Why Do Small Businesses Fail?

Studies have shown that "8 out of 10" small businesses fail in their first 18 months of operations (Fortune, 2013).

Why is this?  Is it in the water?

Anyone can guess, and rightfully so, that there is no “ONE” specific challenge that makes most small businesses fail in the first year. However, there ARE general reasons why some businesses succeed and others fail. Listed below are the top three reasons why small businesses fail in their first year of business.

#1 Reason Small Businesses Fail: Lack of Funding.

Let’s start with the simple question first… No, it’s not in the water. 

Small businesses face a multitude of challenges in their first year of business.  Heck, even before they open shop, entrepreneurs are thrown obstacle after obstacle.  Some of the challenges faced are getting a loan from a bank, convincing friends and family to buy into their idea for a business and/or grabbing the attention of potential investors.

Hard reality of being an entrepreneur … Without financing, most small businesses won’t even get started.

#2 Reason Small Businesses Fail: Business ideas are in your head not on paper.

As a business plan writer, I get phone calls all the time from people seeking help with writing a business plan.  In our conversation, one of the very first question I ask is:

“What is your business idea?”

Without fail, I get from, five minutes to over an hour's worth, of thoughts and ideas on how your business is going to be constructed, run, funded and a multitude of other thoughts and ideas about your current or potential business (I love this part of the job! Entrepreneurs are amazing).

My inevitable next question almost always leads to my dismay:

Are your business ideas written down?

99 times out of 100, the answer is "no".  This leads to the second reason why small businesses fail... No Written Plan!  In most cases, not even scribblings on the back of an envelop. Nothing, nada, zip, zero, zilch. 

Hard reality of being an entrepreneur … Without some type of written plan, no one will know or understand all aspects of your business... not even you.

#3 Reason Small Businesses Fail: No Plan for Growth.

I love getting phone calls from entrepreneurs who started their business and are in desperate need of a business plan because their business is growing faster than they ever expected.

What a great problem to have!

Unfortunately, if this problem is not solved really quick, then irreparable harm may be done to your business.  Businesses that fail to plan for growth often have poor customer service, stressed out employees and subpar quality products or services.  This leads to bad reviews posted on websites, cancelled orders and, overall, rather unhappy customers.  End result: problem solved... no more customers... no more problem.

Hard reality of being an entrepreneur … Plan for growth or it will not be an issue for long. 

If failure is not an option for you...

Write a business plan or have a business plan written for you.  Studies have shown that small business owners with a business plan have significantly increased chances of success (Small business Trends, 2016).

 A written business plan will help you:

  • Obtain funding: Businesses, without a written business plan, have significantly less chances of obtaining funding from banks, investors or even friends and family.  

Do not just tell people about your business.  Show them!

  • Improve understanding of your business: Without being able to see all aspects of your business, it’s hard to fully understand how your business will operate, who your target market will be and critically analyze current competition. 

Understand all aspects of your business.

  • Sustainable Growth: Don’t let success slip away.  Startup business owners often find themselves inundated with business after they start their company.  Do not fall into the trap of not preparing for growth.  Having a written business plan will mitigate this issue. 

Plan for growth.

The reason that so many small businesses fail in the first year is are really no mystery at all.  Small business owners get so wrapped up in their business that they fail to plan and work ON their business. An easy fix to the problem, write a business plan or have one written for you. This does not mean that your business will magically become successful. 

You will just be twice as likely to succeed as compared to a competitor who does not have a written plan!


Author: Paul Borosky, Doctoral Candidate, MBA.

Date: 2/19/18

Owner: Quality Business Plan and Tutor4Finance.com