6 Reasons Why Small Businesses Fail and How to Prevent It

According to the Asian Development Bank, there were around 1,076,000 micro, small, and medium enterprises (MSMEs) in the Philippines in 2021. It’s no surprise, given that 81% of Filipinos feel encouraged to start their own business. 

However, the reality is that one in five small businesses (20%) fails within their first year of opening. This statistic highlights that, while starting a business may feel like a dream come true for many, it doesn’t always guarantee long-term success. 

There are plenty of reasons why small businesses fail, from lacking market research to launching products too similar to existing ones. 

While business financing from companies such as JK Capital can help you avoid business closures, you should still understand the underlying causes of failure. 

6 Reasons Why Small Businesses Fail 

Business failure is common, which is why financial lending companies like JK Capital started offering help to organizations with the following underlying issues. 

1. Operating without proper market research and planning

Many SMEs fail in the first year because they launch products and services consumers don’t actually need. It highlights the importance of conducting thorough market research. Without a solid business plan to fulfill these needs, businesses become vulnerable to mismanagement, which could have fatal consequences. 

Additionally, it becomes much harder to secure a business loan since lenders may not feel confident they’ll get their money back.

2. Lacking capital and financial management

CB Insights found that 38% of startups fail because of insufficient cash flow. Businesses need adequate funding to cover expenses such as facilities, equipment, and, most importantly, employee salaries. If a company isn’t selling enough, it becomes highly susceptible to closure. 

3. Selling undifferentiated products 

Based on Statista’s data, 20% of startups worldwide failed because they were out-competed. It highlights the importance of having an enticing and unique selling proposition (USP) that resonates with your ideal audience. Products that lack differentiation from competitors or fail to offer a competitive advantage have a low chance of succeeding in the market.

4. Producing unengaging marketing 

A common mistake among business leaders is neglecting to invest enough resources in marketing their products or services. A “Build it, and they will come” approach is ineffective. 

The thing is that roughly 72.5% of Filipinos are on social media, meaning they encounter endless content from everyone else on the platform, including that from competitors. A lack of marketing efforts will further obscure businesses and hinder their visibility. 

5. Not adapting to market changes

Market demands constantly change, driven by new technologies and shifting consumer trends. Companies that fail to adapt and provide innovative and relevant products and services set themselves up for quick extinction. 

6. Poor leadership

Poor leadership can have a detrimental impact on various aspects, from project management to employee morale. Inexperienced leaders can mismanage companies, make incorrect investment decisions, and waste valuable resources, leading to the debilitation of the business. 

While it benefits you to understand why small businesses fail, it often isn’t enough. How you use this information to form strategies and take the appropriate action matters even more. 

How to Prevent Small Business Failure 

Internal struggles aren’t always fatal to your business, nor will they ever go away. If you’re facing cash flow issues, contact JK Capital to learn more about our business loan options to fuel your operations. The following strategies can help you overcome these challenges and protect your small business from failure.  

1. Conduct thorough market research and planning

A business plan is nonnegotiable if you want your company to succeed. It plots where you want to take the company and what you aim to achieve, as well as provides details about how you’ll structure your organization and manage finances—all key details for corporate longevity. 

2. Ensure sufficient capital and effective financial management

There are several options available to improve your small business’s cash flow. Effective financial management practices include limiting your spending to what’s necessary and ensuring customers pay on time by resolving invoices quickly or clarifying payment terms.  

Alternatively, exploring SME financing options such as bank loans can provide capital for day-to-day operations, employee wages, or equipment investments. Fortunately, accessing business financing in the Philippines is easy since you can quickly apply for business loans online. 

3. Stay adaptable to changing market trends

What works today may not work tomorrow. You should stay updated on the latest trends relevant to your business and customers. Stay connected by following your industry’s publications, blogs, and thought leaders to ensure you’re well-informed. 

It would also help encourage creativity and flexibility within your organization to keep your operations nimble and products and services fresh. 

4. Invest in customer research 

Who is your ideal customer? What are their likes and dislikes? The better acquainted you are with your customers, the better you’ll market to them. It can mean conducting surveys, improving feedback forms, and even interviewing past customers to see how you can better serve them. 

5. Hire the right people

A bad hire can affect your company’s performance and culture, in some cases. You must review every potential candidate even more thoroughly. Look beyond their resumes to assess their long-term value and compatibility with your existing team. 

While these suggestions aren’t exhaustive, they’re excellent starting points to help you form your own strategies for success.

Set Your Business Up for Success 

Although there are plenty of reasons why small businesses may fail, it isn’t to say that success is out of reach. Establishing a clear business plan, hiring the right people, and managing your finances wisely are all actions to help ensure your small business doesn’t close its doors soon. 

Since capital and a consistent cash flow are fundamental to any business, it’s worth considering applying for SME Loans in the Philippines from JK Capital. Contact us to learn about our business loan options, loan application process, and other services. You can also follow our Facebook page for more information on how to set your business up for success today!