5 Reasons Small Businesses Fail and How to Avoid Them

Business Resources - 5 Min Read

Did you know that only 50 percent of small businesses with employees make it to five years in operation? Even fewer businesses hold on for 10 years, as few as 30 percent. With the odds stacked so highly against you, how do you beat the odds and avoid failure? And what percent of small businesses fail? Let’s take a look at the most common reasons for small business failure, and how you can avoid them:

#1: Outcompeted

Competition is the number-one reason for small businesses to struggle and fail. This is especially true in saturated markets, where dozens of established businesses exist for every newcomer.

The Solution

Give your business its best chance by outcompeting the competition. Provide a better customer experience, better service, quality, pricing, a bigger selection of products or services.

Look for a hole that your competitors have yet to fill, and then fill it yourself! Customers choose brand loyalty based on the experience. Starbucks broke into an already-saturated coffee market by providing a “home away from home” for nomad freelancers and travelers looking for an internet connection, welcoming them in for free Wi-Fi and free refills.

How can you innovate the customer experience in your own industry? Talk to your customers on social media or solicit comment cards. What would they like to see that your competitors aren’t already doing?

#2: Poor Market Demand

Sometimes your business execution is great, but there’s a small or shrinking market for your product, so you still struggle to keep the doors open. Over 40 percent of small businesses fail due to market problems. How do you judge market demand before launching a new product or service?

The Solution

Your business is already open, so it’s a bit late to make a business choice based on industry demand. But you can still take steps toward understanding your market and tweaking your product or service to meet their needs.

Consider creating a minimum viable product, or MVP, before launching the final product. This can take the form of:

    • A landing page on your website that illustrates the product


    • A social media campaign


    • A video demo of the project


  • A Kickstarter campaign

All of this allows you to judge market demand before taking the development process farther, and you can collect and implement valuable feedback to ensure that the final product is really what your target audience wants.

#3: The Wrong Team

Over a quarter of all small employers say that finding and keeping a great team is one of their most significant concerns. Your team is your backbone and your foundation. You need to be able to rely on them, and when you can’t, your business struggles. Studies show that the cost of losing an employee is on average 1.5 to 2 times the employee’s annual salary, in terms of hiring a replacement, training, and productivity impact.

The Solution

How do you solve the problem? You need to show your employees that you value them and want them to stick around. Here are a few proven ways to do that:

  • Prioritize personal growth. Employees are always looking to improve their careers and personal lives, and they often achieve that by “job-hopping”. Mitigate this by giving your employees opportunities to take on more responsibility and earn more. Hire from within, rather than from outside. Implement ways for team members to acquire and practice new skills.
  • Let them know their work matters. What’s your company mission? What impact does your team have on the company and the world? Motivated team members need to know that they’re contributing to a larger cause, and that their time makes a difference. This is particularly important for nonprofits, but it’s still important in any kind of business.
  • Build a caring workplace. This means building a culture where employees feel like their best interests are in mind, their feedback is heard, and their efforts are appreciated. Consider more team-building excursions, team parties, and other celebrations for big project milestones. And most importantly, give feedback often, not just when team members mess up. When they do a great job, let them know!

#4: Poor Customer Communication

Customers need your undivided attention, and any established business owner knows that it’s a real challenge to balance business operations with customer communications. Still, this issue is a critical one: 14 percent of small business failures can be attributed to poor communication with customers.

The Solution

  • Be more social. Your Facebook page should be a community for people who love your brand, not just a place to post ads. 80 percent of your content should be focused on customer engagement, with a call-to-action to like, share, and comment. Don’t exceed 20 percent promotional posts, or your audience will lose interest.
  • Look for existing data on customer trends. Extensive market research can be expensive for a small business. Luckily, the U.S. Small Business Administration and Bureau of Labor Statistics both offer plenty of statistics on consumer trends, so you can see what your target customer wants and needs.
  • Consider a dedicated customer relationship manager. Answering social messages and customer service calls can be a full-time job. Rather than juggling operations and customer communications every day, hire an associate who can handle these tasks for you, and provide utmost focus on each call or message they answer.


#5: Cash Flow Trouble

Are you spending more money than you’re earning? How many businesses fail due to cash flow problems? An astonishing 50 percent of small business owners have cash flow trouble. Difficulty with cash flow leads to late bills and purchase orders, and eventually an inability to keep the doors open. It’s vital to address cash flow problems now before they drag your business down. Here’s how:

The Solution

  • Consider restructuring your process. Can you streamline your operations process so you ship out and sell product faster? The quicker you get paid, the better your cash flow will be.
  • Have policies in place for payments. Stick to the payment deadlines and terms that you give customers. Deposit checks immediately without delay so they clear faster. Send friendly payment reminders for past-due statements. When a purchase order goes unpaid 30 days after the due date, start the collections process if necessary.
  • Consider taking on capital. A business line of credit can be the solution you need for cash flow trouble. This allows you to handle cash flow problems effectively as soon as they come up, before they increase in severity and affect your ability to operate. You can choose to use only the amount of funding you need, and the rest of your credit line stays open for you to use as needed.

Small business failure is a scary thought, but your company doesn’t have to become another statistic. Take action today to address areas where your business is falling short. Improving the odds is completely within your control!

Interested in a working capital loan to improve your business? Call Mulligan Funding at 855-326-3564 to discuss your financing options today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.