Small businesses don't have the same vast financial resources as large businesses do, and they often struggle to get their hands on the capital they need to stay open. As such, failure rates among small businesses are pretty high.
The U.S. Small Business Administration says that roughly 20% of new small businesses fail within a year. And only about 50% of small businesses survive for five years or longer.
But small business closures don't just impact the people who own those companies. They also impact communities on a whole. Here's what happens when a large number of small businesses in your area fail.
1. It can become difficult to find a job locally
Local jobs are particularly important to teenagers without the ability to drive a car and parents who don't want a lengthy commute because they have kids at home and want to minimize their childcare costs. But when too many businesses shutter within a given town, local jobs become harder to find. That could force a lot of people out of the workforce if they have commute-related constraints.
2. Property values can decline
Small businesses lend value to neighborhoods. When too many businesses close down, neighborhoods can become less desirable to live in. The result? Lower property values.
Now you may not have any near-term plans to sell your home, and as such, you may not be particularly worried about what your home is worth. But remember, as a homeowner, you have the opportunity to borrow against the home equity you've built in your property. And the less your home is worth, the less equity you're apt to have access to.
3. Local services can decrease
Local businesses tend to generate tax revenue. When too many close, and your town isn't collecting as much revenue as it once was, it can lead to a decrease in public services. Parks can become neglected, and other programs might disappear. These factors, too, can lead to a decline in property values, but they can also impact your quality of life as a local resident.
It pays to support small businesses in your neighborhood
Small businesses commonly rely on the support of locals to stay alive. So if you want to avoid the repercussions above, you should do your part to support the small businesses in your town.
Instead of buying your coffee from Starbucks, consider stopping into the local cafe down the block and purchasing one of their lattes instead -- even if it costs $0.50 more. And rather than buy all of your books on Amazon, give your business to your local bookseller, even if it means spending $10.99 on a novel Amazon has for $9.99.
In many cases, you will, indeed, pay more money for the product or service you're purchasing if you get it at a local business. But spending a few extra dollars here and there might spell the difference between your home being worth $30,000 more -- or less -- over time.
And if you can't afford to spend extra at small businesses because money is truly tight, at least try to support those businesses by writing positive reviews if you've had a good experience and encouraging friends and neighbors to check them out. Although small businesses need financial support to thrive, if you can't provide that right now, word-of-mouth advertising is a helpful close second.
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FAQs
Local businesses tend to generate tax revenue. When too many close, and your town isn't collecting as much revenue as it once was, it can lead to a decrease in public services. Parks can become neglected, and other programs might disappear.
What is the #1 reason small businesses fail? ›
Financial mismanagement and lack of budgeting are pivotal reasons small businesses, particularly in retail, face failure. Effective cash flow management is crucial. Without it, businesses may struggle to cover essential expenses like rent, inventory and salaries.
Do 82% of small businesses fail due to cash flow problems? ›
Poor cash flow.
According to SCORE, 82% of all small businesses fail due to cash flow problems. When money gets tight, paying yourself, your bills, the payroll and other financial obligations can be extremely difficult.
Is it true that many small businesses fail every year? ›
The failure rates of businesses show that around 20% fail in their first year and about half of businesses are still standing after 5 years.
Why do 70% of businesses fail? ›
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.
Why 90% of small businesses fail? ›
The relatively high startup failure rates are due to various reasons, with the most significant being the absence of a product-market fit, poor marketing strategy formulation and implementation, and cash flow problems. Why do entrepreneurs fail? In most cases, a business fails due to multiple reasons.
What is the biggest mistake small businesses make? ›
Poor Financial Management
Inadequate financial planning, budgeting, and tracking can lead to cash flow issues that have the potential to doom businesses. One of the biggest mistakes that aspiring entrepreneurs make is not having enough money to get the business off the ground.
What would happen if all small businesses fail? ›
Rampant small business failures in your community could lead to local job loss, diminishing property values, and decreased services.
What happens if a business doesn't have enough cash? ›
If you can't pay your suppliers, this can lead to poor business relationships and damage to your reputation. It may also impact your ability to meet your own deadlines and contractual obligations.
What is the survival rate of small businesses? ›
23.2% of private sector businesses in the U.S. fail within the first year. After five years, 48.0% have faltered. After 10 years, 65.3% of businesses have closed. Washington state sees the highest business failure rate within the first year.
88% of millionaires are entrepreneurs. You likely won't get wealthy putting money into a savings account or buying index funds. This is the lie you're sold so you never get wealthy. Everyone should start a business at least once in life.
What is the #1 reason why most people fail in business? ›
The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.
How long does the average small business last? ›
On average, nearly 70% of small businesses make it past their first two years and 50% succeed beyond year five.
Why do small businesses fail quizlet? ›
The three main causes of small-business failure are management shortcomings, inadequate financing, and difficulty complying with government regulations.
Why do 80% of businesses fail? ›
To put things into perspective, more than 80% of business failures are due to a lack of cash, 20% of small businesses fail within a year, and half fail within five years. But it doesn't have to be that way. In fact, many businesses can avoid cash flow problems with proper cash flow forecasting.
What is the number one thing that will cause a business to fail? ›
No planning.
As the saying goes, failing to plan is planning to fail. If you don't know where you are going, you will never get there. Having a comprehensive and actionable strategy allows you to create engagement, alignment, and ownership within your organization.
Why do many small business owners fall short in their record keeping? ›
Knowledge and Expertise Gap: Small business owners often lack the necessary accounting knowledge and experience to effectively manage their finances. This deficiency can lead to errors in financial records, misunderstandings of financial statements, and ill-informed decisions.
