The 3 Most Common Reasons Small Businesses Fail

Preparation can help your business become one of the success stories.

There's something about creating your own business that's tough to beat, despite the work that goes into it. According to the U.S. Small Business Administration, 99.9% of businesses across the U.S. are categorized as small. And though over 80% of all small businesses have no employees other than the business owner, nearly half of us own or work for a small business.

But those are just statistics. In reality, small business owners put their hearts, souls, and dreams into making their enterprises successful. Unfortunately, a certain percentage of those businesses will fail each year. Preventing failure starts with recognizing the warning signs. Here are three of the most common reasons small businesses close their doors.

1. They take on too much debt

Lack of cash flow is the number one reason small businesses shutter. We've all heard the saying, "It takes money to make money," and it's true. Still, taking on debt to get a business up and running means owing money before you have any cash coming into your business checking account.

That's not to say that small business owners should never take on debt, but it pays to be pessimistic. Don't imagine you'll be raking in the dough from the first day your shop is open.

Assume that things will start slow and cash will not always be plentiful. It may mean buying less inventory than you originally planned or being unable to offer all the goods and services you hoped to provide from day one.

Focus on factors you can control, like offering unparalleled customer service. As word spreads and your business grows, you'll have the cash you need to purchase more inventory -- without going deeply into debt.

2. There's no market for what you're selling

Let's say you play the accordion. Your father played the accordion, and his father before him. You naturally assume that everyone loves the instrument as you do and decide to open a music store featuring only accordions.

Before pouring yourself into any business venture, do your homework. Make sure there's a large enough market for what you're selling to turn a profit.

This leads us to our next big reason small businesses fail.

3. Lack of a business plan

You don't write a business plan to impress anyone else but to ensure that you've done your homework and have an idea of what you're getting into. A business plan does not have to be fancy or follow a specific template. What matters is that it directs you to answer the following questions.

What's my business model?

What is your business? How do you plan to make money? Are you selling a specific product to customers who walk through your door or many different products in an online store? Are you opening a business that sells memberships?

Takeaway: Outline how you intend to make money.

Is there a market need for what I'm selling?

Let's say you dream of opening a gym in a small town with three gyms. It's up to you to determine whether the market needs one more.

Takeaway: Determine whether there's a need for what you're selling. Is that need significant enough to keep customers coming back through the next recession or global health crisis?

Am I located in the right spot?

If your business will have a physical location, take into account who lives in the surrounding communities. Let's say you want to open a coffee shop in a neighborhood popular with Mormon families. Because Mormons don't typically use caffeine, there may be better spots. On the other hand, it may be the perfect location for an instrument store, clothing shop, or small cafe.

Takeaway: Pour yourself into finding out as much as possible about an area before committing to a lease. While there are services you can pay to do it for you, the U.S. Census Bureau offers a free demographic tool. Just type in a ZIP code, and you'll have access to the average education, employment rate, income, ethnicity, and more.

Can my business be competitive?

Before dedicating yourself to a new business, do what you can to determine whether the competition will make it challenging to stay afloat. For example, you don't want to open a pet store a block away from another, more established pet store.

If you have an online business, check out every possible site to learn who else is selling your products and if you can compete with their prices.

Takeaway: Figuring out whether you can be competitive before going head-to-head is an excellent way to save time and money. Further, studying the competition can help you pivot toward a more successful business idea. Say you want to open a pet supply store, but there's another nearby. You may consider opening a pet daycare or training center instead.

Do I have a marketing strategy?

Nothing you do as a business owner matters unless people know about you.

Takeaway: Decide how you're going to market your business. Will you send introductory coupons to area homes, engage people on social media, or work with local businesses to promote each other? You may decide to do all three. Whatever you do, set a marketing budget in advance, so you don't overspend.

Sure, some businesses fail, but many succeed. While there are no guarantees, addressing the above concerns and being prepared can help your business become one of those success stories.