January 31, 2023

Why Do Small Businesses Fail? The Most Common Reasons

The failure rate for small businesses is alarmingly high. According to the Small Business Administration, about 50% of all new businesses will go out of business within the first five years. If you're thinking about starting your own small business, it's important to understand why some owners fail and others succeed. Why do small businesses fail? Here are some common reasons:

The Main Reasons Why Small Businesses Fail

There are many reasons why small businesses fail, but the primary one is a lack of planning. They don’t understand how to create an effective business plan or strategy that will set them up for success. They don’t do adequate market research either to understand if their plan is viable or not in their area. Here are some of the top reasons why small businesses fail.

Poor Business Planning

Poor business planning is one of the primary reasons when you want to know, “why do most small businesses fail?” In fact, around 80 percent of small businesses will fail for this reason alone. A good business plan helps you make sure your business is able to generate enough revenue to cover its expenses and turn a profit. It should include a mission statement and goals, market analysis, financial projections, and marketing plans. Your plan will also help you determine how much money you'll need to start your company—and how much time it will take before that investment comes back in profits.

Unsustainable Growth

It can sometimes be difficult to keep up with the pace of growth, especially if you're a one-person show. But you need to be thoughtful about how quickly you grow your business and make sure that it's sustainable. If you're not careful, it's easy to fall into the trap of thinking that "more is better" and overextending yourself in an attempt at making more money faster.

No Marketing Plan

Not having a marketing plan is one of the reasons small businesses fail. A good marketing plan also describes the resources you'll need both in people and money in order to achieve your goals. A well-thought-out marketing strategy can mean the difference between profitability and failure for a small business owner.

Hiring the Wrong People

Hiring the wrong people can be a business's undoing. It's vital to hire for attitude and train for skills, so it's important to look beyond the resume and get a feel for how your potential employees will fit into your company culture. You want employees who are willing to learn, honest and ethical, willing to work hard, and take initiative.

Not Having Business Funding

What causes small businesses to fail? They don’t have enough money. In order to succeed and grow, you need funding to pay for things like marketing campaigns, payroll, taxes, and rent. If you don't have enough capital to cover these expenses, then it's going to be very difficult for you to make any profit and you will eventually need to shut down. In addition to using cash, you can use a small business loan checklist to see what you would need to qualify for funding through loans.

Financial Mismanagement

Another common reason to look at when you’re wondering why small businesses fail, is financial mismanagement. It can happen at any time, but it's more likely to occur when a small business is struggling with cash flow or experiencing unforeseen expenses. Financial mismanagement usually happens because owners don't know how much money they need on hand, or they have no idea how much cash flow they should expect each month—and this lack of knowledge leads them into trouble.

Failure to Adapt

Adapting to change is important, and it's a skill that many small business owners struggle with. You get used to doing things a certain way and you fail to make changes when they are needed the most. Want to know why small businesses fail? Look at whether you’re willing to adapt or not.

Failure to Clearly Understand Your Market

Understanding your market is one of the biggest keys to success as a small business. If you don't know who your customers are and what they want, how can you expect to sell them anything? The same goes for competitors: if you don't understand what they're doing and how well it's working for them, then how can you hope to beat them? Take the time to understand all the nuances in your industry.

The Failure Rate for Small Businesses

Did you know that in the first year of business, only 22% survive after that? Additionally, about half of all new businesses fail within five years. The reasons are many, ranging from poor management to lack of funding or being in an industry with a high failure rate. Too many businesses don’t consider their profits first and create an unsustainable business model.

Industries with The Lowest Survival Rates

While some businesses are more likely to succeed than others, there are industries that are known for their low survival rates. Mining, oil and gas extraction, and quarrying are the industries that are least likely to survive their first year in business. If you want to avoid failure, make sure that you have enough capital to at least get your business off the ground.

Signs That Your Business Is Failing

Unfortunately, it's easy to overlook the signs of your business failing. In fact, most businesses fail because they do not realize that they are failing until it is too late. If you aren’t meeting your sales goals, you are probably going to be on a path to failure. Another sign your business is failing is if you can’t pay your bills on time. When you struggle to pay for payroll and taxes, you may be failing in business as well.

Tips on How To Succeed In Your First Year of Business

Surviving the first year of business is possible. Here are some tips to help you get through it in one piece:

  • Know your vision.

  • Define your target market and location.

  • Create a plan that's flexible enough to accommodate change, but still has concrete goals in place.

  • Use the right tools to help you grow and succeed.

  • Hire the right help.

Consider Financial Assistance & Loan Options for Help

If your business is on the brink of failure, you may be tempted to simply give up and cut your losses. This can be a difficult decision for many small business owners, but it's worth noting that there are several options available for financial assistance in times like these. You may just need a quick boost while you wait for contracts to get paid so you can pay the bills. There are loans to help with this:

Small Business Loans

Small business loans are a type of financing that helps small businesses and other enterprises to grow their operations. You can use these loans for almost any business expense including salaries, inventory, and even leasing space. Make sure you read through the small business loan terms to ensure you know if there are any exclusions.

Revenue Advance

Revenue advance loans are based on the expected future cash flow of a business. The business owner borrows a set amount of money for the loan by using their past and projected revenue as a guide. The business owner agrees to pay back a certain percentage of future sales as the money comes in.

Installment loans

When you want to be able to pay back a set dollar amount each month, an installment loan might be a better option. You can use these loans in various ways to improve cash flow and profitability to help your business survive and thrive.


Starting a successful small business that makes it past year 1 or year 5 is entirely possible. If you need it, don’t be afraid to reach out for help from Fora Financial to get small business lending that can help you be successful in your endeavors.