Small businesses are critical to the American economy. They help to serve local communities and are engines of job growth.
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Starting A New Business
Owning a small business has its advantages such as independence. Entrepreneurs are their own boss and have complete control of their business. Small business owners create opportunities for themselves and can benefit from financial gain.
However, starting a new business is risky, and the failure rate for new businesses is high. With the pandemic, small businesses have been hit hard for several reasons. Many were forced to close during stay at home orders, and unfortunately many had to close their doors permanently.
In the U.S., the economy varies depending on the state that entrepreneurs live and have their business. Some states have a thriving economy for small businesses, while others do not. It can be difficult to determine which states have the highest and lowest small business survival rates.
AdvisorSmith, which produces research on small business success, took a deep dive into the failure rates of small businesses in their latest study.
To find the survival rates of businesses, AdvisorSmith examined data published by the U.S. Bureau of Labor Statistics. The data reports on the survival rate of companies based upon employment reports to various government agencies.
The business survival rate is measured starting from a business’s first employment report, including self-employed workers. To determine failure rates for businesses, they examined business data as of 2020, taking the failure rate of businesses that were started in each of the preceding ten years.
AdvisorSmith found that 22 percent of small businesses nationally fail within the first year, 32 percent fail within the first two years, and 40 percent fail within the first three years of business. Half of small businesses fail within the first five years, and two-thirds fail within ten years.
Small Business Failure Rates by Industry
Additionally, they examined the failure rates of businesses in 18 major industries over the past five years to see where businesses are more likely to fail.
For the industries, they examined businesses that started in each of the five years between 2015 and 2019 and calculated the failure rate through 2020.
The industry with the highest failure rate nationally was information. For businesses in the information sector, 25 percent fail within the first year, 40 percent fail within the first three years, and 53 percent fail within the first five years.
The industry with the lowest failure rate was agriculture, forestry, fishing, and hunting. Only 12 percent of these businesses fail in the first year, while 20 percent fail by the third year, and after five years, only 29 percent of businesses fail.
States With The Highest And Lowest Failures
AdvisorSmith also examined all 50 states and the District of Columbia to see which states had the highest and lowest failure rates.
They calculated the business failure rates for each state for each of the past five years and took a weighted average approach to rank the states for the survival and failure rates.
Washington was the state with the highest failure rates for small businesses. A nationwide high of 37 percent of companies in the state did not survive their first year, while 44 percent failed within the first three years. Washington businesses failed 54 percent of the time by the fifth year in business.
AdvisorSmith found that the state with the lowest failure rate was Massachusetts. In Massachusetts, 20 percent of businesses failed within the first year, 36 percent within three years, and 46 percent within five years.
To view the small business survival rates for all industries and states, visit https://advisorsmith.com/.
