Why Do Black-Owned Businesses Fail?

The rate of failure for Black-owned businesses is at an all-time high today.

Black entrepreneurs launch thousands of new businesses every year, yet they are failing at very high rates.

Overall, 20 percent of small businesses generally fail within the first year. About 50 percent make it to the 5-year mark, and 62 percent survive to be a decade old. For African-Americans, the statistics can be even grimmer. Eight out of 10 Black-owned businesses fail within the first 18 months.

These statistics have remained pretty much unchanged over time. And, contrary to popular misconception, the survival rate curve is pretty similar across industries. No single industry has a distinctly higher percentage of startups that fail. This is the case even for the restaurant industry.

Black-owned businesses lag substantially in sales, profits, employment, and survival. Black entrepreneurs often find themselves with no alternative to pulling the plug. And for those that do actually survive, they’re not growing as quickly or as big as businesses owned by other ethnic groups.

Why do Black-owned businesses fail?

Failure is not something you want to worry about when you start a business. If you want your business to have a chance at success, you need to be aware of and avoid the 8 common reasons why Black-owned businesses go out of business.

  1. Badly thought through business plans. You can put your blood, sweat, and tears into your enterprise, but without a complete, solid and realistic plan to start with, it’s all for naught.

What you see as a perfect business plan on paper may not fare so well in reality. A business plan should be based on current information and market research. It should include:

  • An outline of achievable goals for your business;
  • A clear illustration of the strategies and timelines that should be implemented and met;
  • A picture of an ideal team;
  • Detailed and up-to-date market analysis;
  • The state of the competition;
  • Financial projections;
  • Plans for managing the business’ growth and budget.

While most Black-owned businesses have solid business plans, only a few stick with them. If you start changing your strategies or doubling your spending, you’re risking failure. 

  1. Lackluster market research. Ensuring consumers want the goods you sell seems a no-brainer. Unfortunately, many Black-owned businesses fail for the simple reason that no one wants to buy what they’re selling.

You can have enough capital, the most ingenious idea, and a great business plan to get everything off the ground, but if no one wants your product, it’s only a matter of time before your business crashes.

A product needs to fulfill an unmet need or solve a problem. It’s much easier to satisfy an existing need rather than create one and persuade consumers that they should spend money on it.

Knowing the customers’ income level, gender and age is vital for proper marketing strategies. Market research will help you ensure that the product does not miss the mark.

  1. Tough competition. Focusing on your own business instead of others’ is good advice. However, a great many Black-owned businesses lose out to competitors because they did not pay attention to the competitive landscape of their business.

Even when you launch a new product in the market, it doesn’t take long before new companies start to pop up, vying for their place in the sun. Pay attention to the landscape.

  1. Bad team chemistry. Lacking the correct team composition is another reason behind the failure of many Black-owned businesses. This is a blunder that will result in failure from the start. It is vital to create a team of dedicated individuals with complementary traits and characteristics. While it’s not easy to find the right talent for the job, resources like Facebook and LinkedIn have made it easier to do so.
  1. Cash-flow issues. Even big companies with robust marketing strategies can fall prey to the lack of positive cash flow. Cash flow issues are a major culprit in the failure of Black-owned businesses. Businesses with a positive cash flow have the required operating funds to settle debts, pay employees, reinvest in the business, etc. 

Cash flow difficulties occur when too much of a business’s revenues are tied up in accounts receivables. Stocking too much inventory is another way cash flow is disrupted.

  1. Failure to adapt. If you remain rigid, your business will be just another data point boosting the startup failure rate.

It’s worth knowing that the need you’re fulfilling now may not always be there. Take Blockbuster. Back in the 1980s and 1990s, Blockbuster was the Walmart of video stores. When the Internet started to gain popularity, it failed to keep up with the times, telling themselves the Internet was just a fad. Were they wrong? Netflix and Redbox crept in and stole their reign.

Don’t be another Blockbuster. Pay attention to the market to know when you may need to modify your business plan. Staying on top of key trends will give you ample time to alter your business strategy so that you can remain successful.

As an example, in our connected age consumers expect even small shops to accept credit cards and “currencies” like Apple Pay. Adapt or die.

  1. Unsustainable growth. When a business has an established customer base and a good cash flow, expansion makes sense. 

A common mistake most Black-owned businesses make is taking on more business than they can handle. Businesses should treat expansions as though they are starting all over again. When businesses expand too fast and don’t take the same care with planning, research and strategy, the financial drain of the failing businesses can sink the whole enterprise.

Slow and steady growth is the way to go. It helps to take the time to understand the markets and areas you’ll be reaching if you’re expanding your business’s reach.

  1. Poor management. Management does have an effect on your bottom line. Managing a business takes distinct skills, including in purchasing, marketing, finance, creating a cohesive team, and hiring and managing employees.

Business owners without these skills and their failure to recognize the importance of the very skills they lack are reasons why many Black-owned enterprises fail.

Some business owners fall into the overconfidence trap and would rather struggle with a certain aspect of running a business than educate themselves or outsource work to professionals.

Conclusion

Running a successful business cannot be left to chance or luck. With the right planning, market research, management and flexibility, Black-owned businesses have a better chance of success.

The eight reasons above should give you a clear understanding of how to turn around a failing small business to avoid becoming a failure rate statistic.