There’s both good news and not-so-good news in the economic outlook for America’s entrepreneurial recovery. New business creation continues to outpace pre-pandemic levels—and with greater diversity among new business owners. For many small business owners and entrepreneurs, the negative impacts of the COVID-19 pandemic appear to be fading.
At the same time, challenges persist and threaten the bright outlook. Small and young companies are struggling to deal with inflation and ongoing supply chain disruptions. Gaps in financing, especially for new business owners of color, also weaken the prospects for sustained entrepreneurial growth.
Policymakers at all levels of government must find ways to support and expand entrepreneurial recovery, as small and young companies are essential for job creation, wage growth, and regional economic resilience.
New Business Surge—With More Diversity
In April 2020, the number of new business applications filed in the United States was 22% lower than in February 2020, just before pandemic-induced shutdowns. The number of “high-propensity” business applications in April was 31% lower than in February that year. The onset of COVID-19 seemed likely to suppress the entrepreneurial spirit.
But then the opposite happened.
Beginning in May 2020, Americans started new businesses at a record pace, a phenomenon that has continued nearly unabated. For the last two years, the monthly average of new business applications has been 87% higher than before the pandemic. High-propensity applications have been 35% higher. For context, in the 15 years before the COVID-19 pandemic, the number of business applications in any individual month never reached the monthly average experienced over the last two years.
The composition of this surge in new businesses also differs from before the pandemic. According to Gusto’s latest survey of entrepreneurs, new business owners in 2020 and 2021 were more likely to be women and people of color. This corresponds with findings in the Kauffman Indicators of Entrepreneurship. Using data from the Current Population Survey (CPS), the Kauffman Indicators find a rise in the rate of new entrepreneurs across every demographic group.
Negative Impact of COVID-19 Fading
The pandemic has dogged small businesses and entrepreneurs at every turn. Government-imposed lockdowns forced many to close. Consumer fears also dampened foot traffic at many in-person businesses, such as restaurants and retail stores. In the Census Bureau’s Small Business Pulse Survey conducted throughout the height of the pandemic, sentiment among respondents gradually improved in every phase of the survey.
In the latest Small Business Index from MetLife and the U.S. Chamber of Commerce, just 15% of respondents cited COVID-19 as their top challenge. Two-thirds of small business owners said their business was in good health—that positivity marked a return to pre-pandemic levels.
A good way to gauge entrepreneurial outlook is to understand the motivations of Americans starting businesses. It is entirely possible that the surge in new businesses since mid-2020 was driven by job loss—by a desperate attempt to replace lost wages. In the Gusto survey, however, fewer Americans across demographic groups said they were starting a business because they had lost their job.
Likewise, according to the Kauffman Indicators, the “opportunity share” of new entrepreneurs plummeted from 87% in 2019 to 70% in 2020.f It rebounded sharply, however, in 2021.
There is ample reason for optimism about an entrepreneurial recovery. Americans continue to start new businesses at a record clip—and are doing so to capitalize on opportunities. The population of new business owners has also grown more diverse in the last two years. Yet starting and growing a business is never easy. Small and young companies continue to face a number of hurdles in addition to those that any business faces as a matter of course.
Among small and young companies in the Gusto survey, “top issues facing your business” were:
- Inflation 29%
- Ability to dedicate time and attention to business 20%
- Labor shortage 19%
- Supply chain issues 11%
The Gusto survey results also provide a window into other barriers facing both potential and current entrepreneurs. When asked about reasons for starting their business, large increases were observed from 2020 to 2021 in certain challenges affecting their decision, echoing findings from a recent poll by the Bipartisan Policy Center and Morning Consult. In that survey of working mothers, two-thirds with children under age 5 cited caregiving responsibilities as a barrier to starting a business. While many women, in particular mothers, cite child care as a barrier to business creation, a nontrivial share of women have started businesses because of child care responsibilities. Both of these findings indicate that child care, as BPC research has highlighted, is a significant factor shaping the trajectory of small and young companies and their employees in potentially deleterious ways.
Access to capital is a ceaseless challenge for small and young companies. When Gusto asked new business owners about what they need to succeed, many responses were finance-related: tax credits, grants and loans, resources for expanding online, and rent forgiveness, among others.
The Gusto survey results also highlight persistent financing gaps along racial and ethnic lines. Black business owners, for example, were slightly more likely than others to rely on personal savings versus private loans. Yet Black entrepreneurs applied for loans at a higher rate: 17% versus 14% for all new business owners. The difference is found in approval rates.
55% of loan applications by Black new business owners and 30% of Hispanic new business owners were approved. The approval rate was 70% for White new business owners.
This disparity only leads to discouragement. While 19% of new business owners overall indicated that they didn’t apply for a loan because they doubted the bank would approve them, that figure was 35% and 30% for Blacks and Hispanics, respectively.
Similar disparities are reported in the latest Small Business Credit Survey report from the Federal Reserve System. Most strikingly, even among business owners of low credit risk, 43% of White applicants received all the financing they sought, versus 27% for Blacks and 24% for Hispanics. In 2019, 26% of Black business owners reported receiving all the financing they sought. In 2021, that fell to 14%.
An entrepreneurial recovery is already underway in the United States. But small and young companies need additional support from policymakers to help them power job creation and regional growth. This week, BPC and Gusto will explore how policymakers can do that. In the below videos, event participants offer a preview of that discussion.