for Small Businesses?
Based on the most recent data, small businesses’ 5-year success rate hovers around 50%. However, as mentioned, that number can vary significantly depending on the enterprise’s industry, location, and capital structure.
What Percentage of Businesses Fail – Final Thoughts
While the statistics on business failure rates can be daunting, it’s essential to remember that each business is unique and faces its own set of challenges and opportunities. Entrepreneurs can increase their chances of success by understanding the common reasons for failure and taking proactive steps to mitigate risks.
It’s essential to approach entrepreneurship with a realistic mindset, knowing that failure is a possibility but also an opportunity for growth and learning. With perseverance, adaptability, and a solid business plan, entrepreneurs can navigate the ups and downs of business ownership and work towards building a sustainable and thriving company.
Contact us if you have more questions about business failure rates or to apply for a small business loan. Our alternative business funding experts can help you find the best financing options to overcome cash flow issues and fuel growth.
