Devon Delfino

___ Business Loans › Small Business Loans How Does LendingTree Get Paid? The Percentage of Businesses That Fail — and How to Boost Your Chances of Success WRITTEN BY Devon Delfino EDITED BY Dan Shepard Xiomara MartinezWhite Updated on: May 8th, 2023 Why use LendingTree? We are committed to providing accurate content that helps you make informed money decisions. Our partners have not commissioned or endorsed this content. Read our editorial guidelines here. About 1 in 5 U.S. businesses fail within their first year of operation, according to the latest data from the U.S. Bureau of Labor Statistics (BLS). Given there are 33.2 million small businesses across the country, it makes sense that a percentage of them will fail. To determine where businesses fail at higher rates, we examined the data at the state and industry levels. Here’s what we found, and how to boost your chances of success if you’re considering starting a business. On this page Key findings Percentage of businesses that fail in the U.S. Highest business failure rate within 1 year: D.C., Missouri, Rhode Island Industries with the worst survival rates Why do small businesses fail? How to succeed in your first year of business Methodology Key findings 20.8% of private sector businesses in the U.S. fail within the first year. After five years, 48.4% have faltered. After 10 years, 65.1% of businesses have failed. The District of Columbia sees the highest business failure rate within the first year. In the nation’s capital, 28.0% of businesses fail in that first year, followed by Missouri and Rhode Island (both 27.2%). California sees the lowest business failure rate within the first year. In the Golden State, 13.2% of businesses fail in that first year, followed by Washington (16.7%) and Nevada (18.5%). However, even though Washington has the second-lowest failure rate within the first year, it has the highest failure rate after 10 years (78.5%). The information industry sees the highest percentage of businesses fail in that first year. In this industry — which includes customer service representatives and telecommunications equipment installers and repairers — 26.4% of businesses fail within the first year. It’s followed by the professional, scientific and technical services (23.4%) and administrative and waste services (23.1%) industries. Percentage of businesses that fail in the U.S. According to the latest data looking at the March 2022 status of businesses that opened in March 2021, 20.8% of private sector businesses in the U.S. fail within the first year. Notably, this is a jump of more than 2 percentage points from 18.4% in last year’s report (which compared March 2021 and March 2020) — despite those businesses forming at the beginning of the coronavirus pandemic. A key element is that the Paycheck Protection Program — which offered loan forgiveness for up to 24 weeks of payroll costs and other qualifying expenses — ended in May 2021. Businesses relying on those funds may have been left in the lurch, especially newer, more vulnerable ones. Plus, the consumer price index that measures inflation was up 8.5% year over year in March 2022, after a 7.9% jump the prior month. Businesses requiring physical supplies could have experienced a squeeze on profit margins as they adjusted to rising costs. We also looked at the five- and 10-year business failure rates, which compared March 2022 and March 2017 and March 2022 and March 2012, respectively. At those points, 48.4% and 65.1% of businesses fail, respectively. (Though the one-year failure rate increased compared to last year’s data, the five- and 10-year failure rates are down from 49.7% and 65.5%, respectively.) Although businesses seem to be having a tougher go early, it seems there’s some extra security for businesses that can survive for longer periods. Business failure rate across the U.S. Time frame Percentage of businesses that fail Within 1 year 20.8% After 2 years 27.6% After 3 years 35.9% After 4 years 42.6% After 5 years 48.4% After 6 years 52.5% After 7 years 56.4% After 8 years 59.2% After 9 years 62.3% After 10 years 65.1% Source: LendingTree analysis of U.S. Bureau of Labor Statistics (BLS) data. Highest business failure rate within 1 year: D.C., Missouri, Rhode Island The nation’s capital, the District of Columbia, has the highest business failure rate within the first year at 28.0%. (Remember, this looks at businesses in March 2022 that opened a year prior.) D.C. saw a massive spike in COVID-19 cases at the tail end of 2021 amid the spread of the omicron variant, which could have negatively impacted newer businesses — especially those requiring in-person workers and transactions, prompting some to reinforce masking rules or other restrictions. Tied in second with a one-year failure rate of 27.2% are Missouri and Rhode Island. Labor force participation rates in these two states remained significantly depressed compared to pre-pandemic levels. Both D.C. and Missouri are also in the top 10 for five-year and 10-year business failure rates. Meanwhile, Rhode Island dips to the 21st slot in the 10th year, indicating better overall longevity for business owners who surpass those crucial one- and five-year milestones. Business failure rate across the 50 states and D.C. State Business failure rate within 1 year Rank, 1-year failure rate Business failure rate after 5 years Rank, 5-year failure rate Business failure rate after 10 years Rank, 10-year failure rate Alabama 19.5% 46 47.9% 33 64.4% 30 Alaska 24.1% 12 47.1% 37 66.5% 18 Arizona 22.8% 20 50.8% 15 65.9% 22 Arkansas 22.5% 23 52.5% 8 69.1% 5 California 13.2% 51 44.8% 48 63.4% 37 Colorado 23.0% 18 49.4% 23 65.5% 25 Connecticut 23.1% 16 51.5% 11 67.4% 11 Delaware 22.5% 23 55.0% 3 67.8% 10 District of Columbia 28.0% 1 55.8% 2 69.6% 4 Florida 23.4% 14 49.9% 20 66.7% 15 Georgia 25.1% 7 50.4% 18 63.9% 33 Hawaii 23.0% 18 48.5% 29 63.8% 35 Idaho 22.3% 29 47.5% 35 64.4% 30 Illinois 21.5% 33 45.8% 43 63.8% 35 Indiana 19.6% 45 46.7% 39 63.3% 38 Iowa 20.7% 39 46.6% 40 56.7% 51 Kansas 24.5% 9 53.1% 7 65.9% 22 Kentucky 21.6% 32 47.3% 36 59.5% 48 Louisiana 25.0% 8 49.5% 22 65.2% 27 Maine 22.5% 23 53.8% 4 61.2% 46 « ‹ 1 2 3 › » Source: LendingTree analysis of BLS data. Note: Rankings are from the highest failure rate to the lowest. On the other end of the spectrum, California has the lowest business failure rate within the first year at 13.2%. That’s followed by Washington (16.7%) and Nevada (18.5%). Interestingly, although Washington has the second-lowest business failure rate after the first year, it has the biggest failure rate after 10 years (78.5%). This long-term spike isn’t isolated, as the Evergreen State had the lowest one-year and highest five-year and 10-year failure rates during our 2022 examination. Industries with the worst survival rates The information industry — which includes processes like producing and distributing information and cultural products and processing data — has the highest percentage of businesses that fail in the first year (26.4%). “It seems like it would be a difficult space to break into,” says Matt Schulz, LendingTree chief credit analyst. “It involves things like motion picture, sound and publishing companies as well as telecommunications. These industries feature giant players who dominate the space, making it tough to make a name for yourself.” The industries with the second- and third-highest one-year failure rates are professional, scientific and technical services (23.4%) and administrative and waste services (23.1%) industries. For context, some of the jobs that these include are: Legal advice and representation Accounting, bookkeeping and payroll services Architectural, engineering and specialized design services Office administration Hiring and placing of personnel Document preparation Once you look at the five-year failure rate, though, the retail industry takes the lead, with 69.6% of businesses failing. Considering that retail relies heavily on walk-in business (read: healthy patrons), it makes sense that it may find a harder time weathering economic ups and downs over these longer periods — especially when a pandemic takes its toll. Business failure rate across industries Industry Business failure rate within 1 year Rank, 1-year failure rate Business failure rate after 5 years Rank, 5-year failure rate Business failure rate after 10 years Rank, 10-year failure rate Agriculture, forestry, fishing and hunting 13.8% 18 29.6% 19 50.0% 19 Mining, quarrying, and oil and gas extraction 21.9% 5 52.0% 2 74.4% 1 Utilities 21.2% 8 38.3% 15 57.4% 17 Construction 18.9% 10 40.1% 13 61.2% 14 Manufacturing 17.2% 12 38.2% 16 56.9% 18 Wholesale trade 18.8% 11 46.8% 5 69.8% 5 Retail trade 16.7% 14 69.6% 1 73.0% 2 Transportation and warehousing 19.8% 9 42.7% 9 67.2% 6 Information 26.4% 1 51.8% 3 72.1% 3 Finance and insurance 22.0% 4 44.5% 8 62.9% 11 Real estate and rental and leasing 16.3% 16 34.8% 18 59.1% 16 Professional, scientific and technical services 23.4% 2 47.2% 4 70.2% 4 Management of companies and enterprises 21.7% 6 46.1% 7 64.7% 9 Administrative and waste services 23.1% 3 46.7% 6 66.2% 7 Educational services 21.5% 7 40.4% 11 62.6% 12 Health care and social assistance 14.4% 17 41.2% 10 63.3% 10 Industry Business failure rate within 1 year Rank, 1-year failure rate Business failure rate after 5 years Rank, 5-year failure rate Business failure rate after 10 years Rank, 10-year failure rate Arts, entertainment and recreation 16.7% 14 40.3% 12 65.2% 8 Accommodation and food services 13.6% 19 39.6% 14 62.0% 13 Other services (except public administration) 17.1% 13 37.8% 17 60.7% 15 Source: LendingTree analysis of BLS data. Note: Rankings are from the highest failure rate to the lowest. Conversely, the accommodation and food services industry has the lowest one-year failure rate (13.6%). Meanwhile, agriculture, forestry, fishing and hunting has the lowest failure rate after five years (29.6%) and 10 years (50.0%). Why do small businesses fail? There can be many factors that contribute to small businesses failing in this day and age: Inflation: The cost of materials can make it difficult to own a business. But when you add inflation to the mix — the rate nearly quadrupled from 2020 to 2022 — profit margins can suffer, making it more difficult to survive. Supply-chain issues: Supply-chain issues can leave businesses without enough inventory to stay open. Access to capital: Between startup costs and paying employee salaries and benefits, weathering the sales dips that naturally occur over a year can be difficult. But on top of that, it can be difficult to access funding, especially if the business owner doesn’t have great credit or the business hasn’t established a track record for itself. Bad luck: Yet another reason why businesses might fail is bad luck (think: opening a cafe at the beginning of March 2020). Sometimes the timing isn’t right, or other factors out of their control prevent business owners from success, Schulz notes. How to succeed in your first year of business Many businesses don’t survive their first year. But there are things you can do to strengthen yours and make it over that hurdle. Craft a solid business plan “Some business owners doom their businesses from the start by failing to do the proper research and come up with a sensible business plan,” Schulz says. “For example, you have to understand your target customers and your primary competitors and have a sense of how you can make money. Those things may sound super-basic, but taking the time to think through those things matters.” A solid business plan should include the basics of your business (like how it works and who your audience is), as well as more complex aspects like market analysis, profit margins and financial projections. This can help you lay a solid foundation upon which you can build your business. It can also be a vital step in getting access to a business loan. “There’s an old saying that failing to plan is planning to fail,” he says. “Making a business successful is a tall enough task. Don’t make it even harder on yourself by not taking the time to make a plan.” Strengthen your credit Having great credit can not only help you save money on future financial opportunities, but it can also allow you to access products, like startup business loans, which you may not have been able to qualify for. For context, a “very good” personal credit score starts at 740. Most lenders consider borrowers with that score to be very dependable, so that’s a good goal. Still, you’ll want to raise your score as much as possible to qualify for the best interest rates and terms available — especially if a loan is necessary to get your business off the ground. And even if you don’t, having great credit is useful should you encounter dips in income. (Eventually, you’ll want to focus on your business credit score, which has different criteria.) Quick tip: Signing up for autopay, reducing credit card debt and avoiding applying for other lines of credit are just a few ways you can help build your credit over time. Take advantage of the resources available to you Owning a small business can feel isolating but it’s something that millions of Americans have done, and it’s an important part of the American economy. There are established resources available to help people in your situation succeed. For example, the Small Business Administration has tools available to help you do everything from creating a business plan to getting counseling about starting your business, among many other services they provide. Your local chamber of commerce may also prove useful here. If you’ve never started a business, talking to someone familiar with the details of keeping that business alive can also be extremely helpful. They can help you better understand your industry, and even see the lesser-known issues that may crop up in your business. That way, you’ll be able to plan for those setbacks, and your business will be less likely to falter when you encounter those inevitable hiccups. Make marketing a priority “The best product or service can’t succeed if no one knows about it,” Schulz says. “As simple as it sounds, taking the time to spread the word about what you have to offer is crucial.” That’s why marketing your business and products is such an important part of success during the first year, when few people may have interacted with you or your business. “Leverage social media,” Schulz says. “Network with other businesses in your community. Lean on friends and family to help build word of mouth. Reach out to local media to share your story. There are so many things you can try, but often businesspeople get so wrapped up in other aspects of building the business that they forget one of the most essential tasks: marketing.” Methodology LendingTree researchers analyzed the latest U.S. Bureau of Labor Statistics (BLS) data to find the failure rates for businesses nationwide. Specifically, we calculated the one-year, five-year and 10-year survival rates for businesses by state and industry. (One-year data looks at whether businesses opened in March 2021 remained open in March 2022, while the five-year data compared March 2017 and March 2022 and the 10year data compared March 2012 and March 2022.) State and industry rankings are from highest to lowest based on one-year failure rates. Share Article abg Compare Business Loan Offers Business type: Select Business Type View Your Offers Advertising Disclosures Business Resources Small Business Loans Startup Business Loans