23.2% of Businesses Fail in Year 1: Here’s How to Strengthen Yours

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About 1 in 4 U.S. businesses fail within their first year of operation, according to the latest data from the U.S. Bureau of Labor Statistics (BLS). To put that into perspective, there are 33.2 million small businesses across the country, so a significant number of new ones close each year.

To determine where businesses fail at higher rates, LendingTree researchers examined state and industry data. Here’s what we found, and how those considering starting a business can boost their chances of success.

  • 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. In Washington, 40.8% of businesses fail in that first year, followed by the District of Columbia (32.2%) and Idaho (30.7%).
  • California sees the lowest business failure rate within the first year. In the Golden State, 18.5% of businesses fail in that first year, followed by Kentucky (18.8%) and Massachusetts (19.2%).
  • The transportation and warehousing industry sees the highest percentage of businesses fail in that first year. In this industry, businesses employ truck drivers, airline pilots, sailors, school bus drivers and more, and 24.8% fail within the first year. It’s followed by the mining, quarrying, and oil and gas extraction (24.4%) and information (24.1%) industries.

According to the latest data looking at the March 2023 status of businesses that opened in March 2022, 23.2% of private sector businesses in the U.S. fail within the first year. In the same period, inflation was at 5.0% year over year, adding to difficulties for new businesses.

The 1-year business failure rate jumped more than two percentage points from 20.8% in last year’s report (which compared March 2022 and March 2021). The report before that (which compared March 2021 and March 2020) found that 18.4% failed in the first year, meaning the rate has jumped by at least two percentage points two years in a row.

Interestingly, the 2021-to-2022 data coincided with an even higher inflation rate — 8.5% year over year. However, this prolonged period of elevated inflation could be why we’re repeatedly seeing increases in business failure rates. After all, the longer Americans feel the squeeze of high prices for everyday purchases, the less likely they may be to buy new products and services from small businesses.

Business failure rate across the U.S.

Time frame Percentage of businesses that fail
Within 1 year 23.2%
After 2 years 32.8%
After 3 years 36.2%
After 4 years 43.2%
After 5 years 48.0%
After 6 years 52.9%
After 7 years 56.6%
After 8 years 59.6%
After 9 years 62.2%
After 10 years 65.3%

Source: LendingTree analysis of U.S. Bureau of Labor Statistics (BLS) data.

We also looked at the five- and 10-year business failure rates, which compared March 2023 and March 2018 and March 2023 and March 2013, respectively.

At those points, 48.0% and 65.3% of businesses fail, respectively. (Though the one-year failure rate increased compared to last year’s data, the five-year failure rate dropped slightly from 48.4% to 48.0%.)

Washington state has — by far — the highest business failure rate within the first year, at 40.8%. (Remember, this looks at businesses in March 2023 that opened a year prior.) That’s 8.6 percentage points higher than the second-highest rate, 32.2% in the District of Columbia.

In the second quarter of 2022 — April to June — Washington state had a net loss in private sector jobs. And Washington state’s unemployment rate jumped from 4.2% in March 2022 to 4.5% in March 2023, which could signify more businesses closing in the year.

Important: Washington state saw a massive turnaround from last year’s report, in which its one-year failure rate was the second-lowest across the U.S., at 16.7%. But it also had the highest 10-year failure rate in last year’s report, at 78.5%.

Interestingly, D.C. ranks second, first and second, respectively, among one-year, five-year and 10-year failure rates. That’s despite the district’s significantly higher median household income ($101,722) compared to the U.S. ($75,149).

That said, D.C. is an expensive place in which to live. In fact, it costs about $550 more to rent in D.C. than across the U.S., and median home values are more than twice as high. This, combined with other factors, makes the nation’s capital a difficult place to start a business.

After D.C., Idaho is third with a one-year business failure rate of 30.7%. The state has a slightly lower median household income than the U.S., which could make starting and keeping a business more difficult. (The state is also sixth for its five-year failure rate.)

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 23.5% 26 45.6% 42 63.9% 35
Alaska 27.3% 6 42.7% 49 60.7% 48
Arizona 25.7% 10 50.4% 15 65.9% 22
Arkansas 21.9% 42 50.8% 13 66.2% 21
California 18.5% 51 46.2% 39 64.5% 32
Colorado 23.8% 22 50.1% 17 66.5% 16
Connecticut 25.2% 16 48.9% 26 67.0% 11
Delaware 25.0% 18 51.9% 8 68.8% 5
District of Columbia 32.2% 2 58.1% 1 70.8% 2
Florida 22.6% 37 49.2% 23 65.5% 23
Georgia 28.7% 4 51.0% 10 65.3% 26
Hawaii 23.0% 33 49.6% 20 65.2% 28
Idaho 30.7% 3 52.2% 6 66.5% 16
Illinois 23.0% 33 44.9% 44 63.7% 37
Indiana 23.0% 33 46.9% 36 61.4% 44
Iowa 23.5% 26 46.2% 39 61.1% 45
Kansas 26.2% 7 53.5% 4 67.1% 10
Kentucky 18.8% 50 47.8% 30 62.7% 39
Louisiana 23.6% 25 47.2% 33 65.0% 30
Maine 24.0% 20 46.8% 38 62.5% 41
Maryland 25.1% 17 51.0% 10 66.5% 16
Massachusetts 19.2% 49 43.3% 47 61.1% 45
Michigan 21.9% 42 45.0% 43 64.8% 31
Minnesota 22.3% 38 42.4% 50 59.2% 50
Mississippi 23.5% 26 47.9% 29 65.4% 24
Missouri 25.4% 13 55.4% 2 69.3% 4
Montana 26.1% 8 42.4% 50 60.1% 49
Nebraska 23.2% 31 49.1% 24 69.7% 3
Nevada 28.2% 5 52.9% 5 66.8% 13
New Hampshire 25.3% 15 54.0% 3 66.3% 20
New Jersey 21.4% 45 50.5% 14 66.8% 13
New Mexico 25.7% 10 51.9% 8 68.3% 6
New York 21.5% 44 50.1% 17 66.8% 13
North Carolina 23.3% 30 47.0% 34 62.6% 40
North Dakota 22.9% 36 49.0% 25 67.7% 9
Ohio 23.8% 22 47.0% 34 61.0% 47
Oklahoma 20.9% 48 48.8% 27 66.5% 16
Oregon 25.6% 12 47.8% 30 61.6% 43
Pennsylvania 21.3% 47 45.8% 41 65.2% 28
Rhode Island 25.4% 13 50.2% 16 66.9% 12
South Carolina 22.0% 41 49.4% 22 65.4% 24
South Dakota 26.0% 9 43.9% 45 58.2% 51
Tennessee 23.1% 32 46.9% 36 65.3% 26
Texas 22.2% 39 47.3% 32 64.1% 34
Utah 23.7% 24 49.5% 21 62.3% 42
Vermont 24.6% 19 49.7% 19 64.2% 33
Virginia 22.2% 39 43.5% 46 68.3% 6
Washington 40.8% 1 51.0% 10 76.0% 1
West Virginia 23.4% 29 42.9% 48 63.9% 35
Wisconsin 21.4% 45 48.1% 28 63.2% 38
Wyoming 23.9% 21 52.0% 7 68.0% 8

Source: LendingTree analysis of BLS data.

Conversely, California has the lowest business failure rate within the first year, at 18.5%. It’s followed by Kentucky (18.8%) and Massachusetts (19.2%).

Notably, California’s unemployment rate had already returned to pre-pandemic levels by March 2022 — the start of our review period.

The transportation and warehousing industry has the highest percentage of businesses that fail in the first year (24.8%).

This industry includes roles in air, rail, water, truck and pipeline transportation, among others. It also includes postal couriers, taxi and rideshare drivers, school bus drivers, and warehousing and storage workers. Because of the ties to travel — which can be a tough sell, especially during times of heightened inflation — and the potential for significant startup costs, these businesses might be more prone to shuttering within the first year.

After transportation and warehousing, the other industries with the highest one-year failure rates are:

  • Mining, quarrying, and oil and gas extraction: 24.4%
  • Information: 24.1%
The mining sector saw a marked uptick in unemployment during the examined period, spiking from 2.6% in March 2022 to 6.5% in March 2023, signaling a general industrywide instability that would make it difficult for new businesses to thrive.

At the same time, the information sector — which ranked first in the previous year’s study — saw unemployment rise from 2.3% in March 2022 to 3.1% in March 2023. (For context, some jobs in this industry include producing and distributing information or cultural products, and data processing.)

But as Matt Schulz, LendingTree chief credit analyst, notes: “It seems like information would be a difficult space to break into. 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.”

Once you look at the five-year failure rate, though, the information industry takes the lead, with 55.7% of businesses failing.

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
Accommodation and food services 14.2% 18 42.9% 12 61.8% 11
Administrative and waste services 23.3% 4 49.1% 6 65.8% 7
Agriculture, forestry, fishing and hunting 15.1% 17 34.8% 19 49.5% 19
Arts, entertainment and recreation 17.1% 15 43.5% 10 64.6% 8
Construction 19.2% 10 43.7% 9 59.9% 14
Educational services 19.1% 11 43.3% 11 61.1% 12
Finance and insurance 22.6% 5 46.8% 8 62.5% 10
Health care and social assistance 21.1% 7 42.2% 15 64.3% 9
Information 24.1% 3 55.7% 1 70.9% 2
Management of companies and enterprises 20.0% 8 49.3% 4 67.0% 5
Manufacturing 17.6% 14 42.4% 14 56.4% 17
Mining, quarrying, and oil and gas extraction 24.4% 2 55.4% 2 75.5% 1
Other services (except public administration) 15.6% 16 41.3% 16 60.4% 13
Professional, scientific and technical services 22.2% 6 49.8% 3 69.1% 4
Real estate and rental and leasing 17.8% 13 40.8% 17 57.8% 16
Retail trade 12.9% 19 40.2% 18 58.3% 15
Transportation and warehousing 24.8% 1 48.4% 7 66.0% 6
Utilities 19.6% 9 42.5% 13 54.3% 18
Wholesale trade 18.7% 12 49.3% 4 69.9% 3

Source: LendingTree analysis of BLS data.

Conversely, the retail industry — which had the highest five-year failure rate in last year’s report — has the lowest one-year failure rate (12.9%). This could be due to the general resurgence in public life as pandemic awareness slows.

Meanwhile, agriculture, forestry, fishing and hunting has the lowest failure rate after both five (34.8%) and 10 years (49.5%).

Many factors contribute to small businesses failing, including:

  • Inflation: The cost of materials can make it difficult to own a business. When you add inflation to the mix, profit margins can suffer, making survival more challenging. Although inflation was not as extreme from March 2022 to March 2023 compared to the previous period, the costs can add up for consumers.
  • 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. 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.
  • Bad luck: Yet another reason why businesses might fail is bad luck. Sometimes the timing isn’t right, or other factors out of their control prevent business owners from achieving success, Schulz says.

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 develop 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 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 accessing 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, for which you may not have been able to qualify.

For context, a “very good” personal credit score starts at 740. Most lenders consider borrowers with that score 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. Plus, 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 to help build your credit over time.

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, spreading the word about what you have to offer is crucial.”

That’s why marketing your business and products is 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.”

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.

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 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.

“The Small Business Administration and Department of Commerce websites are great places to start, but a simple Google search of “small business resources near me” can reveal a lot of options as well,” Schulz says. “For women, people of color, the LGBTQ+ community and other underserved populations, there are groups out there aiming to help. Starting a business is incredibly difficult, and the odds are stacked against you in so many ways. You can shift the odds in your favor a bit by enlisting some help from time to time.”

LendingTree researchers analyzed the latest U.S. Bureau of Labor Statistics (BLS) data to find business failure rates 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 2022 remained open in March 2023, while the five-year data compared March 2018 and March 2023 and the 10-year data compared March 2013 and March 2023.

Source

This article originally appeared on LendingTree and was syndicated by MediaFeed.

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This article originally appeared on LendingTree and was syndicated by MediaFeed.

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