Why do so many small businesses fail?

. 5 min read
Why do so many small businesses fail?

What leads a Small Business to failure?

Setting up a business needs a vision, creativity, funding and lots of guts– all in different proportions based on the industry. Running a business is a risky proposition and definitely not for the faint-hearted. Every business, in its initial stages, is a small one and every entrepreneur goes through the same stages before they become a businessman of a big conglomerate. However, it is in these baby steps of running a business that a large number of them perish and disappear. Here are some statistics that highlight some facts that we will throw light on in this article:

  • Did you know that just 20% of new businesses survive their first year?
  • 30% of new businesses fail in their second year.
  • A shocking 50% of small businesses are forced to shut shop within the first five years of their operations.

It is rather tempting and exciting to start your own business that gives you the freedom to do what you’ve always wanted to and be your own boss. While being optimistic is a part of every entrepreneur, one must also embrace the uncertainty that lies ahead. As a new business owner, you must know and understand why a large number of small businesses fail.

Top Reasons Why Small Businesses Fail

No one wants to make mistakes when starting a business– every step is calculated; every move is thought over. However, the statistics stand tall and true and have been for many years. Let’s delve deeper into the top 10 reasons why small businesses fail!

1. Lack of Vision

Every business has its vision and mission, which is the business owner’s thought or goal that they wish to achieve by setting up their business. The vision statement in a business is the roadmap that gets you from point A to point B in the business. However, without a clear vision, there is no roadmap, and it becomes a recipe for disaster.

2. Poor Business Planning

No matter how great a business plan sounds on paper, it might not pan out successfully in reality. A poor business plan is the most common reason the failure of small businesses earlier on in their life cycle. A business plan must have a charted out scheme of things right from the User Value Proposition(UVP), failure to differentiate from the competitors to poor targeting, and wastage of funds. It is not pessimistic to ask some tough questions earlier on in your business as these questions will only strengthen your business plan and prevent your business from failing.

3. Unprofitable business model

Apart from a strong business plan, you must have a profitable business model. No matter how noble your vision and mission may be, a business needs to be profitable at the end of the day. It might be possible that the first few months to a year you use your bootstrapped funds or those raised from investors. However, in the long run, your business model must be a profit-making one if you wish your business success.

4. Poorly defined niche

A common reason why most small businesses fail is the poorly defined niche that the business begins its operations in. Every business has a specific target group of customers. Not defining this target group earlier on or trying to make the business attractive to everyone fails in the business. There is a need to specialise and provide a specific offering that is attractive to a certain set of people who will buy your product or service. There are very few businesses that work on ‘one-size-fits-all’ policy.

5. Failure to understand your customer behaviour

Apart from bad targeting, not understanding your target consumer’s needs and behaviour can backfire. Research on your consumer behaviours and use the necessary methods and plans to appeal and attract them if you wish your business to be successful.

6. Marketing Mishaps

Marketing and advertising is an essential part of early-stage businesses, yet many businesses do not get their marketing budget right. Companies must set realistic budgets and goals for marketing and have realistic projections for sales and profits. This helps in the proper management of funds assigned for marketing endeavours and prevent marketing mishaps that can cost the company dearly.

7. Poor Sales

Every business sets off with certain sales goals that will bring home profits. However, nothing hits a business as badly as poor sales. There are many reasons for poor sales– relying heavily on one customer, lack of data, poor sales strategy, etc.

8. Insufficient Capital

Financial hurdles are also a critical point where most businesses stumble and many daily. Having insufficient working capital can impact a business’s day-to-day operations. This, in turn, can affect other aspects of the business and eventually result in business failure. Another place where many businesses make losses is by pricing their products or services way too low as compared to their competitors in order to attract customers. In some cases, the businesses fail to make the required profits and run out of funds while failing to raise fresh capital. This can result in closing down of businesses very early on.

9. Poor leadership and Management

While anyone can start a business, not everyone has the right business acumen to take the business through. Many business owners take the smart route by hiring the right experts to do things they are not very good at. However, when one fails to delegate and wishes o do everything by themselves, or worse refuses to listen to advice from other team members, it results in the downfall of the business. For a business to be successful, there must be a good leader who can get out the best from their team.

10. Expanding Too Fast

Many companies have faced bankruptcy and have had to shut because the owner failed to put a stop in early expansion. Every business owner dreams of having a huge business that keeps growing. But, it is the right timing of expansion that can make or break a business. Most small businesses that fail early tend to jump on to the expansion road too quickly, resulting in financial burnout and bankruptcy.

How Small Business Can Avoid Failure?

Though it seems inevitable that small businesses fail a majority of times, there are a few things you can do right in order to keep your business sailing through to make it big. Here are a few tips that can be helpful:

  • Have a smart beginning
  • Have a clear vision and mission before you have a business plan
  • Have a concrete business plan with a profitable model
  • Brainstorm with experts from the industry and niche you wish to operate in and get them on-board if you must
  • Manage your finances well and monitor them closely
  • Grow into a leader and learn to lead not to dictate
  • Avoid complacency and continue learning as you go
  • Be optimistic and motivated always


Failure is the stepping stone to success, and all businesses have to face it at some point. However, by getting things right from the beginning, it becomes easy to tide over small failures that eventually take you to bigger things. Taking baby steps, with big dreams, is often the best way to go about it and prevent small businesses from faltering or worse, failing.

Also read:

How to start a company with no capital?
What Is The Right Age To Start A Business?
Top 10 Things Every Business Owner Should Know & Do.
What are Some Beneficial Government Policies for Small Home-Based Businesses in India?