Economic Concerns Rise as Fewer Small Businesses Launching

Entrepreneurship Decline

Most politicians place a heavy emphasis on small business as the backbone of the U.S. economy. Both Hillary Clinton and President Donald Trump openly courted small businesses in the run up to the election, promising everything from lower taxes to fewer regulations. Indeed, this certainly makes sense as a strategy. According to the Small Business Association, small businesses employ 48% of the U.S. workforce, or just under 57 million people.

Nevertheless, starting a small business has and always will be a risky venture. Despite growing confidence among small businesses, many still fail for a number of reasons. Whether it’s because of a crowded industry (such as restaurants) or a dramatic change in technology that leads to a decrease in demand for a product, small businesses always assume some level of risk.

Karen Webster of PYMNTS highlights a side of the story that is not often featured by the BLS or the SBA: fewer new small businesses are opening than in previous years. This may seem counterintuitive, given that small businesses account for half of all U.S. employment and are responsible for nearly two-thirds of all new jobs. However, Webster indicates a hidden truth behind the downward trend:

“Small businesses are also risky businesses, and the Small Business Administration tells us 60 percent of them won’t make it past their first birthday, never mind reaching their second, third or magic five-year milestones. Only a third, they say, will ever cross into double-digit territory and celebrate a decade of being in business.”

As new SBA Chief Linda McMahon explained at her Senate confirmation hearing, part of the problem lies with young entrepreneurs lacking the know-how to handle their finances and mitigate risks. This includes purchasing necessary insurance coverages, such as a Business Owners Policy, that help protect a business against the kind of loss events they may face in the early years and beyond.

In particular, small businesses tend to lack the capital to survive loss events, both early on and when they’ve matured, leading to the scary “60 percent of small businesses fail” statistics. Despite optimism, Webster explains that economists are not overly confident small business growth will rebound to levels last seen prior to the housing bubble. “[They] fear that impact on the vitality of the local economies that this void has created won’t be fully felt for a decade or more.”