(Bloomberg Businessweek) —
During the pandemic, Americans’ bank accounts got plumped up with stimulus payments and money saved from not going out to dinner or on vacation. Blend in a hefty dose of social media-driven agitprop on the ease of launching a company, leaven it with binge-watching of shows such as Shark Tank, fold in a measure of Musk- and Bezos-inspired dreams of becoming the next centi-billionaire, and the result is a boom in small-business formation. In 2021 the US saw a record 5.4 million registrations of startups, census data show.
Two years on, the effect continues as inflation spurs many Americans to look for a side hustle and the acceleration of e-commerce and remote work makes it easier than ever to launch one. More than 5 million new business applications were filed in 2022, a 42% increase from pre-pandemic levels. “People want freedom,” says Karen Jenkins, an independent management consultant in South Carolina. “They want to take ownership of their lives and are willing to take more risks.”
That’s good news for the US economy, because the country’s 30 million-plus small companies were responsible for almost two-thirds of new jobs from 1995 to 2021, according to the US Chamber of Commerce. Less clear is how many of the newly formed enterprises will survive and thrive. The census data show registrations of businesses that aren’t necessarily up and running. It’s much more difficult to build a company that hires staff, generates revenue and earns a profit, evidenced by the hundreds of thousands of startups that fail every year or never get off the ground.
For more than half of small businesses, the rising price of inputs remains the primary concern, according to the MetLife and US Chamber of Commerce Small Business Index, with almost half of respondents to a second-quarter survey saying they’ve taken out a loan in the past year to cover higher costs. “Inflation has certainly taken a bite,” says Jim Holcomb, chief executive officer of the Michigan Chamber of Commerce. “You do see people cutting back on some of the smaller purchases, and that’s where many of these small businesses operate.”
The Federal Reserve’s interest-rate hikes have also taken a toll, making bank loans more expensive—and Fed Chair Jerome Powell has warned rates may go higher still. In the Chamber of Commerce survey, half of the businesses queried said rising rates had caused them to delay expansion plans.
The growth is taking place despite structural and demographic challenges that small businesses faced even before the pandemic. With rock-bottom unemployment—in February it hit 3.4%, the lowest level since 1969—entrepreneurs must scramble to sign up qualified workers. Difficulties finding child care can complicate things for owners and employees alike. And as the population ages, more people are retiring, further shrinking the potential workforce and often making those who remain more expensive to hire. Before the pandemic, “we had seen stalled rates of business creation, and one of the main reasons was demographic change—a slowing and aging population,” says Dane Stangler, who studies small business at the Bipartisan Policy Center, a think tank in Washington, DC.
A big factor in the sustained growth is an explosion of online resources that make it easier than ever for would-be entrepreneurs to get on their feet. A decade ago, small-business owners might have needed “an MBA to figure things out, but you can now pretty much get 99% of that content on YouTube for free,” says Thomas Rhodes, a partner in Rhodes Cos., a South Carolina provider of school graduation mementos. And setting up an e-commerce operation used to require hiring developers and coders, which would typically take months and thousands of dollars. These days, “you can have one in 15 minutes” as a multitude of websites offer such services, Rhodes says.
Among the primary drivers of the increase are women and African Americans. In 2021, 49% of new business owners were women, up from 29% before the pandemic, according to small-business payroll services provider Gusto. And the share of founders who identify as African American tripled to 9% in 2021 from 3% in 2019, suggesting that the startup boom is cutting through the inequality that has dogged big companies for decades. “This shift represents a large opportunity for a new group of entrepreneurs to take part in the benefits of business ownership, to gain more control of their professional life,” says Gusto economist Luke Pardue.
Founders are finding support from an economy that grew faster than expected in the second quarter, thanks to slowing inflation and strong consumer and business resilience. A survey by the National Federation of Independent Business, a lobbying group, found that 40% of owners expect better business conditions, reflecting optimism that the US might just manage to tame inflation without triggering a recession. “It’s a net positive for the economy that there are so many people interested and thinking about starting a small business,” says Holly Wade, executive director of research at the NFIB. “That’s a really good and healthy sign.”
Read next: Small Businesses Are Pioneering the Four-Day Workweek
To contact the author of this story:
Enda Curran in Washington at ecurran8@bloomberg.net
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