If you’re a wannabe entrepreneur gearing up to start a business or you’ve just recently opened your doors, there’s a lot of uncertainty ahead of you.
You can’t be sure how your product will evolve, who your first employee will be, or if you’ll even make it through the many challenges of entrepreneurship.
If you’re wondering what percentage of small businesses fail, we don’t blame you. It’s a valid question, and it’s important to stay up-to-date with the facts.
So, what percentage of small businesses fail? Let’s go through this fact and other small business statistics you need to know.
What Percentage of Small Businesses Fail?
Let’s cut right to the chase—what percentage of small businesses fail?
It’s best to put this statistic into how many U.S. businesses survive.
According to the Bureau of Labor Statistics’ Business Employment Dynamics, here’s what the survival rate looks like:
- About 80% (four-fifths) of businesses with employees will survive their first year in business. (The most recent data shows that of the small businesses that opened in March of 2015, 79.9% made it to March of 2016.)
- About 66% (two-thirds) of businesses with employees will survive their second year in business. (The recent data shows that of the small businesses that opened in March of 2014, 69.4% made it to March of 2016.)
- About 50% (one-half) of businesses with employees will survive their fifth year in business. (Data shows that of the small businesses that opened in March of 2011, 51% made it to March of 2016.)
- About 30% (one-third) of businesses will survive their 10th year in business. (The most recent data shows that of the small businesses that opened in March of 2006, 32.8% made it to March of 2016.)
What you really need to know is that about 20% of small businesses fail in their first year, and 50% of small businesses fail in their fifth year.
These rates are consistent over time, suggesting that year-over-year economic factors—surprisingly—don’t have much of an impact on how many U.S. small businesses survive. The takeaway here is that you can pretty much bet on a 80%, 66%, 50%, and 30% survival rate across 1, 2, 5, and 10 years in business—no matter the year.
It’s important to note that this reflects all businesses in the private sector. While the overall survival rates for small businesses surprisingly don’t vary much, the facts look a little different when you look at business failure industry by industry.
Which Industry Has the Highest Survival Rate?
If you’re planning on opening a business in the health care or social assistance industry, you’re in luck!
Health care and social assistance businesses tend to have the best survival rate.
About 85% of small businesses in this industry survive their first year, around 75% survive their second year, and about 60% make it through their fifth year.
Which Industry Has the Worst Survival Rate?
While historical data looks good for health care and social assistance businesses, it doesn’t look so great for the construction or transportation and warehousing industry.
For the construction industry, about 75% of businesses survive their first year, 65% make it through their second year, and about 35% make it through their fifth year.
The transportation and warehousing industry doesn’t look much better: A little more than 75% of businesses survive the first year, a little more than 65% survive the second year, and about 40% make it through the fifth year in business.
Debunking Industry Failure Myths
Rest assured: This is a myth.
Here’s how business survival rates for restaurants stack up:
- About 85% of food service businesses survive their first year in business.
- About 70% of food service businesses survive their second year in business.
- About 50% of food service businesses survive their fifth year in business.
- About 35% of food service businesses survive their tenth year in business.
Where does this survival rate myth come from? Survival rates for food services are really pretty similar to other industries. The most interesting part of this business failure myth is that the reason why restaurants do end up failing is because they lack access to startup capital—but banks often refuse to lend to restaurants because their business is too risky.
Why Do Small Businesses Fail?
Now that you know what percentage of small businesses fail, you’re probably wondering why they fail.
There’s a whole number of reasons why small businesses close.
According to a 2007 study, the biggest reason why businesses fail is a lack of sufficient capital plus cash flow problems. In fact, 82% of business failed because they experienced cash flow problems. This statistic reiterates the often overlooked fact: Small businesses need capital to grow.
After capital, there are many other reasons why a business fails—from a founder departure to a poorly structured team.
This CBInsights analysis of 101 failed startups polls the reason why a business failed according to their founder:
- 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.
- 13% failed because of poor product timing.
- 13% failed because they lost focus.
- 10% failed because they pivoted poorly.
- 9% failed because they lacked passion.
- 9% failed because of a bad location.
- 8% failed because they didn’t have financing or any investor interest.
- 8% failed because of legal challenges.
- 8% failed because they didn’t use their network or advisors.
- 8% burned out.
- 7% failed to pivot in time.
Clearly, there are a countless number of reasons why a business fails, and a few keep coming to the top: capital access, cash flow, lack of demand, and poor management.
Keep these stats sourced straight from failed entrepreneurs bookmarked, and do your best to avoid making the same mistakes!
Looking More Closely Into Access to Capital …
Because access to capital and cash flow issues play such a large role in business failures, let’s run through a few statistics that you need to know about small business funding.
- As of 2015, 73% of small business owners report being able to access enough capital for their business … meaning that 27% of business owners were not able to access enough capital to operate their business.
- Of the 27% of business owners who could not access capital …
- 57% said the lack of capital had no effect on their business.
- 33% said this left them unable to grow their business and expand.
- 18% reported that a lack of capital forced them to reduce employee size.
- 15% reported that they were unable to finance increased sales.
- 12% said they had to reduce employee benefits.
- 10% said they weren’t able to increase inventory to meet demand.
- In 2015, 40% of surveyed business owners used a bank loan to finance their business (with either a large bank loan, a community bank loan, or a credit union loan).
- But 77% of small business owners who apply for a bank loan from a big bank get rejected.
- It’s a little better if you apply for a loan from a smaller bank, considering that about 52% of small business owners who apply for a bank loan from a small bank get rejected.
- The best approval rate comes from alternative lending, with alternative lenders approving about 60% of business loan applications in 2016.
It’s Not All Bad, Small Business Owner!
5 Facts That Show Small Business is Booming
If you’re looking at the percentage of small businesses that fail, it might seem like the U.S. small business sector is completely doom-and-gloom.
But a lot of statistics show that small business in the United States is alive and well. So, if you’re feeling down on the prospects of starting a small business or U.S. small businesses in general, keep these five statistics in mind.
1. Women-owned small businesses are growing and surviving
A 2012 study shows that female-owned small businesses consistently out-survive male-owned businesses in many industries and areas.
We have a long way to go before there’s gender equality in the entrepreneurial space, but the fact that women-owned businesses consistently outlast male-owned businesses just shows the strength and perseverance of female entrepreneurs.
In more good news, the average revenues of women-owned businesses increased 12% from 2014 to 2015, with average earnings climbing from $67,950 to $72,529 year-over-year. Things are looking up for female small business owners.
2. Minority-owned small businesses are on the rise
The number of minority-owned firms in the United States rose from 5.8 million in 2007 to 8 million in 2012. This stat accounts for a 46.3% increase in the number of Hispanic-owned firms over those years—from 2.3 million to 3.3 million—and a 34.5% rise in the number of African American-owned firms—from 1.9 million to 2.6 million.
Again, there is lots of room for these numbers to grow, but it’s encouraging to see increased diversity among small business owners in the United States.
3. Small Businesses make up a lot of the economy
As a small business owner, you can be proud that you and your fellow entrepreneurs make up most of the economy.
There are a lot of statistics that back up the importance of small businesses in the United States.
United States small businesses comprise:
- 99.9% of all United States firms.
- 99.7% of all firms with paid employees.
- 97.7% of all exporting firms.
- 48% of private sector employees.
- 41.2% of private sector payroll.
- 33.6% of known export value.
Small business is a big deal in the United States’ economy. Remember these statistics any time you’re feeling down on your business.
4. Small businesses account for much of the U.S.’s job growth
If you own a business and manage employees, then you’re in part responsible for these amazing job creation statistics:
- Small businesses employed 56.8 million people, or the equivalent of 48% of the private workplace in 2013.
- In the first three fiscal quarters of 2014, small businesses added 1.4 million new jobs—39% of which were from very small businesses (with fewer than 50 employees).
- Small business accounts for 63% of net new jobs in the United States.
5. More small businesses are opening than closing
One final small business statistic shows a bright spot even with the disheartening news about small business survival rates:
Establishment openings are finally outpacing establishment closings since the recession.
Put simply, more small businesses are opening their doors than closing them, which is great news for small businesses in the U.S. economy.
Looking at the Big Picture
When you take a step back from these small business statistics and look at the big picture, the main takeaway is this:
Running a small business is hard work—and the percentage of small businesses that fail just shows that. There are many different reasons why a small business fails, but in general, keep an eye on your capital sources and cash flow—those tend to be the tipping point for business failure.
But keep your head up, small business owner. Optimism for small businesses owners is growing, and the strength of small businesses in the U.S. economy is validated with amazing statistics year after year!
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