18 Reasons Why Small Businesses Fail

The business world has no sympathy for ill-prepared, rookie entrepreneurs. The desire for independence and more money aren’t enough to guarantee success in business, and it’s always been that way. Many factors contribute to the failure of a business and they’re all intertwined. Entrepreneurs who fail to recognize and correct these problems will not last. To be a winner and to thrive, avoid these catastrophic mistakes.

What are the typical causes for small business failure

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According to the Small Business Association (SBA), the majority of new small businesses will shut down within the first five years of operation. Though circumstances may vary from one company to another, this high failure rate is generally attributed to several common factors. The business owner who is aware of these pitfalls can avoid making costly mistakes and is thus in a better position to run a successful venture.

1. Setting expectation

Business owners have unrealistic expectations or choose ventures that are inappropriate for their personalities, lifestyles, or experiences. Before starting their ventures, aspiring entrepreneurs must make sure that they are clear and realistic about what they want to get out of their businesses and what they have to offer in terms of time, commitment, and experience.

2. Business owners are unfamiliar with the basics of business management.

Many small business owners lack a formal business education and have never experienced running a small business. They may therefore be unaware of some basic tools and guidelines for effective business management. The good news is that there are numerous free or low-cost guides, articles, and tutorials available online that can fill in this information gap. (For starters, check out the websites of the SBA, SCORE, and the National Federation of Independent Business)

3. There is a lack of effective planning.


Business planning is a continual process of setting goals, developing plans, and working every day to achieve them. Proper business planning spans all areas of the business including budgeting, tax planning, and marketing, as well as growth and development.

4. Business owners fail to consistently and effectively monitor their businesses.

Planning means nothing if business owners are not monitoring how well their businesses are operating so they can make any necessary adjustments. Business owners should pay attention in particular to the daily cash flow, to the business’ sales and productivity, and to the movement of products and supplies through the business.

5. Small businesses lack the necessary capital for operation and growth.

One of the biggest reasons why small businesses fail is that they are unable to get the funding they need when they need it. When a business loan is hard to come by (which is pretty common these days), many business owners in desperation or in ignorance make the mistake of choosing a method of financing that is either inappropriate or detrimental to the health of their businesses. For example, they apply for high-interest, sub-prime loans or payday loans, or they rely too heavily on their business credit cards. Business owners should be aware that there are several, relatively safe financing methods available such as SBA micro loans, invoice factoring, vendor financing, and merchant cash advances.

6. The marketing techniques are ineffective or too expensive.

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Marketing is essential to expanding and maintaining your customer base. If a business owner’s current marketing techniques are not bringing in customers or if they are putting a great deal of strain on the operating budget, then they should be re-evaluated. Small business owners who do not have the time or knowhow to effectively market their business should hire someone else to do it.

7. Business owners ignore their competition.

The success of a small business depends on how effectively owners can differentiate their products, services, and solutions from those offered by their competition. A small business’ unique selling point is its greatest asset. In order to maintain a competitive edge, business owners must stay in touch with the current market trends and be aware of what their competition is doing.

8. Business owners are out of touch with customers.

Small businesses often fail because they do not respond to the changing needs and attitudes of their customers Having a personal relationship with customers is an important asset that many big corporations do not enjoy. In order to maintain good relations with their customers, small business owners should focus on quality products and services, should monitor customer satisfaction, and ask their customers for suggestions or improvements.

9. The small business is not in a suitable location.

As the old saying goes: Location! Location! Location! Small business owners can fall into the trap of choosing a location based solely on cost savings, and they may overlook factors such as zoning laws (for a home office), professional appearance, and customer interest or convenience.

10. Business owners fail to actualize their employees.


Many small business owners do not realize the potential hidden within their own workforce. When workers are happy then productivity rises and customers have a more positive experience that can lead to an increase sales. Employees are also a source of business-improving suggestions and problem-solving ideas. Therefore, where possible, business owners should make sure to establish a system of employee advancement and work performance recognition.

11. Business owners fail to invest time and money in research and development.

To be successful, a small business must set aside time and resources to research and development to determine possible areas of expansion and to implement cost-cutting techniques. This ensures that the business is running efficiently and improves flexibility in response to market demand.

12. Small businesses are not using readily available business tools and technology.

These days small businesses have access to a wide range of savvy, low-cost business tools, software packages and services, and technology that is giving them a leg up on even their big competitors. Small business owners who wait too long to embrace it may be making a costly mistake.

13. No concrete business plan

This is a map all new business owners need to show them where they’re going, and how they will get to where they want to be. The plan will force a person to look at all aspects of the venture, i.e. marketing, distribution, sales, promotional plans, advertising, choosing the markets the business will and will not target, etc. By not having a tangible structure, business owners can’t anticipate problems or formulate solutions. Simply opening the doors and making hasty decisions will lead the business into oblivion.

14. Trying to handle complex jobs without experience

Business owners who try to exert influence in areas where they have little expertise will run into trouble. First timers who jump in without specialized knowledge of marketing, sales, accounting, public relations, transportation or designing websites won’t take the business very far. Another mistake is failing to understand customers’ buying habits, which tend to change frequently. Successful entrepreneurs will hire people with the right qualifications to manage the nuts and bolts of a business.

15. A business with a bad location

There is a direct correlation between the physical location of a business and customers’ buying decisions. It has to be in a place where everyone can see it. It’s no coincidence that fast food outlets are often situated near major highways. New business owners fail because they’ve set up shop in the wrong place, in which customers either don’t want the product/service or are loyal to somebody else.

16. Refusing to adapt to the changing marketplace

Business owners must be keen to anticipate new trends and adapt to them. Those who don’t will lose customers to the competition. The advent of technology has altered the playing field and new business owners must be open to new ideas and willing to experiment. Customer demands never stay the same, and it’s unwise to assume that they won’t search for something better down the line.

17. Lack of people skills


Customers may not be right all the time, but they are the lifeblood of any business. Too often, there is an us and them mentality that pervades many businesses, big and small. Staff who are openly hostile with customers will do irreparable harm to the future of a business. To avoid alienating the customers offer a full refund with no questions asked if they aren’t satisfied with the product or service, and make sure the staff uses tact and discretion in these situations. Be diplomatic when dealing with erratic suppliers and distributors.

18. Greed and impatience

Great businesspeople may have everything in place, but want nothing else other than to make some easy money. This causes them to expand too quickly and make bad decisions. Before they know it, they’re teetering on the edge of a cliff.


Even if a business owner makes none of these mistakes, a company can still fail. Perhaps six months down the road the money runs out, or the entrepreneur based all of the business decisions on the suggestions of family members and friends. These individuals will rarely give objective advice. At other times, life gets in the way and events like relationship troubles and unexpected illnesses can replace moments of clear thinking with extreme stress.