Understanding Small Business Survival and Failure Rates

Key findings

• The longer a business is in operation, the higher the failure rate. BLS data shows that approximately 24.2% of small businesses do not survive their first year. However, that number grows the longer businesses are in operation. After five years, 48% have failed, and 65.3% have failed at the 10-year mark.
• Business failure rates are higher for specific industries. Nearly 25% of businesses in the transportation and warehousing industry fail within the first year. The mining, quarrying, oil and gas extraction and information industries follow closely behind with 24% of their businesses failing in the first year. This trend may be attributed to various challenges, including fluctuating demand, rising operational costs, and intense competition within these sectors. Companies must navigate logistical complexities and maintain efficiency to survive, making it crucial for entrepreneurs in these industries to develop robust strategic plans.
• The West Coast sees both the highest and lowest business failure rates within the first year. Washington state has the highest failure rate, with 40.8% of its businesses failing in the first year. Conversely, California has the lowest failure rate within the first year, with 18.5% of its businesses failing within the first year.

The statistics at a glance.

The statistics around small business survival can be sobering. Approximately 24.2% of private sector businesses in the U.S. fail within their first year of operation. Unfortunately, the trend does not improve much over time; after five years, nearly half—48.5%—have faltered, and after a decade, about 65.1% of businesses have closed their doors for good. These figures highlight the fiercely competitive environment small businesses face and the various challenges that can impact their viability.

Geographic variations in failure rates.

Interestingly, there are notable geographical differences in business survival rates across the United States. Washington State has the highest business failure rate within the first year, with a staggering 40.8% of businesses not making it past this critical milestone. Following closely behind are the District of Columbia at 32.2% and Idaho at 30.7%.

On the contrary, California boasts the lowest business failure rate within the first year, with only 18.5% of businesses failing. Kentucky is just behind at 18.8%, and Massachusetts follows at 19.2%.

However, entrepreneurs should not let this data discourage them. A closer look at the data reveals that a significant number of locations exhibit below-average failure rates, indicating pockets of resilience among small businesses. Specifically, 32 out of the 51 locations examined for this piece boast lower-than-average one-year failure rates, suggesting that many entrepreneurs in these areas benefit from supportive ecosystems.

23 locations maintain below-average five-year failure rates, showcasing their ability to weather initial challenges and sustain growth over time.

Impressively, 24 of the locations also enjoy below-average ten-year failure rates, highlighting long-term viability and the significance of local conditions in nurturing successful business ventures.

The environment in which a business operates can significantly influence its chances of survival. In fact, according to a study by Lendio, environmental factors such as access to funding, tax incentives, and a flourishing local economy can significantly enhance business’s chances of survival and success in different states. By selecting a location that aligns with their business goals and provides the necessary resources, aspiring entrepreneurs can create a stronger foundation for long-term viability and growth.

Industry-specific challenges.

Beyond geographical factors, the industry in which a business operates also plays a crucial role in its survival.

Industries with lower survival rates

The transportation and warehousing industry is particularly challenging, with a failure rate of 24.8% within the first year. This figure is closely followed by the mining, quarrying, and oil and gas extraction industry at 24.4% and the information industry at 24.1%. These industries often face unique obstacles, from fluctuating demand to regulatory pressures, making it essential for entrepreneurs to understand the intricacies of their chosen field.

Industries with higher survival rates

Conversely, certain industries demonstrate significantly higher survival rates within their first year of operation. For instance, businesses in the retail trade sector have a low failure rate of just 12.9% in their first year. Similarly, the accommodation and food services industry shows a solid survival rate, with just 14.2% of businesses failing within their first year. The agriculture, forestry, fishing, and hunting industry also presents encouraging statistics with a failure rate of just 15.1%. These figures suggest that businesses in these industries may benefit from more stable demand or fewer operational hurdles, contributing to their advanced longevity.

When selecting an industry for a new business venture, it’s essential to consider not only the initial survival rates but also the long-term viability of that sector. While industries like retail and accommodation may show promising survival rates in their first year, it’s important to assess trends over a longer timeframe. For instance, the food industry, despite often having a solid start, can face challenges related to saturation, changing consumer preferences, and increasing competition, which might impact longevity. A comprehensive assessment of both short-term and long-term survival statistics will help entrepreneurs make informed decisions, ensuring they choose a path that not only offers immediate success but also sustainable growth in the years to come.

Recent trends and influencing factors.

It’s worth noting that the 1-year business failure rate has jumped by at least two percentage points for two consecutive years. This increase can be attributed to several factors, including various economic pressures. Businesses should be adaptable and resilient to help stay afloat during difficult times.

The business failure rates for the past three years are as follows:

• March 2020 – March 2021: 18.4% failure rate
• March 2021 – March 2022: 20.8% failure rate
• March 2022 – March 2023: 24.2% failure rate

Economic pressures can significantly influence a small business’s chance of survival, affecting everything from cash flow to consumer spending. During periods of inflation, for instance, the rising costs of materials and services can squeeze profit margins, ultimately making it harder for a business to stay afloat. When expenses increase, many small businesses are forced to make tough decisions, whether that means raising prices, cutting costs, or even reducing staff. These changes can directly impact customer satisfaction and loyalty, leading to a decline in sales.

Additionally, economic downturns can lead to reduced consumer confidence. When individuals are uncertain about their financial future, they are less likely to spend, which means businesses may experience a dip in sales. This is particularly challenging for startups or small businesses that rely heavily on consistent sales to sustain operations.

Additionally, access to financing becomes more difficult during economic struggles, as lenders tighten their criteria for loans. As a result, small businesses may find themselves grappling with insufficient working capital, making it a challenge to cover day-to-day operational costs or invest in growth opportunities. Understanding these economic dynamics is crucial for entrepreneurs aiming to enhance their resilience and sustainability in an unpredictable market.

How businesses can build a strong foundation for success.

Given these statistics, aspiring entrepreneurs must recognize the importance of building a strong foundation for their businesses. Here are some strategies that can help increase survival rates:

1. Market research. Understanding the market landscape, customer needs, and industry trends is crucial for business planning. Thorough market research can help entrepreneurs mitigate risks by ensuring they address the real demands that businesses within their respective industries face.
2. Financial planning. Sound financial practices are essential. Businesses should maintain a clear budget, monitor cash flow, and prepare for unforeseen expenses to avoid financial pitfalls.
3. Flexible business models. Being adaptable and willing to pivot in response to market changes can make a significant difference in a business’s longevity. This might involve diversifying service offerings or exploring new customer segments.
4. Networking and support. Joining local business networks and seeking mentorship can provide invaluable resources and support. Learning from others’ experiences can offer insights into avoiding common pitfalls.
5. Staying informed. Keeping on top of economic trends, consumer preferences, and industry developments can help businesses remain competitive. This proactive approach can foster innovation and allow businesses to adapt to changes more effectively.

Conclusion

While the statistics on small business survival rates may appear daunting, they also serve as a call to action for entrepreneurs. By understanding the factors that contribute to business failure and implementing strategic practices to counter them, aspiring business owners can improve their chances of success. The road may be rocky, but with careful planning, resilience, and adaptability, the dream of owning a thriving business can indeed become a reality.