How Many Small Businesses Fail?

A shocking number of small businesses fail during the first year. This is often due to problems maintaining cash flow and developing an income base. Many entrepreneurs start with a minimal amount of capital and assume that they will make enough in a few months to be in the red. Unfortunately, it can take years until some businesses are financially successful.

How Many Small Businesses Fail in the First Year?

Luckily, your statistical odds look fairly good in the first year of operation. Only about 20 percent of new small businesses fail in the first year. As time goes on, your odds drop. Only about half of businesses still exist after five years have passed. Only one out of three will make it to the 10-year mark. The good news? These statistics hold true during recessions and expansions. A good, well-run business seems just as likely to stay afloat in a bad economy as it does in a good economy.

Another piece of good news is in store if you may it past the one-year mark. With each added year of operation, your chances of failing drop. In addition, some of the business failures are not from the business actually failing. Part of that number includes owners who closed shop because of a medical illness, retirement or because of a highly paid job offer.

What Causes a Business to Fail?

Excluding family emergencies, medical illnesses and other non-business-related failures, there is one main reason that companies fail. It is generally because of entrepreneur overconfidence. New businesses are often under-capitalized when they set up shop. This means that they lack the funds necessary to pay for the business as they develop a clientele. An over-confident entrepreneur expects to have a self-supporting business sooner than they actually can. Before long, they run out of capital and the business goes under.

Bloomberg actually places the business failure rate much higher than the previous statistics. They stated that 80 percent of entrepreneurs fail within the first 18 months of running the business. In a way, this number may actually be a boon for entrepreneurs: if you are going to fail, fail fast and move on. Failure is actually a part of capitalism and a way the markets determine the best producers. On a personal level, failing quickly gives you an immediate way to learn from your mistakes and begin moving on. It might be a painful process, but it is just one step toward ultimately running your own business.

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