A Survey Detailed the Top Reasons Businesses Fail. Here’s How to Avoid Them

While entrepreneurs create the bulk of U.S. companies and the majority of the nation’s jobs, almost 1 in 5 new businesses fail within the first 12 months of their launch. That daunting total rises to a 50 percent rate within five years, according to government statistics. New data examines the main reasons behind recent closures and sales of some small companies, as well as the lessons their owners want to pass on to benefit other founders.

The insights come from a recent survey by Gateway Commercial Finance, an invoice factoring company, which questioned 213 small business owners who’d been forced to sell or shutter their companies. Titled ”Lessons From Failure: What Former Entrepreneurs Want You to Know,” the compendium of those responses indicates that 54 percent of respondents said they ignored warning signs their firms were in trouble for up to six months before admitting closure was a real possibility. It also suggested the official data on failures within five years is underestimated, with 67 percent of founders telling the Gateway poll they went under within five years.

Most of the principal reasons those owners wound up shutting down or selling up are well established causes of business failures. Poor cash flow led the list, followed by economic uncertainty, declining customer demand, inflation, rising labor costs, and unexpected overhead expenses.  Farther down on the list—but still a notable contributor—were the effects of tariffs from President Donald Trump’s first term, and dramatic increases in import duties after he took office again.

While slight majority of participants admitted they’d ignored red flags that their businesses were struggling for up to six months—with another 19 percent having closed their eyes for up to three—still more said they’d been late to react to those troubles. Nearly two-thirds, or 65 percent of respondents said were particularly tardy taking action to address financial problems.

Topping the list of remedial reactions former entrepreneurs said they should have taken sooner was cutting costs, and adjusting pricing or updating their business model. Others faulted not having monitored cash flow more regularly, not laying off staff when that had become necessary, and failing to apply for loans or other funding they needed.

Indeed, 62 percent of participants believed they’d still be in business if they had secured additional capital. The missed opportunities cited most frequently included securing small business loans, turning to family or friends for funds, using a business credit card, or applying for grants.

“Crowdfunding also stood out as a particular missed opportunity,” the report said. “Only 15 percent tried it, but among those who didn’t, nearly one-third (31 percent) wished they had. This suggests there’s room for greater awareness and education around nontraditional funding paths.”

But those unfortunate entrepreneurs also had advice for aspiring or newly launched business owners. Leading the list was that small company owners must acknowledge their mistakes and learn from them, followed by doing exhaustive market research before opening their doors.

Others recommendations included creating the strongest possible business plan, listening to customer feedback, focusing on cash flow, securing necessary additional funding early, spending more on marketing, having a co-founder or partner, and avoiding the threat of burnout.

What was the last word from those failed entrepreneurs in Gateway’s poll?  For just over half, it was their desire to take a second shot at launching a company. A particular motivator for those who expressed that desire was to rely on “vibecoding”—using intuition, emotion, or gut instinct to make decisions rather than data alone—as a business management tool that didn’t exist when they were bosses.

“This study reveals how often small business closures stem from preventable delays, overlooked funding options, and internal misalignment,” the conclusion notes. “But it also highlights something more powerful: resilience. The majority of former owners aren’t just reflecting on past issues. They’re rebooting, better equipped for what’s next.

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