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Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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The state of small business and entrepreneurship

By: Jackson Mueller
March 13, 2015
   
   

On March 4, the House Small Business Committee held a hearing examining the state of small business and entrepreneurship. Panelists from Gallup, Heritage Foundation, a small business testifying on behalf of the National Small Business Association, and representatives of the Dingman Center for Entrepreneurship at the University of Maryland testified on the importance of small businesses as a driving force for the nation’s economy. What was made clear during the hearing is that small business job creation and entrepreneurial activity continue to lag, despite the relatively low 5.5 percent unemployment rate. What was less clear is what exactly needs to be done, and in what order, to improve small business job creation and entrepreneurialism.

Roughly one out of every two U.S. workers is employed by a small business, with seven out of 10 new job opportunities created by small businesses. In December and January alone, 78,000 jobs were created by small businesses. Businesses with fewer than 500 employees, defined as “small business” by the U.S. Small Business Administration (SBA), added more than 80 percent of the private sector jobs in January, and accounted for 83 percent of newly created jobs over the past four months, according to testimony from the chair and ranking member of the Committee.

The outlook for small businesses is also improving, with the Wells Fargo/Gallup Small Business Index scoring small business attitudes at their highest level since the onset of the Great Recession. In addition, 64 percent of small business owners reported good financial standing, and 71 percent expected to have solid financials a year from now, according to testimony from Gallup’s Jon Clifton.

The uptick in employment numbers and positive financial outlook mask underlying concerns, however, with the National Small Business Association Year-End Economic Survey showing a majority of small firms predicting a flat or recessionary economy this year. Along similar lines, the Kauffman Foundation’s Index of Entrepreneurial Activity found a decline in entrepreneurial activity from 2011 through 2013, according to testimony from Elana Fine of the Dingman Center for Entrepreneurship. In addition, data from the U.S. Census Bureau show that the number of “business deaths” now exceeds the number of “business births” for the first time since the data were first compiled in 1977. On top of this, Gallup’s Payroll to Population (P2P) metric, which measures the number of people employed full time as a percentage of the total adult population, stands at 44.3 percent today – a number that has not changed significantly since early 2010.

The contrasting outlooks also led to contrasting views on both the leading challenges for small businesses and suggestions for improving small business formation and entrepreneurialism. Ultimately, solutions depend on whom you agree with. According to Gallup, the number one challenge small businesses face is finding new customers (15 percent of respondents), with only a handful of small businesses viewing the availability of credit as their most important challenge (3 percent of respondents). David Burton and Cynthia Kay, testifying for the Heritage Foundation and on behalf of the National Small Business Association, respectively, were quick to point to the accumulated and combined weight of regulatory and statutory requirements and tax code uncertainty as significant barriers to small business formation and expansion. Fine of the Dingman Center disagreed that regulation and taxes posed major obstacles for small businesses and pointed instead to accessing customers and capital.

Ideas on how to encourage small business formation and increased entrepreneurial activity differed among the panelists at the hearing. In his testimony, Burton listed 97 recommendations that could revive entrepreneurial activity and drive business expansion. Interestingly, Burton was all for permitting peer-to-peer lending portals, such as Prosper and Lending Club, to provide loans to small businesses without having to file a registration statement. He was also supportive of a Government Accountability Office study focused on bank regulations and current bank regulator practices and how they disproportionally affect small businesses, efforts to protect Regulation D for private offerings, and revisions to Title III of the Jumpstart Our Business Startups Act to make it a “more reasonable statute.”

Clifton cautioned lawmakers from pursuing approaches that would make too much credit available which could, unintentionally, draw in people who may not have the entrepreneurial drive or qualifications for success, which in turn could result in a higher failure rates. He suggested lawmakers look for ways to decrease the time it takes for entrepreneurs to have to navigate the complexity of starting a new business.

Apart from urging lawmakers to provide clarity on the regulatory and tax front, Kay had also looked into financial services offered by the SBA and determined that the length of time to file the paperwork and the complexity of the process itself was significant enough to cause the company to look elsewhere. “For us, it was easier to sign a personal guarantee and take a loan against a home and be in business, and do what I really love doing – which is the work of doing business,” she added.