Why do businesses fail?

You’re almost ready to take the plunge and start your own business, but what happens if it fails? A fear of failure holds back 59% of budding business owners, so you’re not alone. Out of interest, the same survey found that 59% of business owners also agree that running a small business has been easier than they thought.

So, maybe there’s an argument for a ‘feel the fear and do it anyway’ philosophy?

In this blog, we’re exploring the most common reasons businesses fail and how you can prepare best for business success.

How many businesses fail in the first year?

In the UK, around 20% of businesses fail to make it past their first year. And in 2023, there were 309,290 business deaths compared to 316,025 new businesses. Although the number of failed businesses can seem daunting, that’s not the fate of every business — so many go on to grow successfully.

It’s how you deal with your setbacks that shapes a successful business.

Most common reasons businesses fail (and how to avoid them)

The great thing is that many business owners before you have made countless mistakes. And although you’re bound to make many of your own (and that’s ok), you can learn from theirs first.

Poor cash flow management

Cash flow is the reason 82% of businesses fail — a statistic that succinctly shows you the importance of a healthy cash flow. Without it, you can’t function. You can’t invest in new growth opportunities, you struggle to pay bills, wages and debts. You struggle to survive. Poor cash flow can be caused by late invoice payments, unexpected bills or penalties, overinvestment in inventory, seasonal demand, low profits and more.

Not enough planning

Going into business isn’t a decision you take lightly. You might be leaving stable employment, or you might have a family and a mortgage to pay — in these instances, you need a plan. That means you have to do your due diligence and conduct market research, understand what’s already out there, how you can deliver value to your customers and what makes your business unique.

Start by creating a business plan. This helps you map out financial forecasts, pricing strategies, investment or funding opportunities and generally puts you in a powerful position to create a successful business blueprint.

Not knowing your audience

The saying goes, ‘If you market to everyone, you appeal to no one.’ And it’s true. Without understanding the nuances of your target audience, you’ll never understand their motivation to buy or their buying behaviour in general. Your marketing, how you package your product or talk about your service should all be specifically crafted for your ideal audience.

Take time to analyse where they hang out online i.e. social media, forums, private groups or Reddit. And if you have customers already, ask them for honest feedback about how they found your business and any reservations they have about your product or service.

It’s so easy to throw money into a channel you think will generate audience interest, but it’s important you only take calculated risks otherwise your budget will disappear quicker than you planned.

Failure to adapt

Remember Blockbuster? They had the option to purchase Netflix and they turned it down. They’re the classic case of ‘adapt or die’. You need to be adaptable to be successful in business. That means, being flexible to changing customer needs. Not only will this attitude help your business survive, it'll help you remain competitive.

What does being adaptable mean? It might be keeping up with advancements in technologies and automation, staying on top of what products and services no longer meet the customers’ needs, and saying goodbye to outdated business models.

Hiring the wrong people

Hiring staff is costly. And that’s before you even start paying their wage. Recruiting a new member of staff costs businesses around £3,000 on average. So, you’ll want to recruit the best fit possible to avoid doing it all over again.

But it’s not just about finding someone everyone gets on with, it’s about filling those skill gaps to help best support your business as it grows. So before you even start writing your job descriptions and budgeting for salaries, conduct a skills gap analysis. What skills do you already have in-house? Which are the most important to recruit for? Which are going to help you compete in the short and long term?

Loans to help your business succeed

If you don't have working capital to dip into and your savings have taken you as far as they can, perhaps it's time to explore your loan options.

External finance can help support your business as it grows. Giving you the confidence to invest in new product lines or market to your audience. Having working capital is essential when building a new business.

Interest-free loans

The best type of loan is an interest-free loan. These loans keep unnecessary expenditures to a minimum as you grow. These loans can be from family and friends or you can work alongside an angel investor to access funds and business advice without repaying a loan each month.

Learn more about finding an investor for your small business.

Startup loans

To start your business, you might benefit from an injection of cash. You’ll need to buy some insurance, initial stock, you might even need to hire someone straight away. Use your startup loan to invest in your new business from the very beginning. As well as borrowing from alternative finance providers, you can always apply for government startup loan schemes.

Small business loans

With a small unsecured business loan you can apply for up to £500,000 but with a secured business loan, you can access up to £2 million+. Use funds to bulk purchase inventory, renovate your business premises, consolidate debt — whatever will help you grow. These small business loans are designed to be affordable and flexible.

To sum up

All business owners make mistakes, it’s how you deal with them that sets you apart from businesses that fail and those who succeed. If you go into your business venture having done your market research and with an accurate understanding of your company's cash flow, you’re in a strong position to grow a thriving business.

Our business loan comparison tool is completely free for business owners to use. Find and compare eligible business loan options in seconds without affecting your credit score. Compare business loans.