5 Main Reasons Why Small Businesses Fail in the First 5 Years

Last Updated Jun 8, 2020 | Published on Jul 29, 2019 | Small Business

Starting a business is an exciting venture; the promise of income and wealth is appealing enough for aspiring entrepreneurs to jump into the next big thing. Running a successful company is all about taking calculated risks, having enough to working capital to get by, or having the guts to apply for startup business loans.

Putting up a business is the easy part. Managing your business, generating leads, and earning profits is another story. In fact, only 20% of new businesses get past their first year and only 33% make it to the 10th.

This grim fact doesn’t stop businessmen to forge entrepreneurial seas. Fortunately, your business doesn’t have to fall into the 80% failed startup companies. With the right tools and strategies in place, you can steer clear of bankruptcy.

Related: 3 Common Mistakes Small Business Owners Make and How to Avoid Them

Additionally, it’s also important to understand the factors that lead to business failure. So, here are five main reasons why small businesses fail:

1.    You Don’t Have a Business Plan or a Unique Value Proposition

Seasoned entrepreneurs know that what looks good on your business plan may not work out during implementation. It helps to do proper research and planning in order to create a business plan that works for you and establish a unique value proposition.

You need to consider the following factors:

  • Know who your customers are.
  • Create a marketing and advertising plan.
  • Define your short-term and long-term business goals.
  • Figure out how they buy your products or services, whether in-store/online.

These factors affect how you run your business. It’s important to clearly define them to ensure that your products/services are of interest to your customers. Social media platforms make it easier for you to conduct market research. Another factor in creating a sustainable business is to establish a competitive advantage (or also known as your unique value proposition (UVP) that differentiates you from your competitors.

2.    You’re in the Wrong Location

Location plays an important role in the success of your business. Even if you think you have the best-managed, well-advertised business, a bad location could break your business. When choosing the location of your business, here are some factors to consider:

  • Where most of your customers are located.
  • Traffic, community, accessibility, and parking.
  • Condition of your store.
  • The competitors within the area.
  • Warehouse or storage needs.

If your customers don’t need to enter a store to do business with you, then you don’t have to worry about location. In fact, you can even start your company in your own home to save money.

3.    A Poorly Managed Business

It takes a village – an efficient and   knowledgeable village – to start a business. Before launching, it’s important to establish effective management practices. Operating without one can lead to confusion and disorganization.

Related: 5 Profitable Businesses You Need to Try Before the Year Ends

Poor management is also a common cause of downfall among new business owners. Since they’re relatively new to the business industry, they lack relevant expertise in business management, such as selling, promotion, hiring, financing, and more. If you don’t have an idea on how things work, make sure to seek help. Invest in yourself; learn and develop the skills you lack when it comes to running your business.

4.    You Don’t Have Enough Working Capital

Starting a business without enough working capital is like going skydiving without a parachute. However, many business owners underestimate the cost of starting a company. In fact, 21% of entrepreneurs in the United States are left with no choice but use their credit cards to fund their business.

Before you start a business, make sure that you have an estimate on the amount of working capital needed to cover startup costs and to keep your business running for a year or two. You can use a startup calculator but it’s best to consult a financial advisor for more accuracy.

5.    Your Net Income is Too Low

It’s impossible to run a growing business if you don’t have an idea on the amount of revenue you generate and expenses you pay. If your net income is too low, it’s hard for your small business to grow and expand.  You also need to keep an eye on all your expenses.

As a business owner, it’s your responsibility to know the percentage of revenue you can allocate towards rent, inventory, payroll, utility bills, and other expenses. In this way, you can set a realistic goal for cost savings. For your revenue, it should be increasing month after month or years – a steady growth.

Startup Business Loans for Aspiring Entrepreneurs

If you’re looking to start a business, do know that you’re not destined to fail. However, you need to proactively make an effort to achieve success – even if it means you need to take risks. Lack of sufficient working capital is one of the main reasons of business failure. With startup business loans, you can rest easy knowing that you have the capital you need to start and run your business.


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