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What is the Lifespan of a SME in the USA?

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In the U.S., the number of small and medium-scale enterprises totals around 34.8 million, making up for 64%% of new jobs available in the country.

If you're one of the many aspirants looking to start your own enterprise, having a general idea of the chances of your business surviving in its niche is useful in a bustling country like the United States.

In this article, we'll explore the typical lifespan of SMEs in the U.S. and what factors determine whether a business thrives or shuts down within a few years.

What Constitutes a Small or Medium-sized Enterprise in the U.S.?

Any business, to fall within the qualifications of an SME, should meet certain specific criteria on the number of employees and annual turnover. The criteria for all of these factors have been defined by the Small Business Administration, based on the industry to which that particular business falls under, marking a business either small or medium-sized.

In general, a small business in manufacturing and mining industries should employ less than 500 people. Annual profits of non-manufacturing industries should be less than $7.5 million.

While medium-sized enterprises are less clearly defined they should typically employ between 100 to 999 employees, pulling revenues from $10 million to $1 billion.

Factors That Influence an SME Longevity

Insurance

Insurance is a financial safety net that protects businesses from potential risks and losses. A general liability insurance for business policy is one of the most important insurance policies an SME can acquire. Such a policy protects businesses from financial losses due to third-party claims.

It prevents businesses from facing devastating financial losses due to lawsuits, accidents, or property damage. Without coverage, a single lawsuit could bankrupt a small business. This policy is essential for future-proofing.

Economic Conditions

The general condition of the economy is essential for the survival of SMEs. In times of 'economic boom', consumer expenditure rises, borrowing conditions enhance, and companies have an easier time growing. On the other hand, economic declines like recessions or financial crises may result in decreased demand, cash flow problems, and challenges in sustaining operations.

Market Demand and Competition

Demand for a product or service determines the company's success to a great degree. Thus, the SMEs operating in high-demand growth industries are likely to achieve long-term sustainability while those businesses in highly competitive industries may not be sustainable long-term.

Access to Financing and Capital

Securing adequate funds is another big challenge for SMEs. Many small companies rely on borrowings, subsidies, or investment funds for arranging startup costs and allowing business growth. Only companies that have strong financial management, multiple sources of revenues, and sources of financing reliably positioned will sustain business over time.

Common Reasons For SME Failure

Cash Flow Issues

A major reason for SME failure is insufficient cash flow. Even profitable companies may face difficulties if they lack sufficient liquid cash to manage everyday expenses like payroll, rent, inventory, and loan repayments.

Lack of Market Adaptation

Markets are in constant motion. SMEs unable to adapt to changes in consumer tastes, advances in technology, or disruptions within their industry often struggle to survive. Successful SMEs continuously study market conditions, ask customers for feedback, and adjust their operations to gain a competitive advantage.

Poor Management Decisions

While effective leadership is often overlooked, an SME's survival, in fact, necessitates this. Bad decision making has floored many businesses more often than not. Also, a number of startups end abruptly due to their failure to have long-term goals. When there are no long-term goals set, then a business will run without a direction and could become quite vulnerable to mistakes.

Average Lifespan of SMEs in the USA

According to the U.S. Bureau of Labor Statistics, about 80% of small businesses survive their first year, meaning 20% fail within the first 12 months.

The longer-term survival rates continue to fall–70% of firms survive to their second year, and by year five, about 50% of SMEs remain in operation. It gets even more difficult regarding long-term sustainability, as only 30% of small business owners are still operating their companies after a decade.