Recent research from the U.S. Small Business Administration’s Office of Advocacy shows the landscape is optimistic for entrepreneurs considering starting their businesses in low-income areas.As seen in the recent post, Small Business Funding by the Numbers: What Every Entrepreneur Should Know, there are options available for companies looking for the funding and the right location to start their venture.
What is the outlook for entrepreneurs in low-income areas? Take a look at the numbers.
Here are a few of the characteristics of businesses in low-income areas, according to the SBA research:
- The majority of small businesses in low-income areas are in one of five sectors: construction, professional services, other services, trade (including wholesale and retail), and healthcare.
- There are far fewer businesses proportionally in low-income areas.
- Employer businesses (those with at least one paid employee) generally have fewer employees and lower average payrolls. The 503,000 businesses in low-income counties employ on average 12 employees each.
Payrolls are much lower in low-income areas. On average, small-business payrolls in these areas are $33,071, including wages, commissions, bonuses, employee retirement fund contributions, and sick or vacation payouts.
Incorporated businesses have higher labor, non-labor, and total income rates than unincorporated self-employed businesses.
Demographics play a role in the available labor force in low-income areas, too. Larger proportions of the labor force in these areas are women, are African-American, and have at most a high school education. Lower proportions are male, are white or Asian, or college educated. The proportions hold true for self-employed professionals in low-income areas too.
What It Means for Entrepreneurs
It is not surprising that low-income areas support fewer businesses than other areas and that such businesses have fewer employees. What does the data mean for entrepreneurs looking to locate in areas where there is an opportunity for growth?
The answer, as is often the case for entrepreneurs, starts with funding. The challenge for many funders in low-income areas is that many are looking not just for a return on their investment, but also for job creation, according to research by Florida International University professor Dileep Rao.
Rao, however, argues that the issue is not one of access to capital, but instead the need to develop “smart entrepreneurs.” Without the “double home run” of returns and job creation, Rao argues that the government should focus instead on developing entrepreneurs by providing the skills that will allow for better business performance.
Challenges for Funding
The need for better, faster, access to capital is common among those looking to start a business in an underserved community. Fortunately, there are opportunities to leverage existing 401(k) and IRA plans as funding for small businesses.
Unlike traditional commercial lending or venture capital sources, this approach has rapid conversion rates without the need to deal with loan interest rates or equity shares given away to investors.
Benetrends has pioneered this approach, which involves incorporating as a C corporation and leveraging existing retirement funds, without tax or early withdrawal penalties. To learn how Benetrends can help you start or grow your small business, schedule a consultation today.