Before we get started with the top reasons why new businesses fail, let’s see how many new businesses fail early on.
20 percent of new businesses fail early on, say in the first couple of years. The percentage increases to 45 percent in the following four years, according to a small business failure report by the SBA.
It’s a huge number.
Frankly speaking, no one starts a business to fail. Then why do new businesses fail early on?
Do business owners quit on their own?
No. But there are some primary reasons why new businesses fail.
The success or failure of a new business often follows a blueprint, but what most business owners don’t realize is that the path they follow entirely shapes the future trajectory of their business.
For instance, if you are a business owner and you are careful to avoid the primary reasons for businesses to fail, you will surely succeed in the long run.
Temporary ups and downs are part of the business, but they shouldn’t define your goals.
Now let’s dig deep into the top nine reasons that slow down the growth of new businesses. We have also discussed what you should do to succeed in your business.
On this page
#1. Knowledge Gap
The knowledge gap is the primary reason that so many new businesses fail early on. Here, knowledge means understanding every possible aspect of your business to make it successful, which demands extensive research on products, services, and market forces.
That’s what new business owners often overlook.
We human beings are always in a hurry. We don’t want to take out time, pause, and explore something deeply.
We simply want to get results, which becomes the most significant reason behind small business failure.
Approximately 45% of small businesses fail during the first five years due to a lack of understanding of the market and the necessary prerequisites of scaling a business.
One of the major reasons is poor market research; believing in unauthentic information or advice can result in a huge blow to your business.
Running a business means paying attention to every single key factor, such as strategy, research, operations, and customer feedback. Think of your business like a growing plant: if it doesn’t get the essential nutrients, care, and environment, it won’t thrive.
Now the question is, how to start your research? Here are some must-know questions that you should explore before starting your business so that it doesn’t fail.
- Why do people succeed in this business?
- What are the top reasons some of them failed?
- What is the market like for your business?
- Why would people prefer your product?
- Can you provide something better at cheaper rates?
- What exactly do you want from your business? Build a Brand, double your money, or simply create value?
Once you have sincerely answered these questions, then you’re set to take a step further and focus on pricing, marketing, branding, distribution, and customer service.
If you don’t have much time for all of that, it’s better to take advantage of external consultants who will research and provide you with a strategy for your business growth.
#2. Lack of Support
Appreciation and support play a vital role in your business’s success.
If you don’t have a supportive atmosphere around you, it will surely be challenging for you to manifest success in your business.
Support can come from anyone; it could be your friends and family or your business partners and employees.
It is reported that 23% of new businesses fail due to ineffective team and inexperienced management. Therefore, it is necessary to build a supportive and growth-oriented employee base.
Sometimes, when you are starting a new business, most people doubt you. Your friends and family won’t believe your idea. Nonetheless, you must keep moving forward and not lose motivation.
Moreover, you should find people who believe in you, encourage you, and appreciate your efforts. And most importantly, start with passion because passion helps you keep going, especially during tougher days.
A supportive network of encouraging mentors, peers, partners, and vendors not only raises motivation but also contributes directly to business survival and success. Around 80% of small business owners attribute their success in part to strong professional support, sometimes ranking it even more important than cash flow itself.
Remember, businesses don’t just run on cash or planning; they flourish on trust, encouragement, and the determination to keep going. Therefore, build your support network early, lead with passion, and you’ll be far better equipped to deal with uncertain times ahead.
#3. Lack of a Business Plan
If you don’t have a business plan, you can’t succeed; at least you will lose cash rather than make any.
Most small business owners claim that they have their business plans in their “heads”, but they often lack seriousness and show complete disregard for time and the long-term potential of their business.
When you avoid putting your plan on paper, you’re not saving time—you’re risking your future. A written plan doesn’t just organize your thoughts; it helps you see loopholes, make informed decisions, and monitor real progress over time. It becomes a financial compass that guides you throughout your business journey.
Additionally, research shows that businesses with written plans grow 30% faster than those lacking one.
The other benefit of a written plan is that it saves you 10% of your effort. When you have a written plan for something, you are far more precise about everything than with a vague plan in your mind.
Your business plan is a roadmap to monitor progress. You can practically watch what you had expected and how things are going. It highlights the issue and the need for improvement.
You also face many other troubles that can result in a significant loss. For instance, it is reported that a poor business model contributes to about 17% of failures in business.
Therefore, always have a written business plan highlighting every single step of the business, from getting funds from potential investors to marketing and branding. All must be covered under a single Integrated plan.
#4. Lack of Finances
Lack of finances is among the top reasons why new businesses fail in the very early years. If you lack adequate funds, you can’t sustain your business, and as a result, you might have to face multiple setbacks.
In most cases, especially for small businesses, people don’t keep the required money to start a business in their pockets.
For example, according to “The Small Business Bible”, you should keep 6 months’ expenses of your new business as a budget to start it, and shouldn’t expect any return in the first 6 months.
However, most business owners expect quick financial gains within the first month and rely on these funds to cover the cost for the following months, which is quite unsustainable in the long run.
When things don’t go the way they expected, maybe because of the lack of appropriate knowledge or because of any other reason, they suffer a significant loss.
82% of businesses fail because owners cannot manage cash flow. Among these, start-ups have the highest failure ratio.
So always one should keep a budget of a couple of months’ expenses.
#5. Poor Marketing Strategy, or Lack thereof
The right Marketing strategy is the pillar of any business success.
Your customers can only know if you tell them you are available. Whether you are a local startup, a national or international enterprise, or an online company, you need to market yourself.
Reportedly, 14% of small businesses fail due to poor marketing because companies lack a strategic marketing approach, and often struggle to gain visibility and sustained growth
There are primarily two methods to market a business.
- Traditional Marketing
- Online Marketing
Many small businesses fail due to either inadequate or absent marketing strategies.
Yes, that’s true.
Brands like Blockbuster, Sears, Toys “R” Us, and RadioShack are some of the examples of popular names that suffered from poor location strategies, delayed digital adoption, and archaic branding, resulting in business decline and eventually, closures.
If you’re not using the right approaches in your business, achieving desirable results becomes nearly impossible.
Take, for example, an auto dealership based in the United States. If you’re still relying solely on outdated marketing techniques and lack digital marketing strategies, you’re already lagging.
Here are the reasons.
- In research, it’s discovered that 95% of car buyers use the internet in their purchase journey.
- Traditional marketing is 10 times more expensive than digital marketing for an auto sale.
Hence, using outdated or ineffective marketing strategies not only wastes resources but also pushes your business toward failure. In today’s competitive environment, the wrong marketing approach can be a pricey mistake.
#6. Poor Management
Among many other reasons, poor management is another top reason that so many small businesses fail.
The leading cause behind poor management is a lack of communication with employees.
If you are not in touch with your employees at all, or you don’t want to address their concerns. It will create a lot of stress, and hence, your employees will lose interest in your company and seek other employment options.
#7. Bad Location
Among the top primary reasons for new business failure and success, no one can ignore the bad location.
Location does matter a lot in a business’s failure or success, especially when the business widely depends on the area you choose.
For instance, location means a lot for laundromat businesses. It’s one of the biggest reasons laundromats fail. So, if you can’t choose the right location, your business is doomed to fail.
Location is a part of your marketing strategy.
But you should be on it even before starting it.
Here are some guidelines to know if a location is good or bad for a business
- It’s not a relevant market
- It’s not easily accessible
- Lacks parking (essential for some business types)
- It’s not fit for marketing purposes
There are multiple elements to consider when you research a location for your business.
Location research is different for different types of businesses.
Being in a competitive market can be tricky. On one hand, it can push your business to innovate and grow; on the other, it can drain your resources. Finally, how competition affects you depends entirely on your business model, strategy, and performance.
Let’s take two examples to see the difference.
If you start a clothing brand in a market where many other clothing brands already exist, it can actually be a huge advantage. That’s because there are already customers who buy clothes; you just have to play smart and attract some of them to your brand.
Now take a car dealership as an example. To earn good money, it’s very important to choose a location where many people live. A busy area will bring more customers and help your business grow.
Hence, choosing the right kind of location for your business will help you become more visible and attract more business.
#8. Lack of Flexibility
We have a great example of failure due to inflexibility in market. It’s the failure of Nokia.
Nokia was a giant phone company and had a huge market share in the phone business, however, Nokia didn’t adapt to modern technological advancements and suffered huge losses due to the rise of smartphones specifically android phones.
So, being flexible and ready to change with the modern times is very important. If a business stays stuck in old ways, it can fail.
#9. Lack of Patience
Patience is a pillar of business success.
When you just start a business, it always takes time to become a part of that market. People adopt changes pretty slowly. You might have to wait for years to become a brand. But most of the new businesses are in a hurry to get results as they see others getting results want the same success right away.They don’t see the effort someone made to get that position.
If you don’t have the patience to keep going for a long time then you can’t expect big results.So, be patient adh vae passion, it’s a great package for success in any business.