According to the SBA Office of Advocacy, the vast majority of new companies fail within their first 18 months of operation. Only 50 percent of all businesses make it to the five-year mark, and only 33 percent make it to their 10th anniversary. Surprisingly, the failure rate of small businesses hasn’t changed much in the past 20 years, either.
As a small business owner myself who helps other business owners save on their credit card processing fees, I have thousands of clients who fall into the small business category. And, over my seven years in business, I’ve seen my fair share of busts.
In my experience, here are the four most common reasons small businesses fail:
1. Lack of Sufficient Capital or Addressable Market
This one’s pretty obvious. According to a study of 101 small business failures by CB Insights, the most common reason that businesses fail is that there was no market need (42 percent of respondents). The second most common reason for failure? Lack of sufficient capital (29 percent).
When you think about it, these two reasons for failure are two sides of the same coin. If you run out of money, you can’t be in business. And what’s the easiest way to run out of money short of misspending it? Not having any customers because no one needs what you’re selling.
2. Lack of Differentiation and Poor Marketing
How do otherwise “regular” business owners gain a competitive edge? By branding and marketing themselves well. Even if there’s nothing super unique Aabout your business, the way you present it can make or break your chances of success.
While there’s a lot of talk about people having attention spans shorter than goldfish nowadays, as reported by Time, you actually have as many as 15 seconds to make a good first impression before a visitor leaves your website.
How do you take the most advantage of those 15 seconds and ensure a potential customer keeps coming back to your website? Employ good branding and cross-channel marketing to ensure you show up in front of your leads consistently and at the right time.
3. Hiring the Wrong People and Firing Them Too Slowly
One of the biggest mistakes all small business owners have made (myself included) is to hire people for the wrong reasons, and then take way too long to fire them. By the time you realize that they really aren’t cut out for the job, you’re already attached and you feel bad letting them go. So, you put it off — and before you know it, you’ve sunk six figures into a bad employee.
This is always a mistake. According to the U.S. Department of Labor and reported by HR Exchange Network, the average cost of a bad hire is at least 30 percent of their first-year salary. In other words, a bad mid-level hire who makes $75,000 per year will cost you $25,000 and who knows how much wasted time. Let them go.
4. Growing Too Quickly and Spending Too Much Too Soon
One of the most surprising reasons small businesses fail? They became too successful too quickly, and then their risk assessment skills go right out the window.
These bright startups have a predictable trajectory — parabolic growth accompanied by VC investments, rapid expansion and brand extension (i.e., selling more and more stuff). Then, after flatlining for a period of time, they run out of cash in a spectacular crash and burn cycle.
According to Startup Genome, 74 percent of high-growth startups fail due to premature scaling. And, depending on who you ask, scaling too soon too quickly can actually be a predictor of failure. This really isn’t that surprising. Anytime anything goes parabolic, the law of markets comes into play — just as with stocks, what goes up must eventually come down.
How many of these mistakes are you making?
Although I’m three years away from hitting my 10-year anniversary as a business owner and making seven figures per year, I’ll be the first to admit that I have made all of these common business mistakes several times. In fact, I still make some of them today.
Ask yourself, “How many of these mistakes am I making?” Answer as honestly as you can. Then do something about it. Tomorrow is a brand new day.
Aleksey Nugid is the CEO of Nadapayments. He helps businesses that accept credit cards get the best rates possible.
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