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Have you heard that 90 percent of new businesses fail? Or that 50 percent of new businesses fail? Stick around in the entrepreneurial community long enough and you'll likely hear a wide spectrum of claims, mostly falling between these two extremes.
But what is the true failure rate of small businesses? And should it influence your decisions as an entrepreneur?
What we know about the failure rate of small businesses
According to data from the Bureau of Labor Statistics, as reported by Fundera, approximately 20 percent of small businesses fail within the first year. By the end of the second year, 30 percent of businesses will have failed. By the end of the fifth year, about half will have failed. And by the end of the decade, only 30 percent of businesses will remain — a 70 percent failure rate.
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Of course, we have to accept several caveats in these data. Here are some common variables.
- Definition of failure. This study relies on a fixed number of reported businesses. If a business no longer exists a year later, it's counted as a "failure." But there may be entirely valid reasons for the business no longer existing. The owner may be interested in retiring, for example, and chooses to close the business rather than try to sell it or transition ownership; it's hardly fair to count this as the failure of the business.
- Annual variance. As you might expect, there's some variance from year to year, based on economic conditions. The data reported above applied to businesses studied from around 2007 to 2017. It does seem like many of these percentages remain relatively consistent; we might see the failure rate for a single year vary between 15 and 25 percent, but it's not likely to spike or plummet. There are a few exceptions to this, which brings us to our next point.
- Outlier events. Major outlier events can significantly change the failure rate for businesses, for better or for worse. For example, the Covid-19 pandemic has created harsh economic conditions for many industries, including bars, restaurants, nightclubs, and other niches dependent on close physical interaction. Failure rates are exceptionally high for 2020, though we don't have all the figures yet.
- Industry variance. Unsurprisingly, the failure rate varies significantly from industry to industry. Health-care businesses and organizations tend to have a failure rate that's lower than average since the demand for health-care services is high, consistent and steadily increasing. At the other end of the spectrum, failure rates for warehousing and transportation businesses are high; presumably, this is because of high start-up costs and a competitive marketplace. In the middle are businesses such as SEO companies and other marketing firms; they offer low start-up costs, but demand may vary due to market conditions or high competition.
- Reporting. We also need to be wary of errors in reporting. Some small businesses may not be counted in these metrics due to operating in secret or because of clerical oversights. Other businesses may be counted but may not operate like typical businesses.
- Business health. Businesses may survive even when performing suboptimally. Many "successful" businesses in this report may be dangling by a thread.
Why the failure rate matters
Some people wield small-business failure statistics as a tool for discouragement; they want to warn would-be entrepreneurs about the dangers of starting a business. But there's a more useful way to study and learn from statistics like these.
For starters, the failure rate gives you an idea of how and when businesses tend to fail. Only 20 percent fail within the first year but 50 percent fail within the first five years. In other words, an additional 30 percent of businesses will fail between years 2 and 5, or about 7.5 percent of the initial amount per year. If we assume a kind of "death by natural causes" and take that 7.5 percent figure as a predictable rate of failure, we can assume about 12.5 percent of businesses in the first year fail due to lack of preparation in one way or another. If you're better prepared than the bottom eighth of business owners, you're in good shape.
Related: 21 Success Tips for Young and Aspiring Entrepreneurs
This is also useful for calculating risk, especially if you apply this risk to your personal life. We tend to be optimistic when evaluating our own endeavors due to the overconfidence effect, but statistics can keep us realistic and pragmatic. If we assume a 20 percent failure possibility for our business in year 1, we should be distributing our investments and our time accordingly; we need to balance our risk profile to protect us in the event of failure.
Why people overestimate the failure rate
I also want to acknowledge that whenever failure statistics are misrepresented, they're usually inflated. In other words, people have a tendency to exaggerate the failure rate of small businesses. Why? It might be a conservative way to taper expectations, or it might play into the desire to discourage would-be entrepreneurs. Either way, we need to be cautious of people who confidently assert a trivial "truth" about business ownership.
Small businesses do fail somewhat often, to the point where you basically have a 50/50 shot of surviving past year 5. But it's important to take statistics for what they are, to understand their context and to not allow them to unfairly discourage you from pursuing the development of your business.
FAQs
According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
What is the failure rate of small businesses? ›
The failure rates of businesses show that around 20% fail in their first year and about half of businesses are still standing after 5 years. Certain startups, however, tend to have a 90% failure rate and somehow, this statistic became the norm.
Why do 90% of small businesses fail? ›
This high failure rate can be attributed to a variety of factors ranging from financial mismanagement to market dynamics. Understanding these reasons is crucial for both aspiring entrepreneurs and policymakers aiming to foster a more supportive environment for small enterprises.
What is the #1 reason small businesses fail? ›
“If you lack the cash or assets to start on your own, like most businesses, you will need to borrow,” it says. Poor cash flow. According to SCORE, 82% of all small businesses fail due to cash flow problems.
Are many small businesses fail every year True or false? ›
True; The statement that many small businesses fail every year is based on data from the U.S. Small Business Administration. Various factors such as poor management, competition, and economic shifts contribute to these failures. The statement 'Many small businesses fail every year' is true.
Why do 70% of businesses fail? ›
Surveys of business owners suggest that poor market research, ineffective marketing, and not being an expert in the target industry were common pitfalls. Bad partnerships and insufficient capital are also big reasons why new companies fail.
Why do 95% of businesses fail? ›
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.
Is it true that 90% of startups fail? ›
Approximately 10% of startups fail within the first year. According to the United States Bureau of Labor Statistics, the startup failure rate increases over time, and the most significant percentage of businesses that fail are younger than 10 years. Over the long run, 90% of startups fail.
What business has the highest failure rate? ›
Here are five small business types with a high failure rate.
- Restaurants. Independent restaurants have a failure rate of over 60% at the 10-year mark. ...
- Retail stores. Another business with intense competition is a retail store. ...
- Direct sales. ...
- Construction. ...
- Insurance sales.
To put things into perspective, more than 80% of business failures are due to a lack of cash, 20% of small businesses fail within a year, and half fail within five years. But it doesn't have to be that way. In fact, many businesses can avoid cash flow problems with proper cash flow forecasting.
Losing Focus. One of the biggest common mistakes new business owners make is losing focus. Whether it's getting comfortable and coasting or losing interest in their company, it's critical for you to focus on running your small business to help it grow and succeed.
What is one of the four major causes of small business failure? ›
The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.
Why are small businesses declining? ›
He believes this can be attributed to ongoing challenges from inflation and the rising cost of small business loans due to higher interest rates—challenges many small business owners have faced since March 2022, leaving them especially vulnerable to economic volatility.
What is the survival rate of small businesses? ›
What we know about the failure rate of small businesses. According to data from the Bureau of Labor Statistics, as reported by Fundera, approximately 20 percent of small businesses fail within the first year. By the end of the second year, 30 percent of businesses will have failed.
How long does the average small business last? ›
Building a business isn't for the faint of heart when you consider the average lifespan of a small business is only 8-½ years. It takes a real never-say-die attitude to take the entrepreneurial leap.
How long before a new business makes a profit? ›
On average, businesses take two to three years to become profitable. However, many factors determine profitability — while some small businesses fail within the first year, others with low start-up costs can even be profitable in the first year.
What type of business has the highest failure rate? ›
Once you look at the five-year failure rate, though, the information industry takes the lead, with 55.7% of businesses failing. Source: LendingTree analysis of BLS data. Conversely, the retail industry — which had the highest five-year failure rate in last year's report — has the lowest one-year failure rate (12.9%).
Are small businesses are prone to failure? ›
Specifically, around 10% of small businesses fail in their first year, around 31% in their second year, and by the end of the fifth year, almost 50% have ceased operations. This critical period highlights the importance of solid planning, financial management and adaptability in the early stages of a business.
What percent of small businesses lose money? ›
05Small business failure statistics
40% of small businesses will become profitable eventually, but 30% lose money, and 30% break even. The most common reasons businesses fail are: Lack of demand. Lack of capital.
Is there a decline in small businesses? ›
Consequently, small business employment declined, and the employment share of small businesses as a proportion of overall jobs in the economy began to dwindle after April 2021. The decline in small businesses' share of overall employment accelerated a year later, beginning in April 2022.
