Why Do Small Businesses Fail? Business Failure Signs and What to do if Your Business Fails


Running a small business can feel a lot like standing at the helm of a ship. You can be going full steam ahead with no issue, then see trouble on the horizon. Trying to course-correct to avoid the trouble can be tricky and requires you to act fast, before it’s too late.

When a small business owner senses an impending catastrophe, it can be tempting to turn a blind eye and hope it will all turn out alright. But just like steering that ship, it’s important to act swiftly to save your business from potential disaster. If your business is failing, it’s key to identify the problems before they escalate.

So how do you determine a course of action for a failing business? We’re here to help with tips on identifying potential problems and how to combat them before your business reaches the point of no return.

Why Do Small Businesses Fail?

Let’s start with some factors that can contribute to a business failing.

  1. Capital. Inadequate funds can make covering necessary expenses tricky. You may find it difficult to catch up on payments and struggle to break even.
  2. Inexperience. Starting a small business with no prior experience can be tough. Managing that business can be even tougher. It’s difficult to manage finances, employees, and all the other admin involved if you’ve never done it before.
  3. Inadequate marketing. A small business survives off its clientele. If your marketing hasn’t reached enough people, it may be difficult growing your customer base.

5 Signs That a Small Business is Failing

Not sure if your business is actually failing or just going through a difficult time? While neither is ideal, it’s crucial to know the difference so you can take appropriate action. Knowing what you can do to spot the signs early can make all the difference. Here are some signs that your small business is failing and might need some help.

1. Diminishing cash flow.

A steady cash flow is crucial to help your business succeed. If your funds are consistently trending downward, your business might be in trouble.

Lower profits can be a big reason why your cash flow is diminished and can indicate a number of problems. For example, your prices could be too high, driving customers away. On the other hand, your prices could be too low, chipping away at your net profits. It’s also possible that your expenses are exceeding your income.

2. High turnover.

Turnover is a normal part of running a business. But if you find yourself losing employees at a higher rate than you can manage, it may mean something about your business is amiss. Many failing businesses experience higher than average turnover.

Employee morale can make or break your business. If working conditions or wages aren’t meeting your employees’ needs, you may find yourself experiencing higher than normal turnover rates.

3. Inventory overload.

While it’s important to always have products available for customers, having too much backstocked inventory can be a bad sign for your business.

If you’re using your funds to stock up on products, it can leave you in a vulnerable position if you don’t have available cash to make payments or cover expenses and emergencies. This could spell trouble for your small business. Abundant products could also make your business a shoplifting target.

4. Nonstop problems.

Running a small business comes with plenty of hurdles. But battling constant problems — both big and small — could mean trouble for your business.

Tackling a nonstop stream of unexpected problems is one of the signs that a business is failing. It can prevent you from focusing on the bigger picture. Instead of innovating and streamlining, you may find yourself overly focused on the minutia. Not only could this stunt the growth of your small business — it may indicate greater underlying problems with management or cash flow.

5. It’s a one-man show.

Operating a business can make you feel like you’re a lonely island at times. That’s normal. Feeling like you’re handling everything alone all the time, however, could be a symptom of a bigger problem, and is one of the major signs that a business is failing. If you feel like you’re the only one calling the shots, it could mean you’ve failed to delegate tasks or that communication between you and the people in the next chain of command has broken down.

If you don’t have any employees, having a lot of responsibilities might be expected. But it may be that you haven’t considered outsourcing some of your tasks where possible. You may need a bookkeeper or a marketing expert to help you shoulder some of the weight. Your business may struggle to flourish if you’re too busy trying to take care of all the work yourself.

How to Save a Failing Business

… or at least get yourself back on track.

So you’ve identified that your business may be in trouble. Now what? While there’s no simple solution, here are some tips on how to save a failing business before it’s too late.

Learn how to manage cash flow and costs.

If your business is facing problems, the last thing you need is to be hemorrhaging money. Taking control of your expenses and finances is a good way to get a handle on things. Start by cutting back on any extraneous costs. Beyond that, look into ways to cut back on utilities. Review your monthly bills and see if there are any areas where you can trim the fat.

Additionally, keep on top of the money you’re owed.Try to keep up with collections and make sure you’re receiving payments on time.

Don’t be afraid to lean on your support system.

Not only can failure be disheartening — it also can leave you feeling gun-shy or embarrassed. This can make it difficult to reach out for help. Try to curb that impulse. Friends, mentors, and even fellow business owners can be a great help to you. In addition to potentially boosting morale, a support network can be a rich source of useful advice that may help you get back on track.

Get strategic.

If your small business is struggling, it may be a sign that it’s time to reassess your business plan. One way to do this is to perform what’s called a SWOT analysis. The purpose of a SWOT analysis is to identify your business’ strengths, weaknesses, opportunities, and threats. This can help you to better understand what your business offers that others don’t, while also identifying areas for growth.

Figure out how to improve customer satisfaction.

The customer is always right. It may seem like a worn-out platitude, but the point still stands. Your clients are the ones keeping the lights on. You offer goods and services for them. Knowing how to focus on customers and how to increase customer satisfaction is crucial.

So take a beat to consider what else they may want. Consider sending out a survey or asking your regular customers what they want to see from you. Listen to customer feedback and see where you can improve to better meet their needs.

Consider your assets.

Take stock of what you have and whether it can be doing more to benefit you. If you own your business’s location, think about potential ways to use it in addition to your normal business activities. Maybe another small business could lease half of it to operate from, or you can rent it out for events.

When your business is on the rocks, any infusion of cash matters. If you must, you might consider selling the property to someone who will lease it back to you, but of course it’s important to weigh available options before making a major decision like that.

Reassess repeat problems.

If you’ve found yourself encountering the same problems over and over again, it may be time to sit down and really address them. Figure out the root cause of the problem and a course of action to ensure they don’t occur again. Tackling whatever issues are within your control could help steer your small business back on course.

Make sure your team is all in.

If you feel like you’re shouldering a lot of responsibility on your own, it’s possible it’s because your team is out of the loop. Not knowing the business’ goals or what is expected of them could lead to miscommunication and low overall performance.

Make sure your employees are clear on your business’ mission and the game plan to get your business back on track. Keep them informed along the way and make sure you’ve made your expectations clear. Provide training as needed. Above all else, make sure they feel valued. Keeping morale up can help keep employees motivated and invested.

Why Do You Need Business Insurance?

Even the healthiest small business can face unexpected challenges. It’s impossible to predict what’s coming down the road next. Small business owners, as a result, face uncertainty every day. An unanticipated financial setback could leave your business in ruins. That’s why it’s important to protect your business in any way you can.

That’s where Simply Business® comes in.

We work with small business owners to personalize coverage and find business insurance plans that work for their specific needs. Simply Business works with top insurers to offer a variety of coverage options, and help you find the best value.

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What Happens if Your Business Fails?

If you can’t seem to pull your small business back from the brink in spite of your efforts, it might be time to consider whether the business has run its course. Knowing how to close a failing business efficiently will be crucial. Here are some steps to consider taking to make sure your loose ends are tied.

  • Speak with a lawyer first. This could help you avoid legal trouble in the long run.
  • Reach out to any investors and lenders involved to let them know you’re planning to shutter your operation.
  • Contact your vendors and suppliers to end services.
  • File all the paperwork with the state and federal government to officially dissolve the business.
  • Close out your business credit card and bank accounts to help cut your losses.
  • Consider talking to a professional financial advisor to review your situation and see what they would advise.
  • Don’t be afraid to reach out to your network of friends, family, and peers for help. It’s likely many of them have gone through similar challenges and can provide support.

What happens to a small business loan if the business fails?

In most cases, business owners will be expected to pay their debts after closing their business, including loans they may have taken out. Check with your lender to see what their expectations are and if they have programs to help with repayment.

What happens to a lease when a business fails?

What happens to your lease after closing your business will depend largely on your leasing agreement. Unless the agreement dictates that the terms of the lease will be conditioned on the continuation of your business operations, you’ll likely be expected to continue paying for the lease as usual. Consult your lease contract and contact the lessor to determine their expectations. Also consider speaking with a lawyer.

How to pay back investors if your business fails.

Generally speaking, you will be responsible for paying back those who have invested in your small business. Closing a business permanently is a complicated process and can be costly, so making sure you have the funds to make necessary payments means being strategic.

Remember: your first priority is to ensure any employees are paid first. After that, you’ll be required to pay back debtors and creditors. Investors and business owners are generally paid last.

Consulting with a financial advisor could be a good place to start. They may be able to guide you through the process and make sure you have a good strategy to pay back everyone who needs to be.

To make sure you have the funds to cover these payments, make the most of your business’ assets. This might include selling off remaining inventory, furniture, intellectual property, and equipment. Get as much value out of shuttering as you can. If you have the opportunity to sell the business itself, it may be worth considering.

Hiring a lawyer may prove useful as well. If you are ultimately unable to make necessary payouts to your investors, having a legal team on your side can’t hurt.

Turning the Ship Around

If you’re worried that your small business might be failing, don’t take it too hard on the chin. You might be tempted to react emotionally or in a panic. Try your best to keep a level head. Breathe. Figure out what’s going wrong and approach it strategically. Remedy the problems that are within your control. It may take time, but if you act with precision, you may be able to turn the ship around.

Kristin Vegh

After several years of working in insurance while also freelance writing, I’ve finally found where the two interests intersect. I’m a writer with Simply Business with an insurance processing background and a love of research.

Kristin writes on a number of topics such as small business trends, license reciprocity, and BOP insurance.