6 Reasons New Businesses Fail

New business owners commonly struggle to find capital, suppliers, and customers. To be successful, new business owners must prepare for these risks through careful planning and timing.

The U.S. Bureau of Labor Statistics estimates that over 20% of small businesses fail within the first year. Entrepreneurs started 993,489 new businesses in March 2024. Based on historical data, 198,698 of these businesses failed by 2025.

Key Takeaways

• Market research is essential before starting a new business.
• A well-crafted business plan helps guide a new entrepreneur.
• Many companies do not raise enough starting capital needed for new businesses that lack reliable revenue.

Lack of Market Research

New entrepreneurs often find an opening or unmet need within a market and then fill it rather than try and push their product or service in. It’s easier to satisfy a need rather than create one and convince people that they should spend money on it. Business owners should have realistic projections of target audience reach and estimate future sales.

Business Plan Problems

A solid and realistic business plan is the basis of a successful business. Entrepreneurs outline achievable goals, how their business can meet those goals, and possible problems and solutions. The plan will also estimate the costs and inputs needed for the business, and it will determine strategies and timelines.

Traditional business plans are comprehensive, and lenders and investors may want to see this plan. The Small Business Administration offers new entrepreneurs help in crafting a business plan on their website.

Too Little Financing

Companies in the startup phase face challenges in obtaining financing to bring a new product to market. Angel investors, venture capitalists, and conventional bank loans are common sources available to small businesses. The Small Business Administration also offers a variety of loan programs. New owners should brainstorm multiple channels for funding and financing and get educated about this area.

The Small Business Administration offers loans to new and small businesses ranging from $500 to $5.5 million.

Poor Location or Lack of Social Media

Many businesses rely on location for foot traffic. However, location on the internet and social media strength can be just as important as a company’s physical location in a shopping district. A marketing strategy is important. Big billboards may not be the way to go for an internet company, just as online ads may not be the way to go for a heavy-construction business.

Complacency

Once an owner has completed the planning, established their business, and gained a customer base, they must avoid becoming complacent. New entrepreneurs must monitor the market and know when they may need to alter their business plan. Being on top of key trends allows them time to adjust their strategy so that they can remain successful.

Expanding Too Fast

When a business expands too fast and doesn’t take the same care with research, strategy, and planning, the financial drain can sink the whole enterprise. Growing too quickly may overstretch a business that struggles to meet its obligations to employees, suppliers, and customers, creating a growth trap. Rapid growth may lead to an imbalance where whereas scaling a business correctly requires a slow strategy with adequate cash flow.

How Do Poor Revenue Estimates Affect a New Business?

Owners may overestimate revenue generated by sales or underprice a product or service to entice new customers. Small businesses may then face costs that outweigh revenue.

What Is Outsourcing?

New business owners may know their product or service, but may lack the skills needed for payroll, accounting, or technology. If owners outsource activities like IT or human resources, they can focus more on day-to-day operations.

What Should a Business Plan Include?

A good business plan helps keep owners on track and is an essential tool when attracting financing or investors. It should include a clear description of the business, forecasts for current and future employee and management needs, opportunities and threats within the market, projected cash flow, marketing strategies, and competitor analysis.

The Bottom Line

Research, planning, and flexibility can help the owner avoid many of the pitfalls of a new business. Market research, adequate funding, and a good business plan help new businesses succeed.