What Percentage of Businesses Fail in the First Year? (Plus Top Causes of Business Failure)
About 20 percent of small businesses with employees fail in the first year. The business failure rate varies depending on the industry. Only 15 percent of businesses in the health care and social assistance industries fail in the first year. And 25 percent of businesses in the construction and transportation industries fail in the first year, according to the Bureau of Labor Statistics.
In this article, we’ll cover:
What Percentage of Businesses Fail in the First Year?
About 20 percent of small businesses fail in their first year. This figure is for small businesses in the U.S. with employees.
This rate is fairly consistent year to year, meaning economic factors don’t greatly affect how many businesses fail. That said, the failure rate varies by industry, according to data from the Small Business Administration (SBA).
Industry with the Lowest Failure Rate
Businesses in the healthcare and social assistance industry have a failure rate of 15 percent in the first year.
This isn’t the lowest first year failure rate, but businesses in this industry tend to survive over the long term. In their second year, 25 percent fail and in their fifth year, 40 percent fail. This higher survival rate may be influenced by the fact that the healthcare and social assistance industry is projected to grow by 21 percent until 2024.
Industry with the Highest Failure Rate
The construction industry is expected to grow 13 percent but its business failure rate is a whopping 25 percent. The transportation industry suffers the same failure rate. In both industries, 35 percent fail in their second year and 60 percent fail by their fifth year.
Here are the first year business failure rates of other notable industries:
- Arts, entertainment and recreation: 11.6 percent
- Real estate, rental and leasing: 12 percent
- Food service industry (including restaurants): 15 percent
- Finance and insurance: 16.4 percent
- Professional, scientific and technical services: 19.4 percent
Source: the Bureau of Labor Statistics
People also ask:
- Why Do Businesses Fail?
- What Are the Causes of Business Failure?
- What Will the Small Business Failure Rate Be in 2020?
Why Do Businesses Fail?
The top causes of small businesses failures are:
Not Enough Demand
This is one of the top reasons small businesses fail, according to the New York Times. In fact, in one poll, 42 percent of startup founders cited lack of demand for the product or service on offer as the main reason their business failed.
It’s a simple formula: if clients don’t like your service they’ll stop paying for it. Eventually your employees will jump ship and the business will fail.
Some small businesses make the mistake of assuming they can convince clients to buy a service they don’t want. And while sometimes this happens—cell phones were seen as frivolous in the beginning—it’s much more likely it won’t. It is a much better idea to start a business focused on a product or service people already want or need.
Lack of Cash
Lack of cash is another key reason small businesses fail, says Fortune. Still, poor cash flow or not enough access to credit is often symptomatic of other problems in a business.
Bad accounting is one factor that leads to running out of money. If companies don’t keep their books properly (or at all), entrepreneurs won’t have a clue how their business is doing financially. Hiring an accountant to do the taxes isn’t enough—the founder needs to monitor the books herself to monitor cash flow.
Not having a cash reserve is also problematic. When issues arises—a client disappears, a new competitor emerges—a business will suffer if there’s no cash cushion to tide things over.
Lack of access to credit from banks and alternative lenders or other funding also hurts cash flow. This can hurt growth as there’s no money available to add inventory or hire new employees (they may even have to fire existing ones).
Owners can cause a small business to fail—especially owners who don’t like to take risks, avoid conflict with employees and vendors, suffer from perfectionism or don’t listen and are overly stubborn. The problem is compounded when their team points out these failings but owners still don’t learn from their mistakes.
Then there’s the employees. Family businesses can suffer from infighting or there can be conflict between business partners. And if the team as a whole doesn’t have high standards, excellent planning skills, laser focus and plenty of vision for the future, the business probably won’t find success.
New businesses competing against huge, established corporations with big advertising budgets and established reputations are sure to fail. This is especially the case in declining markets, such as book and music stores.
In the end, competition is fierce and if a company doesn’t have a unique product or service, it’ll be fighting for tiny slivers of the market, according to Forbes. Businesses must give value to customers by offering something different than their competitors.
Then, they need to figure out how to communicate that difference. Good marketing is key here. Entrepreneurs who can’t figure out how to tell their customers who their business is and what value it provides in a clear and compelling fashion are bound not to be successful
Even if there’s sufficient demand, if a business doesn’t price its product or service in a way that allows it to compete and turn a profit, it may not be successful. This all comes down to having a strong business model that finds ways to spend appropriately based on projected profit.
What Will the Small Business Failure Rate Be in 2020?
The small business failure rate will likely remain around 20 percent in 2020. This is the failure rate for businesses that are a year old. The failure rate will be about 30 percent in their second year, 50 percent in their fifth year and 70 percent in their tenth year.
These are the current rates and they will likely carry into 2020 as there hasn’t been a great deal of variation in the small business failure rate over the years. The state of the economy doesn’t seem to affect the business survival rate.
For example, businesses started in 1995 and 2005, years with a stronger economy, had almost the same failure rate as businesses started around 2000, when the economy took a turn for the worst. That said, businesses that survive a downturn in the economy may be negatively affected and suffer down the road, according to the SBA.
The business survival rate may fluctuate above and below 20 percent depending on the industry, though.
For example, new small construction businesses have a historical failure rate of 25 percent in the first year. But since the construction industry is expected to grow 13 percent until 2024, this factor could decrease the failure rate slightly.