Taking the risk of starting a business makes it possible to reap big rewards if the business succeeds. To assess your prospects when starting a small business, it helps to know what percent of businesses fail in your industry — and, in particular, what percentage of small businesses fail.
Key Points
• Starting a business involves risks, with about 20% failing in the first year and 50% within five years.
• Businesses that last over five years are considered above average in survival.
• Agriculture and related sectors have the highest survival rates, while mining has the lowest.
• Key failure factors include lack of market need, cash flow issues, poor management, and competition.
• Proper planning, financial management, and understanding industry-specific failure rates can improve business success chances.
What Is the Business Failure Rate?
According to the latest data from the U.S. Bureau of Labor Statistics (BLS), about one out of five new businesses will fail in the first year of operation. The rate of failure changes as businesses get older. There are several ways to define and measure business failures.
Defining Business Failure
A “business failure” typically occurs when a company is consistently unprofitable, cannot pay its creditors or suppliers, and ceases to operate. Some business closures aren’t thought of as failures. At times a business is unable to continue after an unforeseeable event, such as a natural disaster or the loss of its primary customer. And a sole proprietorship can shut its doors for any reason the owner chooses.
Overall Statistics on Business Failure Rates
Business failure isn’t confined to brand-new entrepreneurs who are starting a small business. It can also happen to well-established businesses that have been around for decades or even centuries. So it may be useful to consider the percentage of businesses that fail by industry as well as by lifespan.
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Failure Rates by Industry
The industry that a business operates in can be a major factor in its likelihood of survival. When an entire industry faces rough economic conditions, companies in that field may go out of business due to factors beyond their control.
BLS figures for various industries’ one-, five-, and 10-year survival rates illustrate this. Agency data shows that, of businesses established in 2013, those in agriculture, forestry, fishing, and hunting had the best survival rates. Across those four sectors, 87.5% of businesses were still operational after one year, 66.2% after five years, and 50.5% after a decade.
By contrast, companies in mining, quarrying, and oil and gas extraction survived their first year at a rate of 79.40%. But after five years, the survival rate plummeted to 40.2%. Ten years in, a mere 24.5% of firms were still in business — the lowest 10-year survival rate of all 19 industries identified.
Factors Contributing to Business Failure
There are many reasons that businesses fail. Some failures are due to multiple contributing factors. Here are some of the key reasons.
• Lack of market need. The classic example of changing markets is the death of buggy whip manufacturers after the automobile made horse-and-carriage use obsolete. While industries rarely decline so dramatically, there’s always the possibility that the market for certain goods and services will nosedive. Businesses in that industry would end up going broke unless they choose a new business model.
• Cash flow issues. At other times, a business can almost be a victim of its own success. A company may enjoy high demand for its goods or services but lack access to the capital it needs to meet that demand. Being unable to meet expenses due to cash flow problems is one reason that some businesses fail. That’s why it’s important to have a reliable source of small business financing for help in bridging that gap.
• Poor management. For businesses in the same sector, the quality of executive management can make the difference between one company’s success and another’s failure. Poor management can be a factor in the failure to attract and retain employees, funding missteps, or shortsighted strategic decisions.
• Competition. Some industries are highly competitive and have relatively narrow profit margins. If a new company tries to break into one of these industries without having any strategic advantage, it may fall victim to its competitors. Some rivals might deliberately try to undercut the new business and force it to exit the market.
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Business Survival Rates Over Time
When looking at how many businesses fail across all industries, the overall closure rates tell a sobering story. Approximately 20% of all startups fail in their first year; within five years, the rate is roughly 50%. By the 10-year mark, almost two-thirds (65.3%) of startups have failed.
How to Interpret Business Failure Statistics
Failure is a tough word, because nobody likes to fail. That’s why it’s important to know the odds. If your company operates successfully and profitably for 10 years before going out of business, you need not consider that a failure. After all, a mere 34.7% of businesses endure longer than a decade. The longer your business survives and thrives, the more the risk of starting it will have paid off — even if the business eventually ceases operations.
Strategies to Avoid Becoming a Statistic
To keep your company afloat, it helps to plan and prepare. Among the steps to take before starting your business: studying the market, estimating your expenses, and creating a sound business plan. Adopting an appropriate invoicing schedule is crucial. You’ll want to understand what net 30 is and how it helps both you and your customers.
Another way to help your business survive is through proper financial management. You need to carefully track your revenue and expenses to stay on a path to profitability and sustainability. You should also understand the taxes you’ll have to pay. For example, employers must file and pay quarterly federal tax returns using IRS Form 941, which tracks income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks.
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The Takeaway
Making your small business successful and profitable is a serious challenge. Seeing the statistics on business failure can be sobering, but the facts shouldn’t discourage you from creating a strong business plan and carefully executing it. Know the failure rate of businesses in your industry and how various factors can affect the fate of your company. This will enable you to take measures that will give your business every chance of succeeding.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What percentage of businesses fail in the first year?
Statistics vary, but the consensus is that between 20% and 25% of all businesses fail in their first year.
How does the failure rate differ for small businesses vs. large corporations?
Among all businesses, about 50% will fail within five years.
Are certain locations associated with higher business failure rates?
Business failure rates do vary by state. Washington state has the highest one-year failure rate at just over 40%, with California’s being the lowest at 18.5%.
What is considered a “good” survival rate for businesses?
People may have their own definition of “good,” but the data are clear. Approximately half of all businesses fail within five years, so any business that lasts longer than that is beating the average.
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