What Percentage of Small Businesses Fail

Is it true that most small businesses fail in the first year? Read our article to find out the most common reasons small businesses fail, plus more business statistics.

Small Business Statistics

When starting a small business, the odds aren't in your favor. Consider these numbers from the Bureau of Labor Statistics:

• 20% of small businesses fail in their first year

• 30% fail in year two

• Only 50% of small businesses are still in business after their fifth year

In all, only about 33% of small businesses are still in business after 10 years. Here are some other stats that may surprise you:

• Each year around 400,000 small businesses open their doors, while as many as 390,000 close.

• There are approximately 30.2 million small businesses in the United States with a total of 58.9 million small business employees. But 80% of these small businesses have no employees.

• Small businesses in the United States created 8.4 million new jobs from the years 2000–2017.

Reasons Small Businesses Fail

Small businesses close for two main reasons:

No Target Market
Not doing that research and finding the right market with a need for the product leads to business failure.

Not Enough Money
27% of business owners claim that they can't get the capital they need to run their business. Of the businesses that didn't have adequate capital:

• 2% closed
  
• 13% had to lay off employees
  
• 31% were unable to expand their operations

Other reasons businesses failed include:

• Choosing the wrong partnership or team
  
• Tough competition in the same industry
  
• Incorrect pricing

Small Business Failure by Industry

Certain industries make it tough for small businesses to survive much longer than a few years. The most volatile industries include:

Wholesale Trade: Only 46% survive their fifth year.

Information: Only 44% survive their fifth year.

Finance and Insurance: Only 48% survive their fifth year.

Professional, Scientific, and Technical Services: Only 46% survive their fifth year.

Small businesses in some industries have a higher than average rate of survival. They include:

Retail Trade: 58% survival rate in the fifth year.

Real Estate and Rental Leasing: 59% survival rate in the fifth year.

Health Care and Social Assistance: 55% survival rate in the fifth year.

Agriculture, Fishing, Forestry, and Hunting: 66% survival rate in the fifth year.

Starting a Small Business vs. Buying One

Many owners today bought an existing business rather than starting one from the ground up.

In 2018, 10,312 businesses changed hands. That's a 4% increase from 2017 and a 31% increase from 2016.

The revenue of these sold businesses is also at an all-time high. The median revenue of sold businesses in 2018 was $531,623, a 6.3% increase from the median revenue of $500,000 in 2017.

The median sales price of established businesses was $249,000 in 2018, a 9% increase from the previous year.

Small Business Financing

Many small business owners don't use financing to start their business. In fact, 57% of small business owners use their own personal savings to start their business.

The business owners who didn't have personal savings financed their business with one of the following:

• Personal credit card
  
• Bank loan
  
• Personal assets and/or home equity
  
• Business credit card

More than 43% of businesses with employees needed more than $25,000 to start up their business. On the other hand, only about 10% of businesses without employees needed more than $25,000 to start their business.

73% of small businesses don't get the funding they need to start a business from big banks, but about 50% of small businesses do get the approval they need from smaller banks.

Bottom Line

The United States thrives on small businesses, but running one isn't an easy task. Understanding the reasons small businesses fail and figuring out how you can sidestep those issues is the key to success.