What Percentage Of Small Businesses Fail In The First Year

What Percentage of Small Businesses Fail in the First Year?

Published on: December 6, 2023
Last Updated: December 6, 2023

What Percentage of Small Businesses Fail in the First Year?

Published on: December 6, 2023
Last Updated: December 6, 2023

Starting a new business can be scary.

However, most people are focused on the challenges, not the possibility of failing. 

If you want to succeed, you might find it interesting to know what percentage of small businesses fail in the first year, why, and how to avoid being one of those statistics. 

Key Statistics

  • 21.9% of businesses fail in the first year
  • Businesses which survive three years have a 90% survival rate
  • 97% of US businesses are small businesses
  • 26.4% of businesses in the information industry fail in the first year
  • Approximately 14.5% of businesses fail in the first year due to lack of preparation

What Percentage of Small Businesses Fail in the First Year?

Businesses Fail 615

1. 21.9% Of Businesses Fail In The First Year

The good news is that, when starting a business, the failure rates in the first year are surprisingly low.

This is probably because businesses are prepared to make a loss in the first year and, therefore, aren’t ready to throw in the towel. 

According to statistics, just 21.9% of new businesses fail in their first year.

The second year can be more challenging as 31.8% of businesses fail by the end of year two.

Of those that make it to year three, 39.7% will fail. 

By year five, you have a fifty/fifty chance of survival.

The business failure rate is 50%. By year ten, the failure rate is as high as 65.7%.

However, it’s not all doom and gloom. Businesses that survive tend to have a higher chance of success. 

For example, 31.8% of businesses will fail in their second year, but the survival rate is 68.2%. 

Of course, by year ten, businesses have a survival rate of just 34.4%.

At this stage, it is often a failure to keep up with industry changes or a reduced level of interest in the product, which causes the business’s downfall. 

(Zippia)

2. Businesses Which Survive Three Years Have A 90% Survival Rate

If you have managed to survive three years then your business has a 90% chance of surviving each subsequent year.

This is separate from the failure rates and is effectively a reward for surviving the first three years. 

Of course, having a high survival rate doesn’t mean that your business will survive.

There are no guarantees and 65.7% of businesses will have failed by year ten. 

The survival rate is partially controlled by the industry you’re in, your location, and the level of competition. 

According to studies, the District of Columbia has the highest failure rate in the US.

Approximately 28% of businesses started in this area fail in their first year.

In contrast, just 13.2% fail in California. That’s the area with the highest success rate. 

(Zippia)

3. 97% Of US Businesses Are Small Businesses

It may surprise you to learn there are approximately 28.8 million small businesses in the US and the number is steadily growing. 

Every year, the number of businesses which continue to succeed outpaces those that fail.

Ensuring that the number of businesses in the US rises.

But, the most surprising fact is that 97% of all US businesses are small businesses.

This trend isn’t unique to the US. It’s roughly the same percentage across the globe. 

(Zippia)

4. 26.4% Of Businesses In The Information Industry Fail In The First Year

Businesses Fail 622

As mentioned, the industry you operate in makes a difference to your success rate.

According to the latest research, the information industry has the highest average failure rate. 

Statistics show that 26.4% of businesses in this field will fail in their first year.

The information industry includes motion picture, sound, publishing, and telecommunications

There are a lot of big, well-established, companies in these fields.

That’s a significant cause of failures in new businesses, it’s difficult to get established. 

Other industries which have high failure rates include professional, scientific, and technical services.

23.4% of startups in this industry fail in the first year.

A close third, with a 23.1% failure rate, is administrative and waste services. 

However, after five years, the businesses most likely to fail are retail-based. 

(lending tree)

5. Approximately 14.5% Of Businesses Fail In The First Year Due To Lack Of Preparation

Failure rates are often exaggerated and used to discourage people from starting a business.

It can be by investors who are getting cold feet. 

It can also be a clever manipulation by already successful companies, trying to minimize any competition. 

However, the truth is nearly 22% of businesses fail in their first year and 50% will fail within five years.

That means, approximately 7.5% of the startups will fail each subsequent year. 

If 7.5% is a standard failure rate per year but the first year is 22%, then the difference is likely to be due to a lack of planning. 

That means, 14.5% of businesses fail in the first year simply due to a lack of preparation. 

The good news is that you can press pause and boost your planning, helping you to be one of the success stories. 

(entrepreneur.com)

Top Reasons For Failure

  • 69.6% of retail businesses fail within five years
  • 200,000 more businesses than usual closed in 2020
  • Inflation rates quadrupled between 2020 and 2022
  • The average business grows between 10% and 20% a year
  • 39% of customers won’t use a business which doesn’t provide a personalized experience

1. 69.6% Of Retail Businesses Fail Within Five Years

Businesses Fail 617

One of the biggest reasons for failing is simply the industry you’re in.

As mentioned, in the first year businesses in the information industry are most likely to fail. 

However, by year five, a staggering 69.6% of retail businesses will have failed.

That’s higher than any other industry. 

The failure rate is partly due to the amount of competition.

It’s also due to how difficult it is to obtain and maintain customer loyalty. There is always someone prepared to do it differently.

The latest fads tend to appeal to retail customers.

It’s unlikely that you can choose which industry to trade in, you’ll be driven by your passions and business ideas.  

However, knowing this will help you prepare for the potential of failure, effectively reducing the chances of it happening. 

(Lendingtree)

2. 200,000 More Businesses Than Usual Closed In 2020

A report by Business Insider found that, on top of the average 600,000 businesses in the US that close every year, an additional 200,000 closed in 2020.

The majority of these businesses were a direct result of the global pandemic.

Of course, there were a few who simply took the opportunity to get out.

This statistic reflects that not all failures are within your control.

There are always unforeseen events, such as natural disasters and pandemics.

Any of these could shut your business down and there may be little you can do about it. 

It’s worth noting that this number wasn’t as high as expected, primarily because the government provided a substantial amount of aid. 

The personal services industry was hardest hit, that’s places like hair and nail salons.

Of course, any business can be affected by natural disasters and other events beyond their control.

It’s difficult to plan for these events. 

(Business Insider)

3. Inflation Rates Quadrupled Between 2020 And 2022

Inflation 620

New businesses are usually small.

If they’ve done their homework they will have raised enough cash to last them through two or even three years, with the hope that the business will start making a profit during that period. 

However, no matter how much homework you do, there are several things that can cause a serious issue. The most obvious of these is additional costs.

For many businesses, it’s higher than expected returns or manufacturing delays.

However, one factor which affects a large number of businesses, regardless of industry, is inflation. 

High levels of inflation can seriously damage your costs, creating financial strain on the business and potentially eliminating any surplus cash you have.

For a new business, this can lead to failure. 

That’s why 23% more businesses as normal failed during 2020-2022, when inflation quadrupled.

(Lendingtree)

4. The Average Business Grows Between 10% And 20% A Year

According to the latest figures the average new business will grow at between 10% and 25% every year.

Naturally, the exact rate of growth depends on a  variety of factors, such as industry, the economy, and even how aggressively you try to expand. 

This is where the problem exists for many new businesses.

It’s common to have financial backers.

However, they may be experienced in another field and push you to grow faster than you, or the industry, is comfortable with. 

Rapid growth doesn’t just strain the business finances.

It also places strain on the management team. This can lead to slow or poor decision-making.

Naturally, poor decision-making can have a serious impact on the business.

This and the strain on the cash flow by trying to grow too fast can cause the business to fail. 

New business owners need to be aware of this.  

(banks.com)

5. 39% Of Customers Won’t Use A Business Which Doesn’t Provide A Personalized Experience

This statistic is directly relevant to business survival.

While well-established, larger businesses can handle some customers snubbing them, start-ups can’t.

Every customer counts. 

Unfortunately, most new businesses are focused on creating their product and boosting brand awareness to attract customers.

However, if you don’t pay attention to what the customer wants, specifically personalization, you’re only likely to get one purchase from them.

That’s not going to help your cash flow or your chances of surviving more than a year or two. 

The added advantage of personalization is that it helps your business stand out, customers will like that. 

(Hubspot)

Preventing Business Failure

Businesses Fail 618

There are several things you can do to help prevent business failure.

Create A Good Business Plan

Rush your business plan and you’ll find there are plenty of pitfalls which will trap your business.

These are pitfalls which could have been avoided if you took the time to make a proper business plan. 

Your business plan should include who your intended customer base is, how your product will appeal/help them, what level of profit you can expect to make, and a detailed analysis of all your costs. 

A good business plan will let you know what issues you may face and help you be prepared for them.

It can also help you secure credit. 

Get The Best Credit Possible

Many small b businesses are started with personal funding.

However, if you’re looking to borrow money to get the business off the ground then you’ll need a good credit record. 

If you don’t have one then you may struggle with finance and that can cause your business to fail before you even get off the ground. 

Work on your credit now, reduce any borrowings as much as possible and don’t apply for any more credit.

You should also make sure all bills are paid automatically, ensuring payments are never missed. 

Check For Free Help

It’s worth doing a little research into what resources can be used to help you get your business started.

You’ll be surprised at how much help is available. 

For example, the Small Business Administration has an array of tools available to help you get started.

These are free and include counseling, financial and business plans, and even marketing ideas and connections.

Use the resources available, anything and everything can help prevent you from becoming a business failure statistic. 

Marketing & Personalization Need To Be A Priority

Businesses Fail 623

Finally, you can have the best product in the world but, if no one knows about it, your business will still be doomed to fail. 

The easiest way to build brand awareness and a potential customer base is to start using social media.

Tell everyone about what you’re doing and get them to share it with their friends. 

You should also network with as many people in the industry and in connected industries. 

Alongside building hype surrounding your business and its products, make sure you consider how to personalize your service.

As we’ve established, customers generally demand this. 

Summing Up

Understanding the percentage of small businesses failing in their first year should cause you to doubt starting your own business. 

Instead, this information should help you understand the risks, and the common causes, and take steps to ensure your business isn’t one that fails. 

The key is to do your research, plan your business, and market it like crazy. 

Mix that with a little flexibility and you can create a business which will last for 5,10, or even 30 years.

The duration is up to you.

Sources

Lending TreeEntrepreneurZippia
Business InsiderBanks

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Written by Jason Wise

Hello! I’m the editor at EarthWeb, with a particular interest in business and technology topics, including social media, privacy, and cryptocurrency. As an experienced editor and researcher, I have a passion for exploring the latest trends and innovations in these fields and sharing my insights with our readers. I also enjoy testing and reviewing products, and you’ll often find my reviews and recommendations on EarthWeb. With a focus on providing informative and engaging content, I am committed to ensuring that EarthWeb remains a leading source of news and analysis in the tech industry.