A lot of people are saying small business is dying in America. An article on Brookings charted data from the U.S. census of the bureau, which tells us:
- 1978 had a ~14% firm entrance rate and a ~11% firm exit rate
- 2011 had an ~8% firm entrance rate and a ~9.5% firm exit rate
In short, the U.S. is now losing more businesses than its creating. This trend developed slowly over three to four decades.
The question is why? Here are the most common theories that explain why the U.S. isn’t creating as many small businesses:
1. Big companies are taking up the market
It’s simple math. If Starbucks opens 1,000 new stores, it means mom and pop cafes will have to suffer. Markets are limited. If customers are going to big companies then small businesses are losing customers.
Big companies also tend to hog the best talent in the industry. Put yourself in these worker’s shoes. Would you rather work for a 10-employee tech company? Or take a 6-figure salary at Google?
Also, large companies absorb smaller ones and set them up as subsidiaries. The bigger they become the less small businesses there are.
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2. Healthcare costs
The cost of healthcare is astronomical. Not only do entrepreneurs have to pay for their own health insurance, but they also have to pay for employee benefits.
Large companies have an advantage in this regard since healthcare becomes cheaper when you purchase it in bulk.
3. Technology costs
Technology is imperative to streamline production and scale business. Unfortunately, it’s usually expensive to acquire and properly implement. It’s not cheap to develop an online presence and big business usually scoops up the talent.
There’s also automation, which saves tons of time and money for businesses, but it’s so expensive that only bigger businesses can afford it. If a customer wants self-checkout, chances are they will go to Wal-Mart or Lowe’s before a small business.
4. Our systems are not small business friendly
Some point out that small businesses are held to similar regulations as giant companies. Small businesses must pay income taxes, sales taxes, unemployment taxes, payroll taxes, and more. They are not equipped to handle these regulations and are punished by the IRS.
Others point out that the U.S. government does not provide a lot of assistance to help jump-start small businesses. Some have called for lower taxes on small businesses or for government funds to help them.
5. Can’t get funding
Starting a business costs a lot of money and it’s a huge risk. Consequently, the loans that are readily available to entrepreneurs have high-interest rates and quick payback terms. This crushes small businesses early in their development when they need money the most.
Another problem is that professional investors heavily favor mature companies that have a proven track record of growth. The capital available for business tends to go to larger companies rather than small businesses.
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6. Student debt
Young adults have a student debt problem. Many of them are exiting college with several loans that will take years to pay off. On top of this, many are saving up to buy houses. Therefore, they view starting a small business as unwise at best.
A lot of entrepreneurs rely on a personal savings account to cushion the costs of launching a business. But few have the finances to pull that off.
Unfortunately, many would-be-entrepreneurs are crippled from launching a small business.
The decline of small business may not be bad
Some experts posit that the decline of small businesses is not necessarily a bad thing. We just have to look at it the right way.
With the dawn of the internet, a lot of business is now conducted online. This gave rise to the gig economy, a workforce that is difficult to measure. Since remote work is becoming easier, companies hire freelance writers, web designers, remote secretaries, temporary bookkeepers, and more.
Factors like this are hard to calculate when analyzing the overall health of the American economy. In other words, the decline of small businesses may be a natural development in a technological economy.
What do you think is causing small businesses to decline?