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The Real Data on Small Business Failures

December 7, 2021
By James Gussie

New data from the US Census Bureau reveals that small businesses fail at a rate of 1.9 percent, but there are some important caveats to keep in mind before drawing any conclusions about the nature of enterprise (and more specifically business) failure.

In the article “what percentage of small businesses fail within the first 5 years” it was found that about 80% of small businesses fail in the first five years.

Have you heard the all-too-common statistics on small-business failures? According to a research, seven out of ten new enterprises launched in the United States fail within three years. It’s been mentioned hundreds of times. Is this, however, correct? Is it important to you?

Do a web search if you’re interested in learning more about the research and business failures. Start by looking up data on small company failures on Google. You’ll notice that what we take for granted isn’t always the case. What you won’t find there — at least, that’s what I couldn’t locate — is the so-called conclusive research.

The fact is that no one is aware of it. Statistics are skewed because company existence and destiny have so many tax repercussions. Many companies operate only to file tax returns. Many enterprises are founded and perish as numbers, rather than real people with genuine goals. Some firms are performing well, yet they are no longer in existence because they were sold or absorbed, indicating a successful departure. Some firms relocate or rebrand. It’s really difficult to determine what actually occurred.

I suggest Mark Hendricks’ Why the Small Business Failure Rate is 90% Smoke and Mirrors on BNET a few months ago for some good written skepticism on these small business numbers. The title, as well as Mark’s subtext as “the debunker,” pretty well sums it up. Here’s a key quotation:

According to surveys conducted by renowned academics, 70% of new businesses with at least one employee survive for at least two years. Approximately half of them continue for five years. The SBA came to this result, but other investigations came to similar findings.

Even the failure rate of 30% after one year may exaggerate the true danger of establishing a small firm. That’s because, according to other research, the majority of businesses that shut down were profitable at the time. They may have closed due to the owner’s health difficulties or because he or she opted to pursue something more personally rewarding. Most of the time, they didn’t go bankrupt.

My advice for today is to put the article down. Take a step back from the numbers. The only failure that counts in a small company is the one that has an impact on you. Do your homework first, and then break down your uncertainties into manageable chunks. Your company isn’t a number. Is there a market for what you’re selling? Will they be able to fund your expenses? Will your calculations be accurate? Is it true? You’re fooling yourself, right?

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The “what percentage of businesses fail in the first 10 years” is a question that has been asked many times. A study was done, and it showed that about 90% of businesses fail within the first ten years.

Frequently Asked Questions

What is the percentage of small businesses that fail?

A: The percentage of small businesses that fail is very high. In the United States, some sources say as many as one in five start up companies will close within two years. Some other research says its even higher than this- with only around one out of four new business actually surviving a year and turning a profit. Companies go bankrupt for all sorts of reasons but there are key factors that create vulnerability to failure including poor financial management skills, limited customer base or market potential and lack of capitalization on future opportunities

Which problems cause most small business failures?

A: The main reason for a small business to fail is because the owner did not plan ahead. Its important to come up with an exit strategy, such as if you dont have enough funds or do not know how long it will take your idea to become popular, in order to make sure that your venture does not end prematurely.

How many small businesses fail statistics?

A: The statistic is not entirely accurate, as there are many factors that must be taken into account for a company to succeed or fail. That being said, the number of small businesses failing in their first year after opening can range from 36% and 68%.