5 Surprising Reasons Small Companies Fail and What to Do about It

business failure

About 60 percent of small businesses won’t live long enough to celebrate their second birthday. 50 percent will scrape by for at least five years.

There has been some contention about whether these figures are real or fiction, but regardless of your stance, there is no doubt starting a successful small business takes a lot more than having a brilliant idea.

In this article, we reveal some of the surprising (or not!) reasons for business failure, and tell you what you can do to beat them.

1. Taking the Battle to the Big Boys

The story of David defeating the 6’9″ Goliath with a single slingshot is the stuff of legend.

As an entrepreneur, you can find inspiration in the story. It teaches us no task is too big to overcome. And so when starting a small business, it’s easy to believe you can compete with established corporations in your industry.

Well, you can, but most of the time you’ll come short.

You see, corporations not only have huge market shares, but also the financial muscle to kick you out of the industry. They can acquire your business, especially if it’s likely to disrupt the industry. They can also blatantly copy your innovations and rip you off.

The gist of this is: Avoid launching a business in an overcrowded industry, or one with dominant players.

2. Wearing Too Many Hats

If there is one thing small business owners have in common (besides being entrepreneurs) is being strapped for cash.

Many small enterprises run on shoestring budgets. The inevitable result is a founder who has no choice but to wear many hats, even those that don’t fit. A typical small business owner is the CEO, accountant, salesperson, website developer and everything in between.

Hats off to such entrepreneurs for the effort and dedication, but taking on too many tasks is a recipe for business failure.

It’s understandable that you want to save money, but it’s better to build a small team and delegate some tasks. Your small business will run more efficiently and stand a good chance of pulling in more revenues.

3. Inadequate Cash Reserves

For a business to be profitable, it must meet one fundamental principle: revenues must be greater than cost.

That’s why as a small business owner, your primary goal is to start turning out a profit as quickly as possible. However, a common mistake most owners make is underestimating the cost it’ll take to drive the business to profitability. They hope products will fly off the shelves as soon as the business opens.

Quite to the contrary, it’s not uncommon for new businesses to burn through cash for months before revenues start streaming in.

Without adequate cash reserves, the business will gobble all the capital at hand and leave you with no option but to close shop or go in for business loans. And when you take out loans to fund a shaky business, you risk defaulting. It helps to learn more about the industries that have the highest loan default rates before taking out a business loan.

When starting a small business, draw a business plan that details your estimates of financial expenses and income projections in the first two to five years. This should help you determine how much money you’ll need to keep the lights on until the business is profitable.

If you fail to secure enough capital, don’t go ahead and launch the business anyway. A smarter move would be to try your hand at a business that is not capital intensive.

4. Riding on a Trend

Does anybody remember fidget spinners?

Even if you do, it’s unlikely that you’ll want to buy them. Why? Fidget spinners were a viral trend, and like all trends, they fizzled out.

Your small business will similarly fizzle out if your base it on trending products. Sure, you’ll make a tidy bundle riding the trend, but your business will inevitably collapse when the sales finally dry up.

It’s vital to ensure that the products you intend to sell have a solid market demand. Do some research and identify your potential target market. Evaluate how consumers’ changing consumption habits will affect their need for your product.

5. Taking on Too Much Business

Let’s say your new small business has sped off to a good start. Customers love your product, and they’re buying. That sales curve is looking good.

Then a client places a major order.


The only problem is you don’t have the capacity to fulfill the order. Perhaps you don’t have enough capital to acquire more inventory and satisfy the client’s needs.

Not the one to lose opportunities, you decide to stretch your limits. Maybe you take out a loan to finance the order. Or you ship out the remaining stock to the client and promise to deliver the rest as soon as possible.

Big mistake!

Taking on too much business too soon can be detrimental to your business. For instance, the up-front costs you’ll incur to fulfill large orders can deplete your reserves. If the client delays to make payments, your business will grind to a halt. If you sell all the stock to one customer, the rest won’t wait for you to restock.

Strive to maintain slow, steady growth. Allow your business to grow naturally.

Business Failure: Don’t Be Caught Off Guard

Every entrepreneur wants to be successful. But the hard truth is the odds of business failure are very high. Anything from inadequate capital to expanding aggressively can spell an end to your small business.

The best way to defeat failure is to know why so many small businesses fail in the first place, and learn from their failures.

As you digest this information, don’t forget to keep tabs on our blog for more business tips.

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