If you've looked up small business failure rates ever, then we are confident that you've seen things like "90% of new businesses fail" or "50% of new businesses fail". If you've been in the entrepreneurial community for some time now, then we bet you've heard something like this where the numbers range between these two extremes with a broad spectrum of claims.
But what is the true small business failure rate? Or what is the failure for small businesses in 2021? Should it affect your business decision? Well, if you want to know the answers to those questions and need to know about small business failure rates, then you've come to the right place.
We here at Dropship USA work with e-commerce entrepreneurs and help them set up highly optimized websites that ensure your small business sustainably grows. Our close proximity to so many small businesses has helped us gain valuable insights into failure rates and growth capabilities. So we thought we should let you know everything you need to know about small business failure rates, so without further delay, let's begin!
Small Business Failure Rates: What We Know Already!
According to a report by Fundera, about 20% of all small businesses fail within the first year. That number grows to 30% by the second year and about 50% by year five. The number gets worse by the end of the decade, where a mammoth 70% of the businesses that started out together will have failed, leaving only 30% in the market. Now, these numbers shouldn't discourage you. We are talking about the small business failure rate because we want you to know how not to fail. There are plenty of things that you may need to know when starting a small business operation.
From things like small business loan terms and rates to what the small business tax rate is. You don't even know how the market will respond to your product, but we don't want you to be discouraged by the numbers that we threw at you. Instead, we want you to have a nuanced perspective about small business failure rates. Like all things in life, there are several caveats to the numbers that you saw beforehand, and in the following, you will see some common variables.
So the studies we looked at, like the one from Fundera, rely on a fixed number of reported businesses. Now, a company can stop existing for plenty of different reasons. However, the study counted every business that stopped its operation after one year as a small business failure. There could be a host of different reasons for a company to stop existing. From things like owner retirement, ownership transition, mergers to the owner deciding to change the small business's niche or sector. We're sure that you wouldn't call these circumstances failure, would you?
Annual variance is just part of life. You already know you will see variance from year to year based on economic conditions. So the data you are looking at doesn't really tell you the whole story. However, you will notice that the percentages usually tend to remain relatively consistent throughout the period. Now you may see one year vary between 15% and 25%, but it's unlikely that you will see a plummet or spike overall. But there are a few exceptions to this rule, making it the perfect segway to our next point.
Freak events can heavily impact the general trend of small business failure rates, and it can be both ways, either good or bad, and that depends on the type of event that took place. So in 2020, the COVID pandemic created a harsh economic landscape where almost every business suffered. Industries like bars, restaurants, nightclubs, and other niches dependent on close physical interaction all suffered greatly while e-commerce saw a somewhat upward trend. Without even looked at the numbers, we can already tell you that the failure rate in 2020 is higher than the usual failure rate due to the freak event that is the pandemic.
Difference From Industry To Industry
General failure rates are fickle numbers as there is plenty of industry variance to account for. Each industry is different. While you may see actual failure rates in one while a different industry might have meager failure rates. If you look at healthcare businesses and organizations, you will see this sector has meager failure rates.
That's because demand for healthcare services has always been high and is steadily increasing. In comparison, if you see the failure rates of warehousing and transportation businesses, then you will notice it's quite a bit high as the marketplace is very competitive along with high start-up costs. Businesses like SEO companies and other marketing firms fall in the middle of the pack with low start-up costs, but the demand and competition may vary with time.
Different studies have different metrics, and you need to be wary of errors in reporting. The report you check out might be based on metrics that do not pick up on different small businesses due to operating in secret or because of clerical oversights. Another possibility might be that the company in question doesn't operate like a typical small business; hence the report considers it a failure. So whenever you are checking out these numbers, make sure to check out how it came up with the numbers.
Reports and studies need to have set empirical values to ensure it comes out perfectly, so often, these reports might not consider the whole range of what can be regarded as a viable business. There are plenty of different businesses in the world that thrive even when performing suboptimally. Small businesses might be dangling by a thread and surviving, but the report you are checking out may consider the number too low to consider and counted those businesses as failures. So understanding small business failure rates check whether or not the report considered business health. So that takes care of the variables. Now, we can move to why failure rates are essential.
Why Do Small Business Failure Rates Matter?
We often see many people using small business failure rates as a weapon of disheartening and discouraging hopeful entrepreneurs. Instead of warning the would-be entrepreneurs about the dangers of starting a new business, they end up scaring them. However, that should never be how failure rates should be interpreted. As a new small business, you can find insights by studying and learning from statistics like these. For example, small business failure rates can tell you how and when companies fail. Remember the stats from before? 20% of the small businesses fail within the first year, whereas 50% fail by the fifth year.
So between years two and five, there's 30% meaning the average failure rate is 7.5%. If you take 7.5% as a "death by natural causes" metric, then you still have 12.5% unaccounted for. That 12.5% of businesses usually fail due to lack of preparation in one way or another. So you see, if you are better prepared than the eighth of business owners, then you won't fall into the failed business list. Statistics like small business failure rates can help you calculate and navigate risks. We tend to often overestimate our fortunes and ability due to a phenomenon known as the overconfidence effect.
Reports like failure rates can help reign that in and keep you realistic and pragmatic in our approach. Think about the year one failure rate again. We know that 20% of small businesses fail, so we should take precautions and distribute our investments and our time accordingly. The goal should be balancing against the risk factor to ensure you are covered in case of a failure.
Overestimating Small Business Failure Rates
We've hinted at this before, but people tend to exaggerate the failure rate of small businesses. It can be for a wide range of reasons, from being a conservative way to taper expectations to discouraging would-be entrepreneurs.
So you should take reports claiming to be absolute truths about failure rates with a grain of salt. However, small businesses are prone to failure, and the odds of surviving past year five is 50/50. Don't let fearmongers get you discouraged about building a successful business. Simply understanding its context and not get unfairly discouraged about pursuing further business development.
Hard Work Will Pay Off
So there you go, that's what you needed to know about small business failure rates. Additionally, you should know what is the small business tax rate for your niche and find out the small business loan terms and rates to ensure you are set up for success. Make sure you plan ahead and put in some effort, and you will ensure success beyond year five.
Now, one of the best ways to ensure success is by having a killer website. That's where Dropship US can help you. If you are looking for the perfect dropshipping website, then we are the right choice for you. Our team specializes in creating highly optimized websites that enhance sustainable growth strategies.So if you are looking for complete web solutions, then please contact us! And with that being said, that's about all we have for you today. Let us know in the comments below about your dropshipping ideas. Also, hit us up on our socials and send in your thoughts and suggestions. We love to hear from you, and your feedback helps us improve. We will come back soon with something new for you. Until then, see ya!