Small business is essential to the growth of the U.S. economy. Yet, the creation and growth of the small business environment is still lagging behind the peaks of 2007.
There are many myths which may be stifling small business growth—while untrue, they are still pervasive in government policies, economic strategies and within the mindset of the public.
To be successful in any endeavor, we need to focus on the real issues, not stereotypical views or symptoms surrounding the problem. This is especially true if our goal is to help entrepreneurs become successful and to enhance small business growth.
The Good News
Small business is the main generator of jobs in the U.S. According to the Kauffmann Foundation, the leader in data regarding entrepreneurship in America, since 1977 small business has been responsible for the creation of three million jobs annually.
So it is essential to our economy to encourage the creation and maintenance of small businesses.
While it is true that new business creation has declined since the financial meltdown of 2008 and the ensuing tightening of requirements from financial institutions, there is positive new data over the last few years.
Unfortunately, the many long-standing myths still seem to be stopping small business growth.
The Monstrous Myths
Below are a few of the most common myths that I uncovered during my research as I was writing my book, Mastering the Money Maze: 10 Secrets to Winning Business Financing.
You might find the facts quite surprising!
Large corporations and wealthy individuals are America’s job creators, and we should develop policies to support them.
In fact, the major job creators in the American economy are small businesses.
According to a Small Business Association recent study:
- Since 1995 small businesses have generated 65% of all new net jobs created.
- Since 1990, small businesses have added 8 million new jobs to the economy.
- Large businesses have lost 4 million jobs due to outsourcing, moving overseas and technology.
Yet small business receives the least amount of support from the financial and governmental communities. Note these statistics from the Kauffman Foundation that conducts annual research on entrepreneurship:
- New businesses less than five years old accounted for all net job growth in the United States
- New firms have generated approximately three million new jobs annually since 1977
- While half of new firms survive to year five, 80 percent of the jobs created by those firms survive five years
Women business owners have the same access to capital as do men business owners.
Women own 30 percent of businesses, yet receive only 5 percent of equity capital.
This has remained the same each year according to a study by Biz2Credit. In addition, this analysis states that women’s small business loan approval rates are 20% lower than men.
There are 10 million women-owned businesses in the United States, employing 13 million people and generating $1.1 trillion in revenue, yet capital is just one area where many women business owners have fewer resources than men.
When it comes to the first-year funding needed to get a business off the ground, women received about 80 percent less capital than men did: women obtained $71,000 while men obtained $134,000 according the to the National Women’s Business Council Annual Report.
Women rely on more internal financing to start their businesses than men do because they receive much less from outside sources for start-up funding: Women receive 48% while men receive 68% of outside financing.
Because women rely more on internal financing, their average credit scores are 40 points lower than men’s. This creates a vicious cycle: Women cannot get low-cost money, so they go to alternative lenders or credit cards paying higher borrowing costs—that means less cash flow and less chance for landing a loan.
Most new companies are created by the younger generation and, therefore, we should focus on making funds available to them.
The highest rate of entrepreneurial activity belongs to the 55 to 64 age group.
The Kauffman Foundation has tracked small businesses over the past decade, and they found that this group has been responsible for 21 percent of business formation while the 20 to 34 age bracket had the lowest.
Even more interesting, according to census data, those 65 years of age and over had a total self-employment rate of 27 percent. The rate of new business creation for the 25-34 age group is 7.2 percent.
We tend to think of tech start-ups as being created by the young; however, among American-born founders, those older than age 50 numbered more than twice as many as those younger than 25, according to a new study from the Kauffman Foundation.
New businesses are created by the well-educated.
Fastest growing segment of small business creation are the less educated.
According the to the Kauffman Index of Entrepreneurial Activity, entrepreneurial activity rate among the least educated group, which includes high-school dropouts, remains significantly higher than for other educational levels.
Their entrepreneurial rates started going up in 2006 and have been elevated ever since. This demographic has the least job security, so it is likely they are being forced into self-employment more that other people.
Minority entrepreneurship is at an all-time low.
Minority Businesses are growing across the board.
According to the Small Business Administration there are 29.6 million small businesses in the U.S. and of that number:
- 9.9 million are women-owned
- 8.0 million are minority-owned
- 3.3 million are Hispanic-owned
- 2.6 million are owned by Black or African-Americans
- 2.5 million are veteran owned
- 1.9 million are owned by Asians
- 273 thousand are owned by American Indians and Alaskan Natives
Latino business-creation rate has remained at a high level relative to previous years and other demographic groups. Latinos have gone from making up about 10 percent of all new entrepreneurs in 1996 to 25 percent according to the Kauffman Foundation. The increase seems pretty consistent over time.
When we look at the 15 largest metropolitan areas, Los Angeles had the highest entrepreneurial rate, which may be due to the large populations of Latinos and immigrants.
I believe that to dispel these myths and provide an answer to these issues is to provide small businesses with access to the capital they need to grow their companies.
According to a study by the Small Business Administration, new business owners are often very dependent on their own resources for start-up capital:
- 75% of businesses report using personal or family savings
- Only 12% of businesses uses a business loan
- 13% used personal credit card
- 11% used personal assets
- 7% used business credit cards
- Less than 6% obtained venture capital and grants
Often the owner’s investment is quite substantial, with almost 23% providing over $50,000 in funding.
The good news is that the Small Business Administration found that over the last year, more small business owners have been cultivating relationships with banks or financial institution. After forming those relationships, 74% of those businesses received the full funding requested.
My goal is to provide small business owners with the education required to understand the expectations of lenders and investors, and provide them with the tools needed to win the financing they must have to grow their businesses.
With adequate funding, small businesses can create the jobs essential to get the economy growing again and dispel the myths that are plaguing small businesses.
Diane Weklar, the Authority on Accelerating Business Growth, is the CEO of the Weklar Business Institute. She is the author of the award winning book, Mastering the Money Maze: 10 Secrets to Winning Business Financing,which is also an Amazon #1 Best Seller. This book provides practical insight to build a successful business and the practical steps to raise capital to help your firm grow. She can be reached at Diane@Weklar.com.