The 4 Most Common Reasons a Small Business Fails (2024)

Running a business is not for the faint of heart; entrepreneurship is inherently risky. Successful business owners must possess the ability to mitigate company-specific risks while simultaneously bringing a product or service to market at a price point that meets consumer demand levels.

While there are a number of small businesses in a broad range of industries that perform well and are continuously profitable, about 33% of small businesses fail in the first two years, around 50% go belly up after five years, and roughly 33% make it to 10 years or longer, according to the Small Business Administration (SBA).

To safeguard a new or established business, it is necessary to understand what can lead to business failure and how each obstacle can be managed or avoided altogether. 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.

Key Takeaways

  • Running out of money is a small business’s biggest risk. Owners often know what funds are needed day to day but are unclear as to how much revenue is being generated, and the disconnect can be disastrous.
  • Inexperience managing a business—or an unwillingness to delegate—can negatively impact small businesses, as can a poorly visualized business plan, which can lead to ongoing problems once the firm is operational.
  • Poorly planned or executed marketing campaigns, or a lack of adequate marketing and publicity, are among the other issues that drag down small businesses.

1. Financing Hurdles

A primary reason why small businesses fail is a lack of funding or working capital. In most instances a business owner is intimately aware of how much money is needed to keep operations running on a day-to-day basis, including funding payroll; paying fixed and varied overhead expenses, such as rent and utilities; and ensuring that outside vendors are paid on time; however, owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a small business out of operation.

A second reason is business owners who miss the mark on pricing products and services. To beat out the competition in highly saturated industries, companies may price a product or service far lower than similar offerings, with the intent to entice new customers.

While the strategy is successful in some cases, businesses that end up closing their doors are those that keep the price of a product or service too low for too long. When the costs of production, marketing, and delivery outweigh the revenue generated from new sales, small businesses have little choice but to close down.

The Small Business Administration (SBA) helps small businesses find loans for different needs, offering a variety of loan programs.

Small companies in the startup phase can face challenges in terms of obtaining financing in order to bring a new product to market, fund an expansion, or pay for ongoing marketing costs. While angel investors, venture capitalists, and conventional bank loans are among the funding sources available to small businesses, not every company has the revenue stream or growth trajectory needed to secure major financing from them. Without an influx of funding for large projects or ongoing working capital needs, small businesses are forced to close their doors.

To help a small business manage common financing hurdles, business owners should first establish a realistic budget for company operations and be willing to provide some capital from their own coffers during the startup or expansion phase.

It is imperative to research and secure financing options from multiple outlets before the funding is actually necessary. When the time comes to obtain funding, business owners should already have a variety of sources they can tap for capital.

2. Inadequate Management

Another common reason small businesses fail is a lack of business acumen on the part of the management team or business owner. In some instances, a business owner is the only senior-level person within a company, especially when a business is in its first year or two of operation.

While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don't have the time to successfully oversee other employees. Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it be finances, hiring, or marketing.

Most small businesses start out with the entrepreneur's savings or money from friends and family and then look for outside financing to grow.

Smart business owners outsource the activities they do not perform well or have little time to successfully carry through. A strong management team is one of the first additions a small business needs to continue operations well into the future. It is important for business owners to feel comfortable with the level of understanding each manager has regarding the business’ operations, current and future employees, and products or services.

3. Ineffective Business Planning

Small businesses often overlook the importance of effective business planning prior to opening their doors. A sound business plan should include, at a minimum:

  • A clear description of the business
  • Current and future employee and management needs
  • Opportunities and threats within the broader market
  • Capital needs, including projected cash flow and various budgets
  • Marketing initiatives
  • Competitor analysis

Business owners who fail to address the needs of the business through a well-laid-out plan before operations begin are setting up their companies for serious challenges. Similarly, a business that does not regularly review an initial business plan—or one that is not prepared to adapt to changes in the market or industry—meets potentially insurmountable obstacles throughout the course of its lifetime.

To avoid pitfalls associated with business plans, entrepreneurs should have a solid understanding of their industry and competition before starting a company. A company’s specific business model and infrastructure should be established long before products or services are offered to customers, and potential revenue streams should be realistically projected well in advance. Creating and maintaining a business plan is key to running a successful company for the long term.

4. Marketing Mishaps

Business owners often fail to prepare for the marketing needs of a company in terms of capital required, prospect reach, and accurate conversion-ratio projections. When companies underestimate the total cost of early marketing campaigns, it can be difficult to secure financing or redirect capital from other business departments to make up for the shortfall.

Getting your company's name in front of your customers is a crucial aspect of any early-stage business. It is necessary for companies to ensure that they have established realistic budgets for current and future marketing needs.

Similarly, having realistic projections in terms of target audience reach and sales conversion ratios is critical to marketing campaign success. Businesses that do not understand these aspects of sound marketing strategies are more likely to fail than companies that take the time to create and implement cost-effective, successful campaigns.

What Is the Small Business Failure Rate?

Approximately 33% of small businesses fail in the first two years, 50% fail within five years, and 33% make it to 10 years and further.

What Are Some Signs That Your Business Is Failing?

Signs that a business is failing include small levels or lack of cash, inability to pay back loans on time, inability to pay suppliers on time, customers that pay late, loss of clientele, and an unclear business strategy.

The 4 Most Common Reasons a Small Business Fails (2024)


The 4 Most Common Reasons a Small Business Fails? ›

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.

What are 4 causes of business failure? ›

Five Common Causes of Business Failure
  • Poor cash flow management. ...
  • Losing control of the finances. ...
  • Bad planning and a lack of strategy. ...
  • Weak leadership. ...
  • Overdependence on a few big customers.

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.

Why 90% of small 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.

Which of the following is the most common reason a small business fails? ›

1. Poor Financial Management. Without solid financial planning and effective cash flow management, even the most promising business will fail. Small businesses often have to deal with irregular income streams yet must manage constant outflows, which requires careful balancing to maintain operational health.

What is the most common business to fail? ›

What industry has the highest failure rate? Transportation, construction, and warehousing have the worst failure rates with 30%-40% of these businesses surviving five years, while approximately 50% of all businesses make it to their fifth year.

What is the biggest mistake small businesses make? ›

Poor Financial Management

Inadequate financial planning, budgeting, and tracking can lead to cash flow issues that have the potential to doom businesses. One of the biggest mistakes that aspiring entrepreneurs make is not having enough money to get the business off the ground.

Why do 80% of businesses fail? ›

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.

How long do most businesses last? ›

New businesses that exit within...
1 year21.4%
2 years31.4%
3 years38.4%
4 years44.0%
5 years48.9%

What industry has the highest failure rate? ›

Industries with the worst survival rates

The transportation and warehousing industry has the highest percentage of businesses that fail in the first year (24.8%). This industry includes roles in air, rail, water, truck and pipeline transportation, among others.

Why do 70% of businesses fail? ›

This lack of adaptability, innovation and marketing will almost always result in failure. Let's face it, business owners can easily become complaisant and are often married to their original idea that they founded their business on. People don't like change, especially seasoned entrepreneurs.

What are the 7 reasons why small business fail? ›

7 Reasons Why Small Businesses Fail
  • Lack of Proper Planning. ...
  • Inadequate Financial Management. ...
  • Insufficient Market Demand. ...
  • Weak Marketing and Branding Strategies. ...
  • Ineffective Leadership and Management. ...
  • Competitive Landscape and Industry Changes. ...
  • Lack of Persistence and Resilience.
Oct 5, 2023

Why do small businesses succeed? ›

A key component in why a small business will succeed is its leadership and their vision. A well-defined vision is a skill or gift that every company leader needs in order to cross the finish line. It will be the major force behind an entrepreneur's success and will serve as a compass in tough times.

What to do when your small business is failing? ›

How to save a failing business in 10 steps
  1. Adjust your mindset.
  2. Set goals.
  3. Learn why customers are leaving.
  4. Understand your target audience.
  5. Perform a SWOT analysis.
  6. Take a hard look at your finances.
  7. Get funding if you need it.
  8. Pivot and change direction.
Mar 21, 2023

What are the three main types of failures? ›

Although an infinite number of things can go wrong in organizations, mistakes fall into three broad categories: preventable, complexity-related, and intelligent.
  • Preventable failures in predictable operations. ...
  • Unavoidable failures in complex systems. ...
  • Intelligent failures at the frontier.

What is business failure and causes? ›

A business fails when it can no longer make a profit or generate enough revenue to cover its expenses. Business failure happens when a company ceases to operate or starts losing a lot of money. There's often a high rate of business failures among startups due to lack of managerial experience and intense competition.

How do you recover a failing business? ›

How do you revive a struggling business?
  1. Adjust your mindset.
  2. Set goals.
  3. Learn why customers are leaving.
  4. Understand your target audience.
  5. Perform a SWOT analysis.
  6. Take a hard look at your finances.
  7. Get funding if you need it.
  8. Pivot and change direction.
Mar 21, 2023

Top Articles
Latest Posts
Article information

Author: Jerrold Considine

Last Updated:

Views: 5752

Rating: 4.8 / 5 (78 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Jerrold Considine

Birthday: 1993-11-03

Address: Suite 447 3463 Marybelle Circles, New Marlin, AL 20765

Phone: +5816749283868

Job: Sales Executive

Hobby: Air sports, Sand art, Electronics, LARPing, Baseball, Book restoration, Puzzles

Introduction: My name is Jerrold Considine, I am a combative, cheerful, encouraging, happy, enthusiastic, funny, kind person who loves writing and wants to share my knowledge and understanding with you.