48% of small businesses don’t make it past 5 years: Here’s how your business can beat the odds

Small businesses are the backbone of America,  making up the majority of all U.S. businesses. But despite Americans relying on small businesses to meet their everyday needs, almost half of all small businesses close after five years.

There are many reasons why small businesses fail, with financials and lack of planning being the leading causes.

To understand why more than half of small businesses fail within five years, we’ll look at small business statistics, failure reasons and what you can do to keep your business up and running.

Key insights: Small business statistics

Why do small businesses fail?

While it can be difficult to pinpoint exactly why almost half of all small businesses fail within five years, there are areas that can make or break a business.

Small businesses may fail because they don’t have enough revenue or aren’t getting their products and services in front of the right customers. They may also fail due to poor business planning or lack of capital. Here are some reasons that small businesses don’t make it past the first few years:

They don’t have a clear business plan

A business plan is a good exercise in mapping out a business’s strategy. It helps business owners outline key aspects of growing their businesses, including stating the value of products and services and outlining the business structure, financial forecast and budget. It also allows the busines      s to show potential revenue and any relevant goals or metrics.

Without a business plan, it can be difficult to scale a business and make thoughtful, strategic decisions.

They can’t get access to financing

Businesses may also not make it past their first five years because they may face financial challenges and need financing. Unfortunately, financing is hard to obtain for businesses under five years old.

According to the 2023 Small Business Credit Survey, 40 percent of businesses five years old and under were fully approved for a loan. By comparison, 53 percent of businesses between six and 20 years old were fully approved, and 66 percent of businesses over 20 years old were approved.

While there are lenders who offer some of the best startup business loans with more accessible eligibility criteria, brand-new businesses may still struggle to qualify. Additionally, as newer businesses are considered higher risk, lenders may charge higher interest rates and fees, making it difficult to fit loan payments into a new business’s budget. So, it’s no surprise that the 2023 Small Business Credit Survey found that 36 percent of businesses aged five years or younger used personal funds or a loan from family and friends to finance their business.

They manage cash flow poorly

Another common reason for closure is when a business can’t properly manage its cash flow. Good cash flow management starts with a business setting up and following a business budget, which will track your business’s fixed and variable costs and estimated revenue.

Some business owners think that a business budget is optional, and they don’t know their exact revenue and expenses. Without knowing where the business stands financially, it may fail at the first sign of a cash shortfall or emergency expense. The Q1 2024 Small Business Index found that while 71 percent of small businesses are adequately prepared for any future threats or disasters, 27 percent of businesses say they are only one disaster or threat away from closing.

They don’t have a target market

Many small businesses go to market without having a clear user or customer in mind or a defined product and niche. Small businesses may also enter a saturated market, making it difficult to stand out from all the other businesses offering the same products. Without market research and a customer in mind, businesses are not likely to succeed and make enough revenue to be profitable.

Small business failure rate by industry

Different industries have varying failure rates, which can relate to the profitability of some industries and businesses.

For example, hotel and accommodation services are one of the top industries for growth potential and have a fairly low failure rate. Similarly, agriculture makes up 5.6 percent of the U.S. gross domestic product and has one of the highest five-year survival rates at 65.2 percent.

Source: Survival of private sector establishments by opening year, 2018 to 2023. U.S. Bureau of Labor Statistics

How to maintain a successful small business

Achieving success with your small business means making a strategy for growth and planning ahead to overcome challenges that may crop up. Here are tips for running a successful small business:

Set goals and double down efforts

Use a business plan or other planning document to set business goals, including revenue, sales and marketing goals. Understand what measurements you’re going to use to determine if you’re successful. Then, put in the effort to make sales calls, go to trade shows or work on product development so that you can achieve your goals.

Develop a marketing plan

Consider the various platforms you will use to market your business, whether that’s direct mailers, social media, TV commercials or print advertising. Think through how you will reach your potential customers and track the success of your advertising campaigns to help you make future decisions.

Keep a close eye on finances

Set a business budget and keep track of all revenue and expenses down to the dollar. You want to know how your money is being used so that you can make the most of your income, cut down on waste and plan for unexpected expenses. If possible, also consider starting an emergency fund that you can use in case of an unexpected expense, slow month or actual emergency to avoid financial strain.

Hire talent

You may not have the time or skill to operate every part of your business alone. Think about hiring a talented employee with more skill in an area than you have. By doing so, you may increase sales while giving yourself time back to focus on the areas that you enjoy or excel at.

Apply for financing

You may not need the funds now, but you can apply for a business credit card or line of credit to use for future expenses, build business credit and establish a relationship with a lender, which can benefit your business in the long run.

Bottom line

Being a small business owner means joining the millions of small businesses that serve Americans the most, but it also comes with risks. U.S. Bureau of Labor Statistics data shows that from 2018 to 2023, only a little over half of all small businesses survived five years. But knowing the risks of your industry and managing finances and business loans well will give your business the best shot of surviving and becoming successful over many years.

Frequently asked questions

• What is the #1 reason small businesses fail?

  Small businesses fail mainly because they are unable to manage cash flow. If a business owner doesn’t know the exact amount of revenue and expenses it has, they can’t overcome challenges and plan for unexpected expenses. Creating a business budget and performing a cash flow analysis can help business owners understand where their dollars are going and make decisions.

• What should you do when your small business is failing?

  When your small business is failing and in jeopardy of closing, the first step you can take is to assess why it’s failing. If it’s due to a cash flow issue, you can identify areas of your budget that need to be addressed. If you need more revenue, you may need to increase marketing efforts to bring in that income. In some cases, you may need business financing to help, but that can be risky and potentially cause more financial strain and a cycle of debt.

• What is the biggest key to success for a small business?

  Aside from successfully managing cash flow, the biggest key to success for a small business is providing an outstanding customer experience. By providing quality products and services to their customers, they can grow their business.