Why Do Small Businesses Fail: Top 11 Reasons for Startup Failure

Why do small businesses fail? Business failure isn’t something anyone wants to think about when they start a business. But if an entrepreneur wants their business to succeed, they need to know and avoid these 11 common reasons why businesses fail.

According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new private sector establishments fail within their first year. Those trends have remained pretty consistent over the years, too (all the way back to 1994, in fact).

Another BLS study showed that approximately 34.7% of private-sector establishments born in March 2013 were still operating in 2023, indicating that about 65.3% did not survive to their 10th year. There are many reasons for these failures: difficulty getting loans, supply chain disruptions, inflation, and so much more.

But for most businesses, the cause of failure is much simpler: making a common mistake (most of which are avoidable). Here are the top 11 reasons for small business failure and what new business owners can do to avoid making those mistakes themselves.

Top Reasons Small Businesses Fail

Let’s be clear: for many small businesses, failure isn’t dictated by one singular factor. But there are some common major causes for these closures, and pros will want to avoid them if a successful business is their goal.

1. Many small business owners start for the wrong reasons

The reason for business failure is often tied to the reason the owner started the business. Is the primary reason for starting the business the desire to make a lot of money? Would the business give the owner more time with their family? Will it create a situation where they don’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. And those benefits might not pop up right away, especially in time-consuming industries.

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

The owner has a passion and love for what they’ll be doing and strongly believes — based on educated study and investigation — that their product or service would fulfill a real need in the marketplace.
The owner has drive, determination, patience, and a positive attitude. When others throw in the towel, they’re more determined than ever.
Failures don’t defeat the entrepreneur. Instead, they learn from their mistakes and use those lessons as business tips to help them succeed the next time around. Studies of successful business owners have shown that they attributed much of their success to building on earlier failures and using failures as a learning process.
Entrepreneurs 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.
Successful business owners like — if not love — their fellow man, and show this in their honesty, integrity, and interactions with others. They 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 the company sells, or if the market suddenly disappears because of economic changes or natural disasters. While no one can predict disasters, it’s essential to determine if there’s a market for what the business plans to sell. Business owners also need to check 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 that the business will be able to reach with the marketing dollars and resources it will 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. Just as the business will grow and evolve, so will the market.

3. The business ownership demonstrated (or hired) 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 a business’s 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.

Even if a solo operator doesn’t have a dedicated management team, they can still strive to manage well. A successful manager is also a good leader who creates a work climate that encourages productivity. They have a skill for hiring competent people and training them, and they successfully oversee the tasks they choose to delegate. A good leader is also skilled at strategic thinking, able to make a vision a reality, confront change, make transitions, and envision new possibilities for the future.

4. Insufficient capital caused cash flow problems

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

Implementing a minimum viable budget can help manage expenses conservatively during the initial growth phase, helping ensure that the business remains financially stable. It’s imperative to ascertain how much money the new business will require. An entrepreneur needs to know not only the costs of starting a business but also the costs of staying in business. It’s important to realize that many businesses take a year or two to get going and generate a profit; they often have poor cash flow when they first start out. This means the startup needs enough funds to cover all costs until sales can eventually pay for these costs.

Feeling overwhelmed? ZenBusiness’s business startup cost guide can help entrepreneurs predict how much money they’ll need to launch their business.

5. The business picked the wrong location for its customer base

That old college professor was right — location is critical to the success of most local businesses. If a 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 for even the best-managed enterprise.

Some factors to consider:

Where the 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 a business won’t have customers or clients entering their business establishment, the owner might decide that the ideal location for their startup could be their own home. Other businesses succeed when they’re more mobile, like food trucks or mobile grooming firms. If a business owner doesn’t have a traditional location, they’ll probably benefit from having mobile payment solutions at their disposal to help ensure they get paid.

6. The owners didn’t create a viable business plan

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 business plan. Many small businesses fail because of fundamental shortcomings in this step. A good plan must be realistic for the business model 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 projections: 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 and other investors request a business plan if the business owners are seeking to secure additional capital for their company. A well-developed, solid business plan can be a crucial part of a new business’s success, providing a clear strategy and preparing businesses for financial forecasting and market changes.

7. The owner fell into the trap of overexpansion

Overexpansion often happens when small business owners confuse success with how fast they can expand their business. It’s a small but important distinction; a focus on slow and steady growth is better than unsustainable growth. Many a bankruptcy has been caused by rapidly expanding companies.

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

If expansion is warranted after careful review, research, and analysis, it’s prudent for entrepreneurs to identify what and who they need to add in order for the business to grow. Then, with the right financial management systems and people in place, the leadership team can focus on the growth of the business, not on handling everything themselves.

8. The business has no website and no social media presence

Simply put, if someone has a business today, they 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 were predicted to reach more than $1 trillion. Those numbers are (almost) perpetually growing.

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. It’s a vital part of any digital marketing strategy. If an owner wants to attract customers in their area, the website should include their address, phone number, and hours of operation, and should have a Google Business profile so it will show up when shoppers search by location (example: “Italian restaurants nearby”).

Even if a business doesn’t have customers visiting its physical location (or it gets most of its business through networking and referrals), a strong online presence and a good website help potential customers research the brand before calling. If a business doesn’t have a website and its competitors do, it’ll probably lose out.

A company needs to have social media profiles on the services that its target audience is most likely to use for the same reason. If it doesn’t, the brand won’t look professional and will lose business to competitors who do at least have profiles on popular social media sites.

If a business has products that can be sold online or can take online orders, that’s an added benefit. But at the bare minimum, the company needs a website that lets customers know what it offers and how they benefit by doing business with it.

9. The owners didn’t connect with other business owners

It may sound counterintuitive to collaborate with other business owners because they’re the competition. Right?

In certain aspects, that’s true. But it’s not always the case. In fact, partnering with other small businesses in the area can be quite beneficial, even if they’re in the same industry. For example, if a cosmetologist has a hair salon and there’s another one a mile away, they could befriend the other salon owner and offer their help if they’re ever overbooked. The other salon owner might just extend the same courtesy, helping both stylists serve their clients better. Of course, this isn’t an opportunity a business owner wants to abuse by stealing the other business’s customers; that could quickly backfire.

Even across different industries, meeting the owners of other local small businesses is valuable. One business owner could advertise their product or service in the other’s business space (and hope they return the favor). Plus, other entrepreneurs can give tips on local business issues better than anyone else.

10. The company failed to adapt to market changes and innovate

The failure to adapt and innovate is a common reason why small businesses fail. In today’s fast-paced business environment, companies must be able to adapt quickly to changing market conditions, technological advancements, and customer expectations. Without a willingness to innovate and improve, a business can quickly become outdated and lose its competitive edge.

To avoid this pitfall, business owners should prioritize continuous learning and innovation, staying up to date with the latest trends and technologies in their industry. They should also be open to new ideas and perspectives, encouraging a culture of innovation and experimentation within their organization.

By embracing change and innovation, business owners can help ensure that their business remains relevant and competitive, and is well-positioned for long-term success.

11. The company built a poor customer experience

Providing a poor customer experience is a surefire way to drive customers away and ultimately lead to business failure. Companies must prioritize exceptional customer service skills, ensuring that every interaction with their business is positive and memorable.

To avoid poor customer experience, business owners should focus on building strong relationships with their customers, providing personalized and tailored experiences, and ensuring that their products or services meet their customers’ needs and expectations.

By prioritizing customer satisfaction, business owners can build trust, loyalty, and a strong brand identity, ultimately driving business success and growth.

Conclusion

When it comes to the success of any new business, the business owner is ultimately the “secret” to its success. For many successful business owners, failure was never an option. Armed with drive, determination, and a positive mindset, these individuals view setbacks as opportunities 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. So, ready to join their ranks? Whether an entrepreneur is just starting their first business or they’re hustling to be successful with a current one, ZenBusiness has their back. Take the first step toward business success by forming an LLC to protect personal assets and establish credibility with customers and partners.

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