Small Business Trends
If it seems like 2016 was a booming year for Small Business Trends, it’s because more entrepreneurs are going into business and staying in business. In fact, the survival rate for small businesses remaining in operation past their fifth year rose to 48.73 percent in 2016, compared to 45.95 percent in 2015. That’s a 6 percent year-over-year increase, and the highest the survival rate has been since it started being indexed 30 years ago.
With Small Business Trends showing over 28 million companies taking up residence on Main Street, my company, Guidant Financial, wanted to take a closer look at who today’s small business owners are. We surveyed more than 1,000 of our small business owner clients, asking about their lives as entrepreneurs, how their businesses are performing and what struggles they’re facing on a daily basis. Here’s what we found to be the most noteworthy small business trends.
Small business owners are opportunistic — when they can afford to be.
At 37 percent, the top reason our clients went into business for themselves was because they were dissatisfied with corporate America. Along with this, the No. 2 reason individuals chose to pursue business ownership was due to the right opportunity presenting itself. The 2016 Kauffman Index of Start-up Activity refers to this as “opportunity entrepreneurship” and reports that 8 out of 10 entrepreneurs in 2016 started their business because they saw an opportunity rather than out of necessity (unemployment).
Despite business owners’ opportunistic nature, many are still having a hard time accessing the capital they need to take advantage of business opportunities. Guidant’s small business clients listed “access to capital/cash flow” among their top two challenges, and according to a report from the National Small Business Association, 31 percent of business owners said they were not able to obtain adequate financing in 2016, up from 27 percent the year before. This has created a break for alternative small business funding methods to enter the market. My company, for example, saw a 5 percent uptick in the number of people who used their retirement funds to buy a business in 2016, which has primed them to take action when the time is right, rather than when money allows.
Historically underserved groups are turning to alternative funding.
Unfortunately, it’s been documented that racial minorities traditionally have less access to capital for purchasing a business. According to a report by the Minority Business Development Agency, “Minority-owned businesses are found to pay higher interest rates on loans. They are also more likely to be denied credit, and are less likely to apply for loans because they fear their applications will be denied.” If this trend continues, we expect to see an increase in the number of minority business owners turning to alternative funding methods, such as 401(k) business funding.
Deemed “Rollovers for Business Start-ups” by the IRS, 401(k) business funding allows individuals to use funds in a 401(k) or traditional IRA to buy a business. It’s not a loan, and there are no minimal credit requirements, which means applications and interest rates aren’t involved. In fact, Guidant saw a 35 percent increase in the number of minority-owned businesses using 401(k) business funding in 2016.
Small business owners are educated, but it’s not mandatory.
A large majority of our small business owner clients had some college education, but it’s more common to have not attended college than it was to have earned a doctorate. Eighty-two percent of Guidant’s survey respondents had an associate’s, bachelor’s or master’s degree, but 15 percent had only a high school diploma or GED. And an even lower percentage had a doctorate degree (3 percent). This signals that with the right experience, financing and support system, any aspiring business owner can pursue their entrepreneurial dreams, regardless of education.
Popular Industries are poised for success.
Our clients are opening up shop in every arena from pet grooming to computer repair. The most popular industries for small business owners in 2016 were food and beverage; health and fitness; and business services. For more information on the health of these industries, we looked at the Kauffman Index of Growth Entrepreneurship. This report looks at the high growth of young companies, which is an important indicator for sustained growth in the industry as well as job output. Both health and fitness and business services were listed in the top five high-growth industries, while the food and beverage industry saw its highest year for growth since 2008.
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