A poll of small business owners recently forced to close or sell their companies showed 1 in 6 entrepreneurs said tariffs played a role in their decisions.
Why Small Businesses Fail: Key Insights from Entrepreneurs Who Closed Their Doors
Business owners form the backbone of the U.S. economy, driving most of the country’s employment. But the harsh reality is that nearly 1 in 5 new businesses close within their first year, and this rate rises to 50% by the fifth year, according to government data. A new survey delves into why some small businesses shut down or are sold and shares valuable lessons from former entrepreneurs on what others should know.
Why Do Small Businesses Fail?
The survey, conducted by Gateway Commercial Finance, a firm specializing in invoice discounting, interviewed 213 small business owners who were forced to either close or sell their companies. Titled “Lessons From Failure: What Former Entrepreneurs Want You to Know”, the findings reveal that over half (54%) of the respondents admitted they ignored warning signs of trouble for up to six months before realizing closing was their only option. The survey also suggests that the 50% failure rate within five years might even be higher, with 67% of respondents confirming their companies failed in that time span.
The reasons for the closures aren’t surprising. The most common culprit was cash flow issues, followed by economic uncertainty, declining customer demand, inflation, rising labor costs, and unexpected overheads. However, there was one unexpected factor: tariffs. Nearly 1 in 6 business owners said the tariffs imposed during Donald Trump’s first term played a significant role in their decision to close. Higher import taxes and disrupted supply chains made it incredibly difficult for small businesses to stay afloat.
Missed Opportunities and Delayed Responses
The survey also uncovered that many business owners were slow to respond to the challenges they faced. A slim majority (54%) of respondents had ignored warning signs for as long as six months. Another 19% took up to three months to take action. In total, 65% of the respondents admitted they were especially sluggish when addressing financial problems.
Reflecting on what they could have done differently, many of these former business owners highlighted key actions they should have taken sooner: cutting costs, adjusting prices, or revising the business model. Some also mentioned the importance of better monitoring cash flow, laying off staff when necessary, and seeking loans or investment earlier.
The Importance of Capital and Funding
One crucial takeaway from the survey was the role of capital in business survival. A significant 62% of respondents believed they would have stayed in business if they had secured more funding. Most missed out on funding opportunities, such as applying for small business loans, borrowing from family or friends, using business credit cards, or applying for grants. Surprisingly, crowdfunding was another untapped funding option—only 15% of participants had tried it, but 31% regretted not using it more. This points to a gap in awareness and education about nontraditional funding sources.
Valuable Advice for Aspiring Entrepreneurs
Despite the setbacks, the ex-business owners had valuable advice for others looking to start or grow their own ventures. Their top recommendations included:
- Acknowledging mistakes and learning from them
- Doing thorough market research before launching
- Creating a solid business plan
- Listening to customer feedback and responding accordingly
- Staying on top of cash flow management
- Raising capital early
- Investing more in advertising
- Having a co-founder or business partner
- Avoiding burnout
The Ultimate Lesson: Try Again
So, what’s the key takeaway from these former entrepreneurs? More than half of them said they would try starting another business, knowing what they know now. One thing many wished they had done more while running their businesses was to “vibecode”—listening to their intuition and gut feelings when making decisions, rather than relying solely on facts and data.
Resilience and a New Start
The study concludes with an important reality: most business failures happen due to avoidable delays, missed funding opportunities, and internal misalignments. However, what stands out in the survey is the remarkable resilience of these former business owners. Instead of just focusing on their mistakes, many are gearing up for their next venture, armed with lessons learned from their past experiences.
If your business is facing tough times, the hindsight shared by these entrepreneurs could offer you the foresight you need to make better decisions and steer your business toward success.
