Better economy gives rise to more start-ups
American entrepreneurs are emerging from their Great Recession bunkers.
New business formation is picking up in the U.S., early indicators show, as banks ease credit conditions and rising home and stock prices provide would-be entrepreneurs more investment assets.
"It seems like it has bottomed out and it's starting to increase," says E.J. Reedy, research and policy director for the Kauffman Foundation, which studies entrepreneurship.
Business start-ups are vital to employment growth because they tend to add jobs at a much faster rate than other companies. New firms typically account for about half of total job gains during recoveries, the Federal Reserve Bank of San Francisco says in a new research paper.
The number of new business establishments tumbled from 656,000 in 2007 to 507,000 in 2010, rising only gradually in 2011 and 2012, Labor Department figures show.
Data for the latter part of 2013 and 2014 are not available, but other reports are providing early signs of at least a modest comeback in entrepreneurship:
• The number of franchise locations launched by first-time franchisees is expected to rise to about 5,700 this year from 4,700 in 2013, according to FRANdata, a consulting and research firm for the franchising industry. "As credit has eased, you're seeing more people that want to control their own destiny" and launch franchises, says Steve Caldeira, CEO of the International Franchise Association.
• Businesses with 19 or fewer employees have accounted for 27% of job gains since January 2013, vs. 26% in 2012 and 24% in 2011, figures from Moody's Analytics and payroll processor ADP show.
• Approval rates of small business loans by big banks hit a post-recession high of 20% in June, according to Biz2Credit, an online lending broker. About 4% of the approvals are for start-ups this year, up from 1% since the beginning of the recovery in 2009.
One reason banks are more receptive to hopeful business owners is the rebound in housing prices. Many aspiring entrepreneurs tap home equity to start businesses. As average home values plunged 35% from mid-2006 to early 2012, fewer of them could take out home equity loans as they did during the housing bubble, or rely on their housing wealth to cushion potential failures, the San Francisco Fed report notes.
The tide may be turning. Housing prices in 20 large cities rose 10.8% in the 12 months ending in April and are now about 18% off their 2006 peak, according to the Standard & Poor's Case-Shiller index. That's helping fuel a modest rebound in home equity borrowing.
"Higher house prices may be pulling start-up growth back toward a faster pace and contributing to the higher rate of total job growth observed over the past year," the Fed study says.
Monthly job growth has averaged 231,000 this year vs. 194,000 in 2013.