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Out Of Business Sign

Small businesses continue to be the backbone of the American economy. According to the United States Small Business Administration (SBA), they create two-thirds of the new jobs and drive the entrepreneurial spirit of innovation and creativity. However, the United States Bureau of Labor Statistics reports that 20 percent of businesses fail each year and are further crippled by the pandemic. In fact, Yelp’s most recent Local Economic Impact Report reported that as many as 60 percent of businesses in America will not reopen because of COVID-19. In spite of the pandemic, there are some common reasons why small businesses fail each year.

Business Failings

In an effort to prepare future business owners to avoid common pitfalls, let’s look at some reasons why businesses fail.

Going in Business for Wrong Reasons

Starting a business is one of the most rewarding and challenging things a person can do. However, it’s important to embark on this journey for sound reasons. For example, it would be untrue to think that a person works fewer hours after starting a business. In fact, business hours could grow greatly depending on the circumstances. Strongly examine the reasons for wanting to start a business before taking that initial step.

Poor Management

Most entrepreneurs start a business because of a specific passion, product idea, or marketable skillset. There is a lot of excitement involved, big dreams, great passion, and a drive to succeed. However, many small businesses fail because the owners don’t take the time to put a structure in place to manage the business. Small business owners will initially be tempted to, or perhaps need to, perform every task in the business. However, these tasks can become too great for one person to properly manage.

For instance, keeping accurate accounting records for tax purposes is important. Owners must pay attention to labor laws that regulate small businesses as well. In an office space, there will also be ongoing maintenance, cleaning, and upkeep requirements. Additionally, there is a need for contract negotiations, maintaining a functional website, taking care of customer needs, and more.

Owners should seek guidance on how to put operational procedures in place to help manage these tasks. They should also do some advance research on the matter.

Insufficient Funds

Budding entrepreneurs will need to determine if they have enough money to operate the business without revenue coming in, or without getting a salary for up to 12 months. It is wise for owners to keep a job, or have another source of income, while operating a small business if business revenue is unavailable. This will help to pay bills until earnings increase and become stable. Since a bank loan is difficult to obtain during the start-up phase of a business, consider the following alternatives to conventional funding.

  • Grants do not have to be repaid. Most grants flow from federal, state, and local governments or from private donors through nonprofit organizations. Some grant programs specifically serve women and other minority groups. Some grants serve communities that have higher percentages of minority business owners. Through a careful search, the appropriate grant opportunity can be identified.
  • Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding brings investors and entrepreneurs together normally through social media and crowdfunding websites. In most jurisdictions, restrictions apply as to who can fund a new business and how much they are allowed to contribute because of the high risk of start-up business failures.
  • Startup pitch competitions, also known as pitch or business plan competitions, can lead to investments in startup businesses. They give owners a platform to pitch a startup to several investors at one time for launching or growing a business.
  • SBA is a government agency that offers online tools, training programs, one-on-one counseling, and funding to help small business owners start and grow businesses. The SBA has 900 small business development centers across the US where entrepreneurs can receive support. For more information, visit sba.gov.

Bad Location

Determining where to locate a business is of utmost importance. An entrepreneur can be creative with cost-effective rental options, such as malls, office buildings, warehouses, temporary pop-up shops, mixed-use space, and more. A home-based business will save on overhead costs, but expansion could be limited by restricted physical space. Think about the present and the future when determining a location by asking the following questions:

  • Who are the core customers? Consider consumer demographics and ask if the location is convenient for the customer base. Also, take into consideration if the community pursued is largely dependent on a specific industry. It could be bad for business if that industry declines.
  • How accessible is the location? Choose a location that is not hidden from potential patrons. A facility needs to be accessible to people with disabilities.
  • Is parking convenient? Owners want customers to be able to get in and out of the parking lot without traffic mishaps. Consider if the lot has ample lighting.
  • Are competing businesses nearby? Consumers generally visit only one location when looking for specific products and services.
  • What is the site’s image and history? Make sure the location reflects the image you want to project. Consider if and how the area has changed over the years. Owners may start with a serious handicap if similar businesses failed in that same location.

Lack of Planning

Planning for the future will help to ensure the longevity of a business. Set realistic goals. Assess accomplishments weekly to determine if goals are met. Remember that a business plan is considered a “living document” because it is constantly changing. In order for a business plan to remain relevant, it must be updated whenever there are new developments in competition. As a business owner never stop planning, learning, and growing.


Almost every entrepreneur dreams of business expansion. However, growth that occurs too rapidly, or expands too much, could bring unintended consequences. Common difficulties with overexpansion include

  • a drop in morale and productivity among employees
  • a shortage of cash to meet the cost of expansion
  • staff turnover because of heavy workloads
  • a drop in quality and an increase in customer complaints

Remember if a business expands too quickly, or too much, it may not be sustainable. Research and carefully plan the growth of a business.

No Website

Having a website is crucial when it comes to marketing and exposure. Websites provide a sense of credibility, professionalism, and long-lasting online relationships with clients. Be aware that a customer can access a website almost anywhere and anytime, allowing a business to grow locally and globally. A website is at work while owners sleep. Therefore, keep the brand relevant by having an online presence that will generate potential business 24 hours a day.


As a business owner, it’s important to do research, then execute a well thought out plan. Without a well-defined business strategy, it’s difficult to know where a business is headed. Also, maintain a work-life balance and by all means, have fun.