“The world of the small business is getting tougher and tougher and the US has become a far less friendly place for the entrepreneur”

The latest data from the National Federation of Small Business is not going to cheer those looking for some dramatic recovery in the economy in 2013.  It has long been an assumption that the small business community is key to the growth of the US economy.

A quick review of what is expected from small and medium sized business points up the crucial role it plays in the economy as a whole.  This is the sector that does the majority of hiring and most importantly this is the sector that does the majority of the training.  People seeking to move into a given career need to gain experiences and for the most part that will be gathered in a smaller business first. The small business is often the critical element in a given community – the glue that holds a town together or that provides a sense of neighborhood.  The small business is generally one that offers more continuity and the owners are far more deeply rooted than the employees of some larger entity.  The small business is also likely to pay far more in taxes as they do not have the same ability to manipulate the tax code that their larger counterparts can.  They do not get all the local tax breaks and incentives that are offered to large companies and therefore they become the tax base for most communities.  The small company is usually the one that innovates and tries new things. In much of the high tech world it is the pattern to allow the small start-up to try these new ideas and if they succeed the bigger companies buy them and fold the ideas into their own system.  Suffice it to say that the small business community is key to the survival and growth of almost any community.

This is why the data from the last year has become such a concern.  The world of the small business is getting tougher and tougher and the US has become a far less friendly place for the entrepreneur.  The number of start-up operations has fallen drastically since the beginning of the recession but more worrisome still is the fact that this decline in start-up activity was noted all the way back to the beginning of the last decade. Even with all the frenetic growth between 2003 and 2007 the start-up was in trouble and small business was struggling to survive. That boom was a one-trick pony driven by the housing bubble – it was not a surge caused by the expansion of business.

There are many reasons for the small business challenge.  Some are related to the perils of a down economy and some are related to competition. There are changes in the way that consumers interact and there are regulatory issues that hamper the development of business.  The small business community is not united by anything but its size and that means that each community and each business sector has its own set of problems to overcome. In general there seem to be three major issues that nearly all of the small businesses face.

The first is that the competitive deck is stacked against them in many ways. The consumer has been a big part of this shift as the desire for most is low price and convenience.  The value placed on service and interaction has diminished and that puts the emphasis on big brands and big facilities.  The shopper no longer wants to visit a dozen stores to get what they want – they seek a one-stop shopping alternative and that places a lot of pressure on the small operation. There is a similar pattern in the small industrial and manufacturing facilities as their consumers seek operations that can do a lot of work in a variety of fields.

The second major issue is regulatory. In the 1970s the average small business person spent roughly 85% of their time on directly working their business – selling, managing, marketing and all the rest. Today that percentage has fallen to 61%. The rest of the owner’s time is spent reacting to regulations and demand from various government institutions. The regulations that have been developed have often been ill-conceived and are inappropriate for the small business and these serve as major inhibitions.  Lately the banking community has been visited by hundreds of new rules and regulations and the response from many small and community banks has been to go out of business rather than to try to comply.

A third major issue is that small business is now hard pressed to hire. There are fewer people qualified to work as needed and small business struggles to find ways to pay for those who have the skills. The result is that small companies have less qualified employees than in the past and when that workforce eventually gets to the point that they can contribute the small company is poached by a larger entity. The stress of trying to make do with less qualified and reliable employees has convinced many of these smaller operations to shut down in the last decade.

Source:  Dr. Chris Kuehl, Armada Corporate Intelligence

BIIA comment:  There is a fourth factor which troubles small business.  It is the lack of access to finance.