It is generally accepted that small business is a significant driver of job growth in the US. While precise data is not available, it has been suggested that, historically, startups have accounted for approximately 20% of job creation.
Currently, small businesses appear to be suffering more than larger concerns, probably due, at least in part, to weaker balance sheets. Without significant financial strength, surviving lengthening periods of materially reduced revenues is more difficult for small companies with smaller reserves and borrowing power.
While it is clear that the current pandemic, and steps being taken to limit the spread of infection, have been very hard on small businesses, these enterprises have always been vulnerable. Available data suggests that more than 50% of new businesses fail within the first five years. Interestingly, despite the challenges inherent in the current economy, the rate of new business formations is higher than it was a year ago. Applications for employer identification numbers, that entrepreneurs need to start a business, have passed 3.2 million during the first 8 months of 2020, compared to 2.7 million in the previous year. Some of this may be attributable to changing consumer preferences, pushing some businesses over the edge, and creating opportunities for new business models.
While small businesses are not typically a component of most investor portfolios, their success, or failure, is a material factor in determining the course of the economy and, consequently important to the performance of marketable investments.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA