Starting a small business is an exciting venture, full of dreams of success and the desire to be independent. However, the surprising truth is that not all businesses survive the test of time. According to the US Bureau of Labor Statistics (BLS), approximately 24.2% of US businesses fail within their first year of operation. Understanding the factors that contribute to these survival rates can help budding entrepreneurs better prepare and increase their chances of longevity in a competitive environment.
Lendio looked at national and industry data to determine which factors could influence the success or failure of a business.
Statistics at a glance.
The statistics surrounding small business survival can be overwhelming. About 24.2% of private sector businesses in the US fail within their first year of operation. Unfortunately, the trend doesn't improve much over time; after five years, about half—48.5%—have gone bankrupt, and after ten years, about 65.1% of businesses have closed their doors for good. These statistics highlight the highly competitive environment small businesses face and the various challenges that can impact their operations.
| The country | Business failure rate within 1 year | Rate, 1-year failure rate | Business failure rate after 5 years | Rate, 5-year failure rate | Business failure rate after 10 years | Rate, 10-year failure rate |
|---|---|---|---|---|---|---|
| Alabama | 23.5% | 26 | 45.6% | 42 | 63.9% | 35 |
| Alaska | 27.3% | 6 | 42.7% | 49 | 60.7% | 48 |
| In Arizona | 25.7% | 10 | 50.4% | 15 | 65.9% | 22 |
| Arkansas | 21.9% | 42 | 50.8% | 13 | 66.2% | 21 |
| California | 18.5% | 51 | 46.2% | 39 | 64.5% | 32 |
| In Colorado | 23.8% | 22 | 50.1% | 17 | 66.5% | 16 |
| Connecticut | 25.2% | 16 | 48.9% | 26 | 67.0% | 11 |
| Delaware | 25.0% | 18 | 51.9% | 8 | 68.8% | 5 |
| District of Columbia | 32.2% | 2 | 58.1% | 1 | 70.8% | 2 |
| In Florida | 22.6% | 37 | 49.2% | 23 | 65.5% | 23 |
| Georgia | 28.7% | 4 | 51.0% | 10 | 65.3% | 26 |
| In Hawaii | 23.0% | 33 | 49.6% | 20 | 65.2% | 28 |
| Idaho | 30.7% | 3 | 52.2% | 6 | 66.5% | 16 |
| Illinois | 23.0% | 33 | 44.9% | 44 | 63.7% | 37 |
| In Indiana | 23.0% | 33 | 46.9% | 36 | 61.4% | 44 |
| Iowa | 23.5% | 26 | 46.2% | 39 | 61.1% | 45 |
| Kansas | 26.2% | 7 | 53.5% | 4 | 67.1% | 10 |
| in Kentucky | 18.8% | 50 | 47.8% | 30 | 62.7% | 39 |
| in Louisiana | 23.6% | 25 | 47.2% | 33 | 65.0% | 30 |
| Maine | 24.0% | 20 | 46.8% | 38 | 62.5% | 41 |
| Maryland | 25.1% | 17 | 51.0% | 10 | 66.5% | 16 |
| Massachusetts | 19.2% | 49 | 43.3% | 47 | 61.1% | 45 |
| In Michigan | 21.9% | 42 | 45.0% | 43 | 64.8% | 31 |
| Minnesota | 22.3% | 38 | 42.4% | 50 | 59.2% | 50 |
| Mississippi | 23.5% | 26 | 47.9% | 29 | 65.4% | 24 |
| Missouri | 25.4% | 13 | 55.4% | 2 | 69.3% | 4 |
| Montana | 26.1% | 8 | 42.4% | 50 | 60.1% | 49 |
| Nebraska | 23.2% | 21 | 49.1% | 24 | 69.7% | 3 |
| Nevada | 28.2% | 5 | 52.9% | 5 | 66.8% | 13 |
| New Hampshire | 25.3% | 15 | 54.0% | 3 | 66.3% | 20 |
| New Jersey | 21.4% | 45 | 50.5% | 14 | 66.8% | 13 |
| In New Mexico | 25.7% | 10 | 51.9% | 8 | 68.3% | 6 |
| New York | 21.5% | 44 | 50.1% | 17 | 66.8% | 13 |
| North Carolina | 23.3% | 30 | 47.0% | 34 | 62.6% | 40 |
| North Dakota | 22.9% | 36 | 49.0% | 25 | 67.7% | 9 |
| In Ohio | 23.8% | 22 | 47.0% | 34 | 61.0% | 47 |
| In Oklahoma | 20.9% | 48 | 48.8% | 27 | 66.5% | 16 |
| In Oregon | 25.6% | 12 | 47.8% | 30 | 61.6% | 43 |
| in Pennsylvania | 21.3% | 47 | 45.8% | 41 | 65.2% | 28 |
| Rhode Island | 25.4% | 13 | 50.2% | 16 | 66.9% | 12 |
| South Carolina | 22.0% | 41 | 49.4% | 22 | 65.4% | 24 |
| South Dakota | 26.0% | 9 | 43.9% | 45 | 58.2% | 51 |
| Tennessee | 23.1% | 32 | 46.9% | 36 | 65.3% | 26 |
| Texas | 22.2% | 39 | 47.3% | 32 | 64.1% | 34 |
| Utah | 23.7% | 24 | 49.5% | 21 | 62.3% | 42 |
| Vermont | 24.6% | 19 | 49.7% | 19 | 64.2% | 33 |
| Virginia | 22.2% | 39 | 43.5% | 46 | 68.3% | 6 |
| Washington | 40.8% | 1 | 51.0% | 10 | 76.0% | 1 |
| West Virginia | 23.4% | 29 | 42.9% | 48 | 63.9% | 35 |
| In Wisconsin | 21.4% | 45 | 48.1% | 28 | 63.2% | 38 |
| Wyoming | 23.9% | 21 | 52.0% | 7 | 68.0% | 8 |
| Average | 23.2% | 48.5% | 65.1% |
Local variation in failure rates.
Interestingly, there are significant geographic differences in business living standards across the United States. Washington State has the highest rate of business failure within the first year, with 40.8% of businesses not making it past this critical stage. Following closely behind is the District of Columbia at 32.2% and Idaho at 30.7%.
In contrast, California boasts a low first-year business failure rate, with only 18.5 percent of businesses failing. Kentucky is just behind at 18.8%, and Massachusetts is next at 19.2%.
However, entrepreneurs should not let this data discourage them. A closer look at the data reveals that a significant number of areas show below-average failure rates, indicating pockets of resilience among small businesses. Specifically, 32 of the 51 areas surveyed for this piece boast failure rates below the one-year average, suggesting that many entrepreneurs in these areas are benefiting from supportive ecosystems.
23 areas maintain failure rates below the five-year average, demonstrating their ability to address early challenges and sustain growth over time.
Surprisingly, 24 locations also enjoy failure rates below the ten-year average, highlighting long-term performance and the importance of local conditions in developing successful businesses.
The environment in which a business operates can have a significant impact on its chances of survival. In fact, according to research conducted by Lendio, environmental factors such as access to financing, tax incentives, and a thriving local economy can significantly improve a business's chances of survival and success in different states. By choosing a location that matches their business goals and provides the necessary facilities, budding entrepreneurs can build a solid foundation for long-term performance and growth.
Industry-specific challenges.
Apart from geographical factors, the industry in which the business operates also plays an important role in its survival.
Industries with a low survival rate
The transportation and warehousing industry is particularly challenged, with a failure rate of 24.8% within the first year. This figure is closely followed by the mining, quarrying, and oil and gas industry at 24.4% and the information industry at 24.1%. These industries often face unique challenges, from dynamic demand to regulatory pressures, making it important for entrepreneurs to understand the complexities of their chosen industry.
Industries with a high survival rate
Conversely, certain industries show very high survival rates during their first year of operation. For example, businesses in the commercial sector have a low failure rate of 12.9% in their first year. Similarly, the lodging and food industry shows a strong survival rate, with only 14.2 percent of businesses failing within their first year. The agriculture, forestry, fishing, and hunting industry also presents encouraging and unsuccessful statistics of 15.1%. These statistics suggest that businesses in these industries may benefit from stable demand or fewer operating constraints, which contributes to their improved longevity.
When choosing an industry for a new business, it is important to look not only at the initial cost of living but also at the longevity of that industry. Although industries such as retail and accommodation may show promising living standards in their first year, it is important to examine trends over the long term. For example, the food industry, despite having a strong start, can face challenges related to water saturation, changing consumer preferences, and increased competition, which may have long-term effects. A thorough assessment of both short-term and long-term survival statistics will help entrepreneurs make informed decisions, ensuring that they choose a path that not only provides immediate success but also sustainable growth for years to come.
Latest trends and influencing factors.
It is noteworthy that the 1-year business failure rate has exceeded at least two percent for two years in a row. This increase can be attributed to several factors, including various economic pressures. Businesses must be flexible and resilient to help them stay afloat during tough times.
Business failure rates over the past three years are as follows:
- March 2020 – March 2021: 18.4% failure rate
- March 2021 – March 2022: 20.8% failure rate
- March 2022 – March 2023: 24.2% failure rate
Economic pressures can greatly influence a small business's chance of survival, affecting everything from revenue to consumer spending. In times of inflation, for example, rising costs of goods and services can squeeze profit margins, ultimately making it harder for a business to stay afloat. When costs rise, many small businesses are forced to make tough decisions, whether that means raising prices, cutting costs, or even laying off employees. These changes can directly impact customer satisfaction and loyalty, leading to lower sales.
Additionally, a recession can lead to lower consumer confidence. When people are uncertain about their financial future, they are less likely to spend, which means businesses may have an impact on sales. This is especially challenging for startups or small businesses that rely heavily on consistent sales to stay afloat.
Additionally, access to finance becomes more difficult during economic crises, as lenders tighten their lending practices. As a result, small businesses may find themselves struggling with insufficient working capital, making it challenging to cover day-to-day operating costs or invest in growth opportunities. Understanding these economic conditions is important for entrepreneurs who aim to improve their resilience and resilience in an unpredictable market.
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