A small business that starts today is much more likely to make it to the five year mark than one that started in the 80’s, 90’s, or 00’s, according to recent studies that measured Federal Census data from 1977-2015. The small business failure rate has been declining for a while, and although there are shifts in the rate that cause it to fluctuate over time, the downward trends are still noticeable.
Scott Shane, Entrepreneur writer and professor at Case Western Reserve University, says there are 5 reasons the small business failure rate has been declining. We’ll share those reasons with you below.
5 Reasons the Small Business Failure Rate is Still Declining
“Economists are not sure why, but I think five factors are central: A shift of small business to more favorable sectors of the economy; less competition from new entrants; fewer marginal businesses being formed; smarter small business owners, and better business-management technology.”
These are the 5 core reasons the small business failure rate is continuing to drop – in other words, these are the 5 reasons small businesses are more successful today than they have been in the last decades. We offer an explanation of each reason below.
1. A shift of small business to better economic sectors
A random sample of small businesses back in the 60’s or 70’s would have included a large proportion of companies in industries like construction, which are infamous for high failure rates. A sample of companies today shows that most small businesses are in industries (or sectors) like services, where business closure rates are among the lowest. Between the changes, the rate of small business survival went up and is continuing to rise.
2. Less competition from new businesses
Fewer small businesses are being formed today than in past decades. Census data shows that the rate of new businesses dropped by more than half – 51% – from 1977 to 2015. With less competition from new businesses, existing businesses and the smaller numbers of new companies have a better chance at survival than before.
3. Fewer marginal businesses started
Marginal businesses can be a big problem for other small business’ survival. Marginal businesses are formed on a faulty premise – either no one wants to buy their product or their audiences are already happy with another company in their industry. These companies are especially likely to fail, so with fewer of them around, the failure rate declines.
4. Smarter, more experienced/educated owners
Business owners in the past may not have received as much education or had as much experience in business as those of today. That gives modern business owners an edge in the likelihood of success – their businesses are much less likely to fail.
As Shane put it, “Small business owners today are better at managing their businesses than their counterparts were 35 years ago. They are better educated and are more likely to have studied business in school. Moreover, the growth of the Internet and the popularization of academic research has exposed more small business owners to knowledge about how to run a business effectively.”
5. Better tech for business management
It’s harder to run a successful business without computers, CRM and inventory software, POS terminals, etc. As technology continues to improve, it gives small business owners an increased advantage. By helping them be more productive, efficient, and error-proof, fewer mistakes are made and profits are maximized. It’s a conducive environment for success.