The small business ecosystem is driving the US economy, making up 99.9% of all businesses. Each year, more than half a million small new establishments are created, but a portion of them fail. Curious about how many small businesses fail or which states and industries boast the best survival rates?
Join us as we dive deep into the world of small business failure statistics, exploring patterns, sentiments, overall health, and the primary reasons some businesses don’t thrive.
- Around 669,200 small establishments open each year in the US.
- 93.6% of all new businesses have less than 20 employees.
- The failure rate for businesses with less than 20 employees is 12.11%.
- One in five (21%) of start-ups fail after just one year in business.
- About a quarter (24.7%) of small businesses make it beyond 15 years.
- Colorado, Florida, Nevada, and New York are the US states with the highest rate of failed small businesses.
- The US Small Business Optimism Index is 89.4, the lowest level since January 2013.
How many small businesses are started each year?
A total of 669,205 new establishments were started in the US in 2020 . Technically, the US Small Business Administration defines small business as “an independent business with fewer than 500 employees”. According to this broad definition, 99.9% of new businesses are considered small. Out of the 668,665 small establishments that started in 2020, 93.6% had fewer than 20 employees, and just 6.4% had 20 employees or more .
What percentage of small businesses fail?
The latest data shows that approximately 20.8% of all businesses that started in 2021 failed within the first year. Exit rates are largely driven by small firms .
Business failure rate by years in business
Looking at historical data reveals the actual small business failure statistics at the end of the first, fifth, tenth, and fifteenth years.
Approximately 21% of new businesses fail during the first year of being open, 28% during the first two years, and 48% during the first 10 years. Just 25% of companies make it beyond 15 years in business .
Small business failure statistics support the idea that success of a new business has a lot to do with the entrepreneur, rather than the environment. After the first volatile years those who are truly into doing business and are able to create effective systems for doing business, including marketing, stay in operations. They are able to learn from mistakes, develop resilient systems, and create jobs.
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Business failure rate by number of employees
Average employment size of the surviving businesses at each of these milestones offers a glimpse into their growth trajectory and capacity to retain or expand their workforce over time.
|Milestone||Average failure rate||Average number of employees of survivors|
How many businesses fail in the first year?
From 2007-2022, an average of 22.7% of start-ups failed in the first year. That is in line with the available historical data. Since 1994, one-year failure rates have ranged between 19.9 and 24.8%.
Consistency in data suggests that year-over-year economic factors do not have much of an impact on small business failure rates. We should look at internal factors instead. Many start-ups are paper or casual businesses that meet goals other than real activity, such as transfer of ownership or tax deduction. When there is no sustainable effort or the idea was never workable, casual start-ups undoubtedly fail within the first year.
What percentage of businesses fail within the first 5 years?
During the same period, the five-year business failure rate was 53.6%. Those who have made it through the five-year mark increased their employment to 8.7 workers on average, up from 5 people in their inception. The five-year milestone is crucial, as the probability of survival increases with the company’s age.
What percentage of businesses fail within the first 10 years?
The ten-year failure rate was 67%. The average employment of survivors grew to 11.7 workers. Although there is just a 1 in 3 chance that a start-up will be operational after 10 years, the rate of business failures flattens out significantly after the 5-year milestone.
How many make it beyond 15 years?
Just 24.7% of companies established in 2007 made it beyond 15 years. On average, these firms had 14.2 employees in 2022.
Small business failure rate by industry
In 2020 the annual establishment exit rate averaged around 9.42 across US industries. For small businesses with up to 19 employees, the failure rate was significantly higher, estimated at 12.11%. Small establishments in the transportation, management of companies, and accommodation and food service industries faced the highest small business failure rate in 2020.
In comparison, small businesses with more than 20 employees were far less susceptible to failure. The failure rate for establishments hiring 20-499 staff averaged at 2.78% .
The establishment exit rate is a metric used to understand how many small businesses fail over a specific period of time. To calculate establishment failure rates, the annual number of small business closures is divided by the average number of active small businesses in the same and previous year.
Small business failure rate by state
In 2020, Colorado, Florida, Nevada, and New York stood out as the states with the highest proportion of failed small businesses nationwide. Within these states, small businesses with fewer than 20 employees experienced an approximate establishment failure rate of 13.5%. This is 43.31% higher than the national average of 9.42%. All these states are in the top half of the nation for minimum hourly wages and cost of living index. Entrepreneurs are further challenged by high levels of regulation that can increase costs for starting a new business .
Small Business Failure by State: Detailed Comparison
|1-19||20-499||500 or more||All|
|National (50 States + DC)||12.11||2.784||5.27||9.422|
|District of Columbia||12.284||2.901||6.909||9.024|
Meanwhile, businesses with 20-499 employees appear to be less susceptible to failure, as the failure rate among them peaks at 3.45% in South Dakota.
On a more positive note, small business failure rates (firm size >20 employees) are lowest in Wisconsin (10.10%), Pennsylvania (10.2%), Iowa (10.27%), and South Dakota (10.45%). Interestingly, the cost of living index in these states is below the nation’s average. This suggests that it’s easier for small businesses to succeed in areas where the cost of living and related business expenses are lower.
Overall, with the exception of New York and Florida, small businesses in Eastern states exhibited lower rates of failure compared to their counterparts in Western states. This trend persisted throughout the decade between 2010 and 2020.
Why do small businesses fail?
The 2023 NFIB survey among small business owners in the US revealed that the most significant problems they face are quality of labor, inflation, and taxes.
24% of small business owners report that labor quality is the most important problem to operate the business. For 23% of owners, inflation is their top business problem. Still, this is 14% lower than the figure last July, when inflation concerns reached their highest point since 1979. Significantly less survey participants (14%) state that taxes are their single most important problem.
Among small business owners experiencing declining profits, 29% explained the downfall with lower sales, 20% blamed the increasing materials costs, 13% reported usual seasonal fluctuations, 10% cited higher labor costs, 9% saw lower prices, and 4% blamed higher taxes and regulatory costs .
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Small business optimism
As of April 2023 the US Small Business Optimism Index is 89, a 4.2 points decrease compared to the same period the previous year. This marks an ongoing trend of optimism indexes remaining below the survey’s 49-year historical average of 98 .
Owners are overall cynical about the future. A net negative of 47% expect better business conditions over the next six months. Almost all small business owners see economic slowdown and bleak sales prospects. Uncertainty persists and is mostly associated with elevated inflation. This suggests that small business owners need to pay close attention to how inflation may impact the costs of running a business.
The optimism of small business owners is influenced by the size of their staff. Optimism rates tend to rise as the number of employees increases, suggesting that those business owners who manage to grow and create jobs are more optimistic than those who don’t .
Small business health
A survey among small business owners reveals that in Q2 2023, 14% of the respondents evaluated the overall health of their business as either poor or very poor. This is a significant improvement from the pandemic highest in Q1 2021 when 24% of owners had negative sentiment about their business health .
The recent inflationary challenges took their toll on the small business health index. Owners currently struggle to adjust to higher interest rates and tighter credits, but they remain hopeful for the future. 71% expect their revenues to increase over the next year, demonstrating remarkable resilience.
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How does the US compare with European countries?
In 2017, 733,286 businesses were started in the US. After one year, 20.9% failed. Compared to the US, the average 1-year failure rate of countries within the European Union is 19.3% .