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Published in Small Business

New business applications in Michigan skyrocket during pandemic

BY Sunday, August 16, 2020 05:30pm

As the COVID-19 pandemic battered Michigan’s economy through the spring and early summer, the number of people forming their own businesses grew exponentially.

Business applications in the state increased more than 123 percent from the 31st week of 2019 through the same point in 2020, or the week ending Aug. 1, according to U.S. Census Bureau data.

The author of the annual Small Business Association of Michigan scorecard on the state’s entrepreneurial economy attributes the triple-digit growth rate to the economic downturn that the COVID-19 pandemic triggered. 

Graham Toft, the owner of Sarasota, Fla.-based GrowthEconomics Inc., sees new business formation in the present recession beginning to play out similarly to the financial crisis of 2008, when many people resorted to forming their own businesses after losing a job.

The scenario creates the need for greater support for entrepreneurs who for whatever reason decided to set out on their own during a perilous time, said Toft, who highlighted the data last week during a briefing on the 2020 SBAM entrepreneurship scorecard. The spike began in late June, Toft said.

“We recall back to the churning in our thinking that went on and what we saw that during the last major recession, there was a lot of small business activity in Michigan, and we suddenly realized that, ‘Hey, this is what happens in a downturn.’ What I’m thinking right now is it’s happening again,” Toft said. “What I’m thinking right now is this is the time where we need to be thinking ahead as to how we help those small businesses position themselves for growth.

“We have opportunities ahead of ourselves here.”

That growth rate sharply contrasts to the substantially smaller increases in new business applications in prior years and the 1.1-percent decline in the same measure from 2018 to 2019.

The business applications are for new companies “with planned wages,” meaning “it’s not just some paper application” but a business coming together that will generate a salary and income for the owner, Toft said.

Support systems needed

The growth rate also comes as data show that some small businesses have closed for good or may not survive the economic fallout from the pandemic, said SBAM President Brian Calley. A survey SBAM conducted this spring found that one in seven respondents were unsure their businesses would survive the pandemic.

Whether the growth in new business applications is the direct result of “activity out of desperation that we often see in down times” or another reason, the finding heightens the need for economic development policies that lead to even greater support and nurturing of entrepreneurs, Calley said.

“Sometimes entrepreneurism is borne out of desperation. People don’t have any other options and less to lose, so they’re going to go for it right now. But, still out of it comes opportunity,” Calley said. “When I look at the number of business applications that have happened here in the beginning of summer and then compare it to the work that needs to be done to create a stronger environment for entrepreneurs to do well, it tells me this work has never been more urgent than right now because the more success we have with this cohort of people, the better that our long-term prospects will be.”

The major increase in new business filings comes as nobody knows for sure how Michigan will fare economically in the months and even years ahead as a result of the fallout from the pandemic, said SBAM CEO Rob Fowler.

The scorecard does not indicate whether people filing a business application did so out of desperation, or “how many of them just got the entrepreneurial nudge that they needed to actually take a dive,” Fowler said.

“In either case, Michigan is going to have to be prepared to really help people with ideas get them started, to help those that are already started and get them off of the ground, and help those who have real potential to grow,” he said. “If we do that better than other states, I like our chances, but that’s the work ahead of us.”

Michigan is not alone in experiencing a spike of new business applications.

Nationally, applications grew 82 percent year-over-year for the same 12-month period, after declining 6.3 percent in the prior 12 months, according to the U.S. Census Bureau data.

Calley cited the data to advocate for “entrepreneurship-led” economic development policies by the Michigan Economic Development Corp. and Michigan Strategic Fund “where you add (small businesses) in as a formal priority and part of the mission” and “that you don’t just be open to having a good environment for them, but that becomes part of the core mission of the organizations.” 

“What we’d love to see happen out of this is that we look at the environment around starting and growing a business as being the main objective of economic development (and) that attraction (of businesses to Michigan) is a good outcome of having a good environment, but really it’s about building around the people who are already here,” he said. “There are so many different aspects outside of just the core business that you have, and having an entrepreneurship-led economic development is really about the wrap-around services of the entrepreneur, and that the system itself helps with the implementation of all of those things that have to be done to be successful in business.”

Measuring up

The SBAM scorecard, prepared in partnership with Michigan Celebrates Small Business, uses dozens of data points to offer a look at the state’s entrepreneurial climate, change and vitality.

The 2020 scorecard ranked Michigan 22nd as of 2018 for entrepreneurial climate, defined as factors that support the entrepreneurial economy. The ranking declined from 17th and 19th in 2018 and 2017, respectively, but remains much better than a decade ago when the state ranked 41st.

In entrepreneurial change, Michigan ranked 26th nationally in 2018, down three spots from 2017, but also well above the ranking of 47th a decade earlier. Entrepreneurial change metrics gauge the “direction and momentum of growth in the entrepreneurial economy,” according to the scorecard.

The state was 36th for entrepreneurial vitality in 2018, or the “level of entrepreneurial/small business activity as a share of a state’s total business economy.” That’s down one spot from 2017, but seven places above 2008.

By other measures, Michigan ranked well compared to other states and in the top 10 in some areas, including:

• First for physical science and engineering workers;

• Second in worker’s compensation premiums and business tax burden;

• Fourth in high-tech manufacturing employment, industry research and development, and patents per innovation worker;

• Fixth in business liability costs; and

• Seventh in university R&D and top graduate programs.

Michigan also remained a top performer in several metrics compared to other Midwestern states.

“While we have seen some progress in Michigan, we know that if you’re standing still, you’re falling behind and the risks of complacency have never been greater for entrepreneurs,” Calley said.

The areas where Michigan lagged and ranked in the bottom 10 nationally as of 2018 include malpractice costs (40th), bridge quality (41st), public high school graduation rates (42nd), unemployment insurance costs (47th), and unemployment insurance tax structure (49th).

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