What Percentage of Small Businesses Fail?

Small businesses are central to the economy. From 1995 to 2021, small businesses created 17.3 million new jobs, contributing to 62.7% of job creation compared to large businesses which created 10.3 million jobs during the same period. According to data from the U.S. Small Business Administration:

• There are 33,185,550 small businesses in the U.S., making up 99.9% of all businesses^[1]
• 99.7% of businesses with paid employees are small businesses^[1]
• 46.4% of private sector employees work at a small business^[1]
• Small businesses are 97.3% of exporters and comprise 32.6% of known export value^[1]
• Small businesses contribute to 43.5% of the U.S. GDP^[1]
• Small businesses comprise 39.4% of private sector payroll^[1]

There’s no argument that small businesses are making a big impact – but what causes some to fail? We pulled together the latest research and statistics to find out. In this article we cover:

• Business failure rates
• Industries with the highest chance of success
• Business survival rates by state
• Reasons businesses fail

Small business failure rates

Running a business is no easy feat. In fact, 1 in 5 businesses won’t make it past their first year. According to data from the U.S. Bureau of Labor Statistics:

• 20.8% of companies fail in their first year (March 2021-March 2022)^[2]
• 27.6% fail by their 2nd year (March 2020-March 2022)^[2]
• 48.4% fail by their 5th year (March 2017-March 2022)^[2]
• 65.1% fail by their 10th year (March 2012-March 2022)^[2]

And if you’re wondering if the COVID-19 pandemic or the aftermath of the 2008 Financial Crisis had anything to do with this, the data shows that these numbers are relatively consistent over time:

• 20.6% of businesses failed their first year (2011-2012)^[2]
• 31.4% failed after two years (2010-2012)^[2]
• 53.6% failed after five years (2007-2012)^[2]
• 65.8% failed after ten years (2002-2012)^[2]

What industry has the highest chance of success?

If you’re looking to build a business that’s more likely to stay afloat, a few industries have higher survival rates than others. According to the most recent data from the U.S. Bureau of Labor Statistics, the agriculture, forestry, fishing, and hunting industry has the highest 5-year survival rate at a whopping 70.4%^[3]. Real estate, rental, and leasing are in second place at 65.2%^[3]. Retail trade comes in third with a 5-year survival rate of 62.2%^[3]. So, if you want to start a business with a higher chance of survival, renting and selling property, fishing, or opening a retail store are a few options.

The field with the lowest success rate is mining, quarrying, and oil and gas extraction, which has a 5-year survival rate of 48%^[3]. The information industry also scores low at 48.2%^[3], and the professional, scientific, and technical services industry has a 52.2% 5-year survival rate^[3].

However, you may also want to consider the growth rate of specific industries. The U.S. Bureau of Labor Statistics found that from 2021 to 2031, jobs in math are expected to increase by 28.7%^[4], the highest out of all occupations. Computer and information technology, as well as personal care and service, are also likely to expand, with projected growths of 14.6% and 14.1%, respectively^[4]

On the other hand, office and administrative support, sales, and production are all expected to shrink by 2031^[4], making them industries you may want to avoid.

Restaurant failure rates

There are a lot of rumors out there about the limited prospects of starting a business in the food industry. While it's certainly not an easy field, restaurant survival rates are more promising than expected:

• 86.4% of restaurants survive one year^[3]
• 80.1% survive two years^[3]
• 60.4% survive five years^[3]
• 38% survive ten years^[3]

These rates are higher than the national average! So if you want to start a restaurant, prepare well, but know you're not doomed^[9].

Business survival rates by state

While you should consider many factors when choosing a location to start your business, state-by-state survival rates reveal some interesting trends.

When comparing 5-year survival rates from 2017 to 2022, we found Oregon to have the highest survival rate at 58.5%, while Missouri had the lowest at 39.5%^[5].

Reasons businesses fail

In a study of 111 failed startups from 2018 to 2021, C.B. Insights found that the most prominent reason startups fail is because they run out of cash, with this happening to 38% of startups^[6]. Other significant reasons include a lack of market need (35%) and other competitors taking over (20%)^[6]. Some additional findings from the study include:

• 19% had a flawed business model
• 18% dealt with regulatory or legal issues
• 15% struggled with pricing and costs
• 14% didn't have the correct team
• 10% mistimed the product
• 8% had a bad product

While some of these problems are more difficult to fix than others, you can take many preventative measures to address these pitfalls before they occur, such as investing in audit and ERP software to mitigate legal and pricing issues.

The importance of capital

As seen above, failing to generate adequate capital is the number one reason startups fail. Yet many businesses still struggle to generate funding. The National Small Business Association found that:

• 20% of companies say that a lack of money is one of the biggest threats to their business^[7]
• 37% of small businesses say that they have not been able to get enough financing^[7]
• 45% of companies say that a lack of capital has stopped them from being able to grow their business^[7]

So what type of financing should you go after? From getting a business loan to acquiring venture capital, there are numerous sources of funding out there. However, according to the 2023 report, small businesses use three methods more than others:

• 34% use credit cards^[7]
• 31% use business earnings^[7]
• 27% use no financing^[7]

Product-market fit

Another critical driver of business success is product-market fit. If not enough people want to use your product, your business will fail. Some recommended steps you can take to determine your product-market fit include:

1. Researching your audience - analyze data from specific panel research studies. What does your target audience think of your product? Why are they using it?
2. Understanding the market as a whole - scope out factors such as competition, age of the market, and where you fit into the market. Will you add value and a good that people cannot get elsewhere?
3. Iterating and improving - as the adage goes, "If at first you don't succeed, try, try again." You're unlikely to make the perfect product on the first try. And even if you do, markets and audiences change over time, so you must continually adapt your offerings to succeed.

These three steps won't guarantee you'll meet a market need, but they're a good start.

Other reasons businesses fail

Factors such as lack of cash flow and market fit are perpetual hurdles for small businesses to overcome. However, recent nationwide issues have compounded these problems, causing small business owners even more difficulties.

• 51% of small businesses say that inflation is one of their most significant challenges^[7]
• 45% say economic uncertainty is a considerable challenge^[7]
• 71% of companies say inflation has caused products to cost more^[7]
• 58% of small businesses have lost net profit due to inflation^[7]
• 55% of small business owners expect a recession during 2023^[7]
• 37% of companies say that hiring new employees has been very difficult over the past year^[7]

The Bottom Line

There's consistent data that shows that about 20% of small businesses fail within their first year. However, some industries such as agriculture, real estate, retail, and even food service, as well as businesses in states like Oregon and South Dakota tend to survive at higher-than-average rates.

Running a small business isn't for the faint of heart, but being mindful of cash flow and market fit are good ways to point you in the right direction. You've got this!