Facing challenges in the initial years of your new business is somewhat very common. If you want to be prepared, there are certain things that you must know right from the beginning. Regardless of these issues, it’s certainly not impossible to build a successful business.
Small Business Administration estimates over 600,000 new businesses open every year in America. Some of them are bound to fail whether small/large. Besides that, half of the U.S. population is employed by small businesses.
Businesses can fail for various reasons, including funding issues, less market demand, and workforce issues. Also, the failure rate can change widely based on the industry or state.
So if you are planning to start a business, the following business failure statistics will give you all the insights to avoid mistakes that failed businesses have made.
Business Failure Statistics: Key Findings
- According to the U.S. Bureau of Labour Statistics, within the first year of business, 1 in 5 American businesses fail.
- Nearly half (49.7%) get failed after 5 years and only 30% manage to survive after 10 years.
- Sweden (97.2%) and Greece (96.7%) have the highest 1-year business survival rates.
- Countries with the lowest 1-year business survival rates are Denmark at 73.1% and Lithuania at 63.4%.
- The highest business failure rate in the U.S. within the first year is in Hawaii (25.4%).
- When it comes to the U.K., less than half of the new businesses survive the first 3 years.
- Mining, quarrying, and oil/gas extraction have the highest failure rates within 1 year (25.6%).
- Surprisingly, 19% of Arts and entertainment businesses fail in their first year, ranking fourth on the list.
- 82% of businesses fail due to outstanding debts and cash flow problems, making it the biggest reason.
- The average lifespan of American small businesses is 8 years.
Current Failure Rate of Businesses that Started in 2016
The research done by the Bureau of Labour Statistics for businesses that started in 2016 gives us a clear idea of the business failure rate over the years. It shows the percentage of businesses that failed to survive up until 2021.
In America, there were 733,085 new businesses were formed in 2016. Of them, 20.4% closed their doors after the first year (in 2017). The percentage increases by 31.2% in the second year followed by 38.8% in the third year.
This is not surprising as there are risks and uncertainty involved in continuing a business after some point. And because of this entrepreneurs deliberately chooses to shut down businesses as the years pass. Here are Entrepreneurship statistics for some better insights.
You can see that after 5 years, the business failure rate for businesses started in 2016 reached 49.7%. This means nearly half of the businesses shut down in firth year, which is 2021.
Global Business Failure Statistics: Failure Rate By Country
Different countries across the globe have various pros and cons when it comes to starting a business. It may be easier to start a business in one place compared to the other because of various factors like loan approvals, competition, market demand, and many more.
This is why failure rates for businesses can vary based on the region. The following region-wise business failure statistics prove this point.
- In the U.K., only 40% of new businesses can survive more than 3 years, while 20% will shut down within a year.
- Compared to this, 50% of U.S. start-ups make it past 5 years, and shockingly, only 35% of them survive after 10 years.
- 60% of small businesses in Australia fail within the first 3 years of their start-up.
- On the other hand, 85% of Canadian start-ups can survive for 3 full years, which is far better than in other countries.
- These two are followed by the Netherlands at 95% and Belgium at 91%.
- On the other hand, the lowest is reported in Denmark at 73.1%, Portugal at 71.3%, and Lithuania at 63.4 %.
U.S. Business Failure Statistics:
The U.S. Bureau of Labour Statistics data reveals the failure rate of new businesses over 10 years. The stats reveal the following.
- 18.4% of new firms close down in the first year itself.
- Almost half of the businesses (49.7%) don’t make it through the first five years.
- An astonishing 67% of businesses close their doors after crossing the 10 years mark.
- Only 25% of businesses manage to cross the 15 years mark, which means 75% close down.
States-wise Business Failure Rates in the US:
The state-wise business failure statistics reveal interesting things about American start-ups. Turns out that states that have the highest failure rate within 1 year don’t have the highest rate for 5 or 10 years.
- Hawaii ranks first when it comes to the number of businesses that fail within one year. Compared to the national average (18.4%), 25.4% of new businesses in Hawaii fail to survive for more than a year.
- After Hawaii, Rhode Island and Kansas ranked the highest at 23.1% and 23.2% respectively.
- 10.9% of new businesses fail in Washington within the first year.
You might find Washington as one of the best places to start your business, right? Wrong! Things change dramatically when we look into business failure rates after 5 and 10 years. Here’s what has been revealed.
- Businesses in Washington have the highest failure rate after 5 years (59.6%), followed by Connecticut at around 54%.
- Skip to 10 years, Washington stays at the top with 81.7% of businesses failing after 10 years, followed by Arkansas at 71.1%.
Here, you can see that the case of Washington is the most interesting. Washington, the state with the lowest (10.9%) business failure rate in the 1st year, has the most number of businesses failing after 5 years at 59.6%.
It also has the most number of businesses (81.7%) closing down after 10 years of operation, that’s a staggering 16% more than the U.S national average of 65%
Why Do Startups fail?
For a new business, the first two years are the most crucial. You need to have a winning business strategy to reach greater success during this phase. However, many fail at this same step.
The most common reasons behind the increase in small business failure rates are poor business plans, lack of market research, and running out of funds to keep the business going. But these aren’t the only culprits.
There are more reasons why businesses don’t survive the early stage. The following business failure statistics highlight the top reasons why new businesses fail.
1. Running Out of Cash
Running out of funds is the major setback that many new businesses face. So what percent of small businesses fail due to a lack of funds? According to the Statista report, 38% of businesses fail due to cash flow issues and failure in raising new capital.
Cash flow issues – insufficient liquid cash running in and out of business plays a huge role in funding issues. This can happen when the product doesn’t fit in the market (low demand) or lacks the confidence to look for capital.
When dealing with outstanding debts, there are always chances of making financial mistakes. Expanding a business too quickly is another reason why firms run out of cash.
- According to stats, 63% of Americans fail to start a business because of funding issues. And…
- Lack of financial support is the major factor behind failing of 52% of small businesses. Check out these Small Business statistics for some better insights.
2. People Don’t Need the Product/Service
What’s worse than knowing that the product/service you’re selling isn’t in demand! Business failure statistics say that 35% of new businesses fail because what they are selling isn’t actually needed by customers. There could be several reasons why.
Assuming that people will buy your product because of additional features is a mistake. If it’s not needed, no one would spend more on it. Internet research and talking to potential customers are necessary to know if there is market demand for your product.
3. Getting Outcompeted (Lack of Market Research for Competition)
Every business must know who are their competitors before setting up its strategies. According to stats, 20% of businesses close down because they don’t take competing businesses into account and eventually fail to outperform them.
Customers do like lower pricing but buying from a trusted brand is just as important for them. So as a start-up, your focus shouldn’t only be on low pricing. You should be offering something extraordinary that customers would appreciate to edge out competitors for customer attention. These Brand Loyalty statistics will help you understand more.
4. Wrong Business Model (or Not Having One)
A business model is essentially a plan for how a business is going to make a profit. It includes products/services they are going to sell, expected capital cost, and target market. Statistics show that 19% of new businesses follow the wrong business model which fails.
5. Bad Pricing
About 15% of businesses close down because they fail to properly price their products. There are no rules when it comes to pricing but it plays an important role in running a successful business.
Competitive pricing can catch lots of eyes especially when your product is offering the same value. Your pricing should be low enough to attract customers but at the same time high enough to cover your cost and generate adequate profit.
6. Poor Marketing
14% of small businesses do not know how to get their audience’s attention and the major reason for their failure is that. Marketing your new business is the most essential skill that an owner must develop. Your products won’t even get noticed if you fail to market them effectively.
With 86% of businesses using Facebook for advertising and 60% of online shoppers discovering new products on Instagram, social media advertising is very effective for start-ups. It’s also relatively affordable and you can be selective with your target audience.
7. Not the Right Team
A wrong team can be a reason behind 14% of business failures. A start-up business needs to have a diverse team with all the necessary skill sets that would contribute to its future success.
8. Other Reasons Why Businesses Fail
- With 82% of small businesses closing down due to cash flow problems, it is the #1 risk of starting a new business.
- The prior risk of starting a new small business is cash flow
- 18% of new businesses fail because of legal/regulatory issues.
- As per Startup statistics, 10% of start-ups fail because the product is ahead or late in terms of trend/timing while 8% fail because of defective products.
- There is also an aspect of disputation between teams or investors due to which 7% of businesses fail.
- 6% of new businesses fail when they try to change some aspects of their products/services to meet customer demand or change the target audience.
- At the bottom of the list, 5% of start-ups fail due to burnout or lack of passion.
There is a reason why lack of passion and burnout is at the bottom of the list. 92% of small businesses do not regret starting a new business. Having more purpose and passion is natural to those who want to start a business.
Effect of Covid-19 On Business Failure Rate
The World Health Organization officially declared Covid-19 as a pandemic on March 11, 2020. What’s noteworthy is that people who started a business during the start of this crisis. They were able to sustain better than those who started a year before.
- About 21.6% of businesses that opened in 2019 failed to continue in 2020 due to the pandemic.
- A staggering 22% of SMBs closed down between February and April 2020.
- This recorded the largest drop of 3.3 million active business owners in such a short time.
- 21% of U.S. businesses went through mandatory closure due to health authorities or government orders.
- This means nearly one-third of businesses remained non-operational in that year.
- Yelp reports that in 2020, 60% of Covid-19 business closures in America were permanent.
- Only 63% of businesses stayed profitable during the pandemic in 2020.
- In 2020, international tourist arrivals dropped globally by 73% and 40% of tourism and travel businesses faced a risk of complete shutdown.
- A report revealed that 10% of U.S. restaurant businesses closed permanently because of the pandemic.
- Food trucks suffered the most as 22.5% of them went out of business.
- While the largest food segment had the lowest failure rate. the quick-service restaurant failure rate was a mere 9.8%.
- Gym and recreational businesses suffered a lot in the pandemic.
- The American fitness industry lost $29.3 billion in revenue between March 2022 and June 2021.
- A July 2021 survey revealed that 22% of U.S. gyms & fitness studios had shut their doors permanently after the beginning of the pandemic.
Business Failure Rates By Industry
BLS (U.S. Bureau of Labor Stats) data reveals that 20% of small firms fail to survive even a year. The data applies to all American small businesses that have employees and is fairly consistent year to year. So we can say that economic factors have less impact on the number of businesses that fail every year.
However, business failure statistics data from SBA reveals that failure rate varies by industry. The following stats obtained from the analysis of the U.S. BLS shows a clear picture of business failure rate by industry.
Industries with the Highest Failure Rate
The top spot in terms of the highest business failure rate goes to the mining, quarrying, and oil/gas extraction industry. You should reconsider your plan in this industry because the business failure statistics reveal that,
- Businesses in mining, quarrying, and fuel extraction have the highest failure rate of 25.6% in the 1st year.
- The same industry also leads when it comes to failure rate after 5 years (58.5%) and after 10 years (74.8%).
- In the second place, waste and administrative services have a failure rate of 20.9% in the first year…..which is…
- Just a fraction more than the information industry (20.8%) in third place.
- The information sector also ranks 2nd in terms of most businesses failing after 5 years (51.7%) and after 10 years (73.3%).
- At the fourth position, 18.9% of businesses related to Arts, entertainment, and recreation fail in their 1st year.
Industries with the Lowest Failure Rate
The industries with the best survival rates are (Agriculture, forestry, fishing, hunting) and (real estate and leasing). The following stats show industries with the lowest business failure rates.
- At 11.6% real estate & leasing businesses have the lowest failure rate in the first year.
- It also ranks second for the lowest number of businesses that fail after five years 35.1%) and 10 years (59.8%).
- After this – Agriculture, forestry, fishing, and hunting businesses have the lowest failure rate of 12.3%…Interestingly..,
- This industry beats the estate and leasing businesses for the lowest failure rate after five years (30%) and 10 years (48.1%).
- In third place, only 12.4% of businesses related to retail trade fail in the first year.
- And fourth, 14.1% of health care and social assistance firms within a year.
- Construction industries have a failure rate of 17.5% in their first year which increases to 47.5% after five years and 70.5% after 10 years.
- 17.1% of businesses related to construction fail within a year and 41.1% close down in their first year.
- While 16.2% of warehousing and transportation firms fail within a year.
Steps to Succeed in Initial Years of Business
Since low cash and insufficient market research are the top reasons behind business failure, you must make sure you don’t become a victim of these. You need thorough market research and a financial plan to launch a successful business. Here’s how to kick-start a business in 2022.
Set Your Goals – Know your current position and set the goals for where you want to be within a particular period. Note down how much you want to invest and how much profit you would generate. This way you’ll keep your progress in check and avoid wandering.
Market Research – A thorough market research of your product is very crucial. Know customers’ desires, what makes them instantly tick, their earnings, and how much they are willing to spend. A new product that ticks all-important marks instantly stands out among the rest.
Control Your Expenses – Think twice before writing checks, otherwise, you’ll end up spending more on unnecessary things. Know the right time to spend and cut costs whenever possible.
Find Your Customers – Utilise every opportunity to market yourself. People whom you know might very well be your first customers. Reach out to everyone on your network and try to build connections.
Build a Good Team – Note down the most useful rules in your business and fill them with the right individuals. For instance, leadership roles, managers, and effective salespeople are key positions.
Frequently Asked Questions
1. What is the primary reason that so many new businesses fail?
The most common reasons why businesses fail are lack of funds, not enough demand, and lack of market research.
2. How many businesses fail in the first year?
Approx 20% (19.84%) of businesses close down in the first year. This number stays fairly consistent.
3. What industry has the highest failure rate?
Businesses related to mining, quarrying, and extraction have the highest failure rate with 25% closing down in the first year itself.
4. How many businesses permanently closed in 2020?
60% of businesses permanently closed their doors due to the pandemic in 2020.
5. Which businesses have the highest chances of survival?
Estate and leasing have the highest success rate with only 11.6% of businesses closing in the first year. Agriculture, forestry, fishing, and hunting businesses have the most chances of survival.
This business failure statistics explains how every start-up has the risk of failure and many factors contribute to it. Some of the major ones are running out of cash, low demand, and a competitive market. People have changed their preferences and buying habits because of the pandemic. A major one is increasing online purchases.
As an aspiring entrepreneur, you should take all things into account to put your best foot forward.