This article summarizes the economic impact, major concerns and characteristics of small businesses in the US and points to demographic trends likely to change the face of small businesses in the new decade.
The impact of small business on the US economy is enormous: according to the Small Business Administration (SBA,) in 2018, there were 30.2 million small businesses, which represents an impressive ninety-nine-point nine (99.9%) percent of all businesses in the US.
In 2018, small businesses employed more than 47.5% of the private workforce and accounted for 1.9 million new jobs; and over the last five-(5) years, job creation by large corporations dwarfed small business job creation, as small businesses created approximately 6.8 million new jobs to the 2.7 million new jobs created by large corporations.
Each month, an average of 543,000 new start-ups are formed in the US. Reasons small business owners cited for starting a small business in 2018 were a “readiness to be their own boss” followed by a “desire to follow their passion.”
Twenty (20%) percent of these businesses will fail after the first year, thirty-three (33%) percent after the second year, but nearly half of those start-ups will be in business after five- (5) years and one-third (1/3) will be in business after ten- (10) years. The reasons why businesses fail historically have been: (i) insufficient cash flow, and (ii) a bad idea or misreading the marketplace.
The demand for small business financing increased slightly in 2018 to forty-three (43%) percent, from forty (40%) percent of small businesses in 2017. More than forty (40%) percent of small businesses applied for financing in 2018, but one-third (1/3) of them received only part of the financing for which they applied, and another one-fifth (1/5) were unable to secure any financing. Sixty-nine (69%) of small business owners used their personal funds and more than fifty (50%) percent of small business owners relied on credit cards .
Seventy (70%) percent of small businesses had debt in 2018, but half of these businesses had less than $100,000 in debt; and the average small business loan provided by the SBA in 2018 was $107,000.
In terms of ownership structure, according to the National Association of Small Business’ 2015 Economic Report, forty-two (42%) percent of businesses were S-Corporations and twenty-three (23%) percent LLC’s – because they are not double taxed; however, with the recent Section 1202 changes in the tax laws, which reduced the tax rate to 21% for C-Corporations, some small business owners who are looking to reinvest their earnings are looking again at C-Corporations.
Fifty-seven (57%) percent of small businesses were profitable, twenty (20%) percent broke-even, and twenty-three (23%) percent are unprofitable in 2018, but these statistics may be a function of tax planning decisions made to reduce small business owners’ tax obligations.
Almost seventy-five (75%) percent of small business owners said that the costs of doing business have increased over the last decade, but more than half of these businesses were able to pass these costs onto their customers.
Income for small-business owners was actually up seventy-five (75%) percent in the last ten-(10) years. The average small business CEO pulled down just over $160,000 per year in 2018, but, eighty-two (82%) percent of small business owners reported that they made less than $100,000 per year.
With respect to demographics, forty-four (44%) percent of small business owners are Gen-Xers (i.e., 39 to 54 years old) and now lead Baby Boomers (who are 55 to 73 years old), who own forty-one (41%) percent of small businesses. Millennials (23 to 38 years old) own twelve (12%) percent of businesses and two-(2%) percent of small business owners are 74 years old or older.
Over the next five years, the percentage of Millennials in the workforce are anticipated to increase significantly and this demographic trend will likely impact the above percentages in the next ten- (10) years. Another trend on the rise are business startups by individuals over 50, as many people are now retiring later in life.
Even though some of the world’s most famous entrepreneurs like Bill Gates, Mark Zuckerberg and Elon Musk started successful businesses at a young age, according to a study by two MIT professors and the U.S. Census Bureau, with respect to age, 40-year-olds are over two- (2) times more likely to establish a successful startup then someone who is 25-years old.
While a Small Business Trends survey revealed that a small business owner’s education didn’t have a bearing on the profitability of his or her small business, more small business owners are starting with or gaining higher levels of education. There was a seventy-seven (77%) percent jump in the share of small business owners with Associate degrees year-over-year, and an eleven (11%) percent increase in those with an advanced degree. Seventy-one percent (71%) of small business owners have some college, and just over half (51.4%) have a four-year degree. The most popular fields of study are business, medicine, and pharmacy.
Although women now outnumber males in the workforce, in 2018, seventy-three (73%) percent of small business owners were males and twenty-eight (28%) percent females. In recent years, however, the growth of women-owned businesses has been slow but consistent. For instance, women owned businesses, which number 12.3 million, grew by 4% last year. Interestingly, of women-owned small businesses, forty-seventy (47%) percent of these small businesses are owned by women of color.
Back in 2015, the SBA broke down small businesses by ethnicity, age, and location. The SBA identified that fifty-seven (57%) percent of small businesses were owned by whites and twenty-nine (29%) percent minority-owned businesses, but the growth of minority owned businesses has grown significantly over the last five years and now amounts to 46% of all businesses. These percentages are also like to continue to grow in the next decade.
Sixty-seven (67%) percent of small businesses were existing businesses and thirty-three (33%) percent new businesses, and eighty-three (83%) percent of small businesses were in located in an urban or suburban area versus seventeen (17%) percent in a rural community.
Forty-one (41%) percent of small business owners consider themselves Republicans, twenty-nine (29%) percent Democrats, and eighty (80%) percent of Republicans business owners were male versus twenty (20%) percent females, and the gender diversity mix among Democrats was sixty-four (64%) percent to thirty-six (36%) percent.
Evidence of the US’ ability to attract top entrepreneurial talent outside the country remains strong, as fifty-five (55%) percent of all “unicorn businesses” in the US are started by immigrants. Unicorn startups are startups with a valuation of $1 billion or more.
Attracting and retaining employees remains the small business owner’s biggest challenge, while their biggest concerns include economic uncertainty, taxes, healthcare, interest rates, followed by the regulatory environment.
With regard to marketing, sixty-four (64%) percent of small businesses today have a web site and sixty-one (61%) percent of these businesses invest in social media marketing. Fifty-three (53%) of small businesses say that “content marketing strategies,” such as blogging, are a top priority in 2020 because of the increased returns associated with inbound marketing.
The bottom line on small business ownership, in my view, is how happy small business owners are with their decision to open a small business. When polled, almost half of small business owners — forty-eight (48%) percent — are “very happy” with their decision to start a small business, and twenty-nine (29%) percent of small business owners indicated that they are “somewhat happy.”
So, as we enter the new decade, the impact of small business on the US economy, which has remained consistent over time, is Brobdingnagian. The growth of new businesses will likely continue to drive our country’s economic growth and will continue to play a significant role in the creation of emerging technologies, but changing demographics in the US are likely to further diversify the make-up of small business owners in the new decade.