The State of the U.S. Entrepreneur

May 12, 2009

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Despite the extraordinary challenges small-business owners face in this downturn, the entrepreneurial spirit remains strong in America.

Small businesses are the leading contributor of net new jobs to the United States economy — 93.5 percent in the last 20 years — and recent findings make clear that Americans recognize the importance of small businesses in revitalizing the national economy through job creation and innovation. In a survey of 2,000 Americans, from the Kauffman Foundation, nearly 80 percent of respondents said that entrepreneurs are critically important to job creation — more so than big business, scientists and government — as a means of leading the country out of the economic crisis.

Yet small businesses today face extraordinary challenges.

In the National Small Business Association's 2008 Year-End Economic Report, small-business owners cited economic uncertainty (75 percent), health insurance (43 percent), inability to access capital (33 percent) and federal taxes (32 percent) as their most significant challenges to future growth and the survival of their business.

"Small businesses are dealing with dramatic decreases in growth of revenues, profits and employee size," the NSBA said in a statement. "Financing continues to be a problem for small-business owners, who reported increased reliance on credit cards — nearly half (49 percent) used credit cards in the past 12 months to finance their business."

According to numbers gathered by Automated Access to Court Electronic Records (AACER), which tracks bankruptcy filings, there were more bankruptcies in 2008 than at any time since federal law in 2005 made it tougher to file for bankruptcy. Company filings rose 50 percent to 64,318. AACER data indicates that "in the first quarter of this year, 20,251 businesses sought either Chapter 7 or Chapter 11 protection — a 52 percent increase over the 13,291 business bankruptcy filings during the same period last year," the Wall Street Journal (subscription required) reported of the findings.

Inc.com refers to the "quiet crisis" of small businesses ending their operations. In March, Inc.com reported new data that points to defaults on Small Business Administration (SBA) loans having increased dramatically in the last year, up to 26,718 for 2008.

"For the past half-decade, loan defaults have been on the rise — from 2.4 percent in 2004 to 8.4 percent in 2007. But in 2008, the failure rate climbed to 12 percent," Inc.com said. "Yet high failure rates are problematic for businesses that are still viable. Already-skittish lenders have grown even more hesitant, leaving more small business owners starved for capital."

Despite lower interest rates and other incentives attached to loans, small-business lending has tightened significantly. Because of the economic slowdown, "the credit worthiness of many potential borrowers has deteriorated over the last year, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards)," the National Federation of Independent Business reported in its April 2009 Small Business Economic Trends report.

Access to credit and capital remain rough, capital spending and inventory investment are at or near record-low levels, employees are being let go and projected job growth hasn't fared much better. Moreover, with taxes and regulations on the way up, it is difficult for entrepreneurs to develop a level of confidence and certainty that will translate into business investment and growth.

There is no doubt the struggling U.S. economy has tested business owners' confidence and optimism, yet entrepreneurs are resilient. Recent data from the Kauffman Foundation and the U.S. Census Bureau found that while start-ups do tend to decline slightly during downturns, they remained "robust" in even the most severe of the sample period's recessions.

"In a recession, you tend to get a lot more people starting companies because they can't do anything else, and the number of start-ups is actually remarkably stable," Robert E. Litan, vice president of Research and Policy at Kauffman, told Inc.com in February.

Moreover, unlike large corporations with stockholders and board members to appease, small-business owners can "assess the situation and make the necessary adjustments to stay current and valid for their customers," as noted at the OPEN Forum by American Express OPEN.

"For all its current economic woes, America remains a beacon of entrepreneurialism," The Economist recently said.

According to the new American Express OPEN Small Business Monitor, a semi-annual survey of business owners with fewer than 100 employees, 74 percent of manufacturing entrepreneurs believe managing through the recession has made them better business owners, despite the challenges they face. Moreover, nearly four in 10 entrepreneurs feel the current economic environment creates opportunities for their business.

"American citizens have an unusual belief that, for all their recent travails, their fate still lies in their own hands. They are comfortable with the risk-taking that is at the heart of entrepreneurialism," The Economist's special report, titled The United States of Entrepreneurs, noted.

As such, entrepreneurs are not taking this recession lying down.

When small-business owners were asked about which future growth strategies they plan to implement in the coming 12 months, the top three responses to the NSBA's 2008 Year-End Economic Report were new advertising and marketing strategies (48 percent), expanded Internet presence and e-commerce (41 percent), and strategic alliances (32 percent).

Since then, many are finding new resources to tap and new ways to manage costs beyond the traditional steps of laying off workers or cutting back on staff hours.

In the latest American Express OPEN Small Business Monitor, released last month, nearly half of business owners (45 percent) are open to bartering for new products or services with customers or suppliers, and nearly one-quarter (23 percent) report their barter activities have increased due to the economic environment. (For additional steps small companies are taking, click HERE.)

Small businesses have long been referred to as the engine of the national economy. Thriving in an environment that encourages innovation and is conducive to global competitiveness, small firms generate the lion's share of new patents and are now being counted on to lead the nation out of the recession.

And while most entrepreneurs expect a prolonged downturn, the majority has no regrets. According to a survey recently released by online payroll firm PayCycle, 87 percent of the 478 small-business owners polled said they would start their business again given the chance to do it over — if only to be their own boss.

Earlier: Small Biz Owners Revisiting Age-old Tradition: Bartering

Resources

Americans Want Government Stimulus for Small Businesses and Entrepreneurship... Ewing Marion Kauffman Foundation, March 17, 2009

2008 Year-End Economic Report National Small Business Association, Jan. 12, 2009

NSBA 2008 Year-End Economic Report National Small Business Association, Jan. 12, 2009

Bankruptcies Rise Sharply (subscription required) by Jacqueline Palank The Wall Street Journal, April 7, 2009

Small Business Closures: A Quiet Crisis by Caitlin McDevitt Inc.com, March 16, 2009

NFIB Small Business Economic Trends by William C. Dunkelberg and Holly Wade National Federation of Independent Business, April 2009

Will Obama's Tax Hike Affect You? by Kelly Faircloth Inc.com, April 28, 2009

Business Dynamics Statistics The Kauffman Foundation and the U.S. Census Bureau, Dec. 1, 2008 (last modified)

Kauffman Foundation-Funded U.S. Census Bureau Data Highlight Importance of Business Startups to Job Creation in the U.S. The Kauffman Foundation and the U.S. Census Bureau, Jan. 14, 2009

How Important Are Startups to the Economy? by Kelly Faircloth Inc.com, Feb. 15, 2009

Economic Recovery Lies in the Hands of Entrepreneurs by Deborah Chaddock Brown OPEN Forum by American Express OPEN, April 2, 2009

The United States of Entrepreneurs The Economist, March 12, 2009

Entrepreneurs Say Managing Through Recession Makes Them Sharper Business Owners... American Express OPEN Small Business Monitor, April 15, 2009

87% of Small Business Owners Would Do it All Over Again... PayCycle, Feb. 24, 2009

Small Business Problems & Priorities National Federation of Independent Business, June 2008

CEOs Hit Rock Bottom, Less Popular Than Congress Rasmussen Reports, Feb. 18, 2009

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