Determinants of SME failure and bankruptcy prediction: A systematic literature review

Abstract

This literature review analyses 62 articles published between 2014 and 2025 on the failure of small and medium-sized enterprises. Despite the economic and social importance of Small and medium-sized enterprises, they remain vulnerable. The existing literature is fragmented and scattered across different conceptual, methodological, and empirical approaches, justifying the need for an integrative review of this phenomenon which is the objective of this study. The findings show that SME failure is the result of a complex interaction between internal and external factors. The most frequently identified internal factors include inadequate financial management, entrepreneurial skill gaps, and governance weaknesses. External factors, such as macroeconomic instability, including inflation, exchange rate volatility, and rising interest rates, as well as institutional constraints such as corruption and limited access to finance, significantly exacerbate the vulnerability of SMEs, particularly in the early stages of their life cycle. This review also highlights a notable methodological shift in the literature, marked by the growing use of advanced bankruptcy prediction models. Recent studies favor approaches based on decision trees and ensemble methods (Random Forest, XGBoost, LightGBM) which achieve accuracy levels above 90%, particularly when combining financial and nonfiancial variables. The most recurrent and agreed-upon financial predictors are liquidity, leverage, and profitability ratios, whereas nonfinancial variables include age, size, sector of activity, region, structure of ownership, and governance. On a theoretical level, this synthesis helps to clarify the mechanisms that explain entrepreneurial failure. On a practical level, it provides public decision makers, financial institutions, and SME managers with concrete levers to improve failure prevention and strengthen the resilience of SMEs.