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Why Small Businesses Fail and How to Not Fail in the New Year

November 15, 2023
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There are a ton of studies about how most small businesses do not make it. There are studies that show the small business failure rate. For example,  20% of new businesses do not make it past the first year. Others show 50% do not make it past 5 years, and according to the SBA, only 30% make it past 10 years.  

There is some question as to how accurate these actually are, based on a number of variables. One thing is for sure however. Many, many businesses fail, and you do not want yours to be one of them. 

Don’t Become Another Small Business Statistic in 2021small biz failures

The question isn’t really about how many businesses fail. Rather, it’s about how not to fail. The best way to do that, is to take a hard look at the reasons why businesses fail, and then figure out how to avoid the pitfalls they were not able to. 

Here are 5 of the most common reasons why small businesses fail, and how to avoid them. 

Why Small Businesses Fail: Lack of Market

You can have what may seem like the best idea ever, but if there is no market for it, it will not do you much good.  On the flip side, there may be a need or desire for your product or service, but your timing is just off.  

For example, people may love old movies. But, in this pandemic state, the timing is not right to open a theater dedicated to them. Most are avoiding crowds.  Furthermore, the disposable income isn’t there.  Post pandemic may be another story.  Movie lovers will be looking to get out. 

Incomes may still be low, but they may actually be more willing to drop money on a reduced-price ticket for an old movie than $12 or more on a ticket for a new move.  

You have to do market research, and remember, timing is everything. 

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Why Small Businesses Fail: Lack of Money

Honestly, this may actually be number one right here.  Of course, you can have all the funding you need and still fail.  Even the best of businesses go down if they do not have the cash they need. So, this is where investors, small business loans, and other more creative business funding options come into play. 

Still, don’t think that a lack of personal or business credit means you don’t have a chance.  Truly, it is possible to build business credit, and you can even fund a business at the same time.  Options from The Small Business Administration work for many.  

Not only that, but nontraditional funding products like the credit line hybrid can be a lifesaver. The ability to take on a credit partner means you can access cash even without great personal credit, and this is one of the rare products that actually helps build business credit. 

Other benefits to using this type of funding include that it is unsecured.  In other words, you do not have to have any collateral.  Next, the funding is “no-doc.”  This means you don’t have to provide any bank statements or financials.  

Not only that, but often you can get interest rates as low as 0% for the first few months, allowing you to put that savings back into your business. 

The process is pretty fast, especially with a qualified expert to walk you through it.  One other benefit is this.  With the approval for multiple credit cards, competition is created.  This makes it easier, and likely even if you handle the credit responsibly, that you can get interest rates lowered and limits raised every few months. 

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Why Small Businesses Fail: No Plan or Not Working the Plan

If you apply for funding or financing from anyone, it’s likely you have a business plan.  Most lenders and investors require one.  Of course, if you are able to self-fund, that’s a different story altogether. Still, even if you have a plan, it does you no good if you don’t follow it.  That’s where most small businesses are when it comes to this point. 

If you have a plan, work it.  Follow your marketing plan as developed per your market research. Stick to your budget.  Work the plan.

Here are the basics of a solid business plan. 

A Strong Opening 

This includes an executive summary of the business idea, a description of the business that goes into further detail, and the strategies you plan to implement for getting started. 

Market Research 

This actually includes two parts.  

Analysis of audience

What need will your business fill, and for who? How will your business fill the need? All of that information goes in this section. 

Competitive Analysis

Is there already a business working to fill this need? Is there room for more? How do you plan to compete with them? 

The Plan 

How is all of this going to play out, from start to finish. What steps are you going to take? This is more detailed than your strategies section. 

Who will own or does own the business and who will run or currently runs it from day to day. This could be as simple as stating that you are the sole owner and operator, or as complicated as laying out a complete partnership plan or board or directors’ format. It just depends on how your business works. 


This section includes current financials, projections, and a budget plan for the loan funds you are applying for.  Lenders need to see that you know how to handle the funds you get, and that you have a plan to pay them back.

Working the Plan 

Are sales down? Refer to your plan.  Struggling with cash flow?  What does the plan say?  Trust the process. Also, remember to revisit the plan occasionally even if things are going well to look for ways to improve it, or adjust it if necessary.

Not having a business plan or not using a plan you have is definitely one recipe for why small businesses fail. 

Why Small Businesses Fail: A Failure to Adapt

Another reason why businesses fail is failure to adapt. Never have we seen this more glaringly in a society than during the 2020 COVID-19 pandemic, but it is always a reality.  Failure to adapt is failure to thrive.  Whether a quick pivot to working remotely, or revamping your entire strategy, the ability to adapt has proven to be a major survival technique for small business. 

Some examples that came out of the pandemic include:

  • Small bakeries offering curbside service and deliver
  • Locally owned movie theaters offering backyard movie packages, to-go theater treats, and family party packages for those in the same household to rent and entire theater
  • Hairdressers making house calls
  • Small boutiques offering online sales that you pick up curbside

These are just a few examples. There are many more out there. 

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Why Small Businesses Fail: Not Having the Right Team in Place

Good help is hard to find, and a lack of it has caused many businesses to sink fast. It is important to hire the right people, and that takes planning.  You need to know your strengths and weaknesses first. Then, you can look for people that have strengths where you have weaknesses.  These are those that can stand in the gaps you may not be able to fill. 

This may not always be employees. You may need to outsource things like accounting or janitorial work. You also need to be diligent when hiring. Take the time to look at social media for example.  You may get a new view of who you are hiring. 

Why Do Small Businesses Fail?

A lot of the studies focus on how many businesses fail.  And it’s true, there are many reasons why small businesses fail.  However, these studies do not focus on the fact that a lot do survive.  Avoiding these common reasons why small businesses fail won’t guarantee survival, but it will certainly help.  Start the new year off planning to thrive, not fail. 

About the author 

Faith Stewart

Faith has a BBA with a major in Accounting, and a combined 20 years of experience in the fields of finance and account.

Before switching to writing, she spent 10 years working in various areas of small business and personal finance and accounting, including working as a public auditor at BKD, LLP, Financial Director at Central Arkansas Development Council, and Commercial Credit Analyst at Farmer's Bank and Trust.

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