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US small business is changing: 11 things you need to know

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Small businesses are critical to the American economy. They drive healthier communities and create jobs. They are also leaders in innovation: Small businesses outpace large firms 16 to 1 when it comes to patents granted per employee. More women, minorities, and veterans are becoming small business owners than anytime in recent memory. While disparities in access to capital remain, new ways to support the growing diversity of small business owners, from both the public and private sector, are helping bridge those gaps. And new small businesses can now be started with less capital, or new kinds of capital, thanks in part to technology. Here's what you need to know.

Most of the new jobs in the economic recovery were created by small businesses.

It's a politician's cliché to say that small businesses are the backbone of the economy — but it also happens to be true.

Small businesses were responsible for 60 percent of net new jobs created from 2009 to 2013, after the recession. That means a big chunk of employment, taxes, and local services are directly tied to small business.

Congress has long recognized the importance of small businesses to the economy: In 1953, it passed the Small Business Act, which created the Small Business Administration. Today, the SBA supports billions of dollars in small business loans to entrepreneurs nationwide. According to the agency, 99.7 percent of all US businesses are small businesses, or firms with fewer than 500 employees. A little less than half of Americans — 48 percent of the private workforce — are employed by a small business.

Small business owners still turn to large national, regional and community banks for traditional loans. Alternative lending, such as crowdsourcing and online lending, are increasingly popular methods for financing. Financial institutions like JPMorgan Chase lend tens of billions of dollars to small businesses every year, and they're also exploring new ways to support small business ownership nationwide by testing new technologies and reaching out to underserved audiences like veterans, women and minority entrepreneurs.

"Providing capital can positively impact small-business growth, including in underserved communities," said Jennifer Piepszak, CEO for Chase Business Banking. "But beyond lending, we also believe in the power of sharing intellectual capital: advice, technical assistance, and connections to supporting services. There is a broad and multiplying effect of both kinds of capital flowing through a community."

The Small Business Forward initiative is a five-year, $30 million global effort to help bring capital to those who need it most and help entrepreneurs master back-office skills that will help grow their businesses. JPMorgan Chase has partnered with nonprofit lending institutions across the country to help those new to credit get financing, and through networking and informational events like Startup Weeks, they have helped small business owners get the resources they need.

This isn’t just about philanthropy: Small businesses create successful and more vibrant communities. And that’s good news for everyone.

Small businesses are good for communities — and for your health.

Thriving small businesses help create thriving communities, and it's these business owners who tend to stay in their communities, employ locally, and provide goods and services to their local areas.

According to a 2012 Civic Economics study, independent businesses recirculated roughly 48 percent of their revenue locally — meaning money spent at small businesses goes back into the local community — compared to national chains, which recirculated only 13.6 percent. This means more tax revenue for local governments to fund things like schools and roads, better jobs for residents, and more money to local non-profit organizations.

What's more, it turns out small businesses might even be good for your health. A 2012 study from Baylor University and Louisiana State University looked at data from more than 3,000 US counties and found that communities with higher proportions of small businesses have better health outcomes and lower rates of health problems like diabetes and obesity. Researchers hypothesized that employees at small businesses, including those who are self-employed, feel more stable and connected to their communities, whereas those at large retail chains don't, as they suffer higher turnover. Small businesses also tend to lend more support to the places in which they're located: They are more likely to give money to community health initiatives and things like farmers markets, researchers found.

The number of women-owned small businesses is growing rapidly.

The number of women-owned businesses is on the rise — growing by 26.8 percent from 2007 to 2012, to 9.9 million firms owned by women as of 2012, according to census data. Some 90 percent of these businesses were considered "non-employer," or businesses that don't have any paid employees, meaning a lot of women have been going into business for themselves, and doing so successfully. Women-owned businesses brought in roughly $1.4 trillion in 2012, and the figures for that year show a 45 percent increase from 1997, when there were only 5.4 million women-owned firms.

Women entrepreneurs receive only a small fraction of US small business loans.

Despite accounting for almost a third of all businesses in the US, women-owned small businesses receive 16 percent of all conventional small business loans — and only 4.4 percent of the total dollar amount of all loans given, according to a 2014 Senate Committee on Small Business and Entrepreneurship report. That's $1 of every $23 in small business loans. As a result, women start businesses with roughly half the capital that men do.

There's a similar pattern when women entrepreneurs are looking for venture capital. According to the Senate report, only 7 percent of all venture capital funding goes to companies with a female CEO and most venture capital funds don't have any women on their executive teams.

The government is slowly making gains in helping to address these disparities. Federal contracts are a huge source of money for many small businesses, as small businesses are awarded $90.7 billion in federal contracts annually. In the 2015 fiscal year, women-owned small businesses, for the first time ever, received 5 percent of these federal contracting dollars — a small but important milestone in advancing access to capital for women.

Connecting women to resources and education is also crucial. The Small Business Administration has a number of Women's Business Centers throughout the US where they help women entrepreneurs with everything from business advice to loans to marketing, and more.

More and more small businesses are minority-owned.

The Kauffman Index, which tracks "main street entrepreneurship," has some fascinating data on the rise of minority entrepreneurs. Like the rest of the population, business owners today are a more diverse group than ever. The fastest growing segment is the Latino population, which accounted for 13.5 percent of business owners in 2014, up from 5.6 percent in 1996. Asian-American and African-American ownership rose substantially, too, while white ownership declined from 86 percent to 72 percent.

Minorities who own small businesses have a harder time accessing capital.

While the Equal Credit Opportunity Act ensures fair lending practices, a lack of credit history, generational wealth, or professional networks can negatively impact minority applicants. Studies have shown that minority applicants are rejected for loans more often than their white counterparts. This can be discouraging to would-be entrepreneurs looking to start a business.

It's important to consider the relationship between wealth and the ability to start a business. Having a higher net worth, owning a home, or holding other assets means that a small business owner can borrow against these things or use their own wealth to invest in a potential business. Latinos and African-Americans have wealth levels, on average,11 to 16 times lower than whites, another major hurdle facing minority entrepreneurs.

Access to capital is hugely important to the long-term success of businesses which is why helping minority business owners connect with the right resources and lenders is more important than ever before. The Small Business Administration's LINC program can help connect borrowers with the right lenders for their needs. The Minority Business Development Agency at the Department of Commerce also has a wealth of information for business owners who need help either getting off the ground or growing their businesses.

A 2010 study from the Minority Business Development Agency looked at the disparities between minority and non-minority owned firms and found that 19 percent of minority-owned businesses did not apply for a loan out of fear of rejection, compared to 12 percent of non-minority owned firms. A 2016 study from the same economists reported that white owners of startups were three times more likely to say that their loans were always approved than were African-American owners. And the authors found that white business owners launch their enterprises with an average of $106,702 in capital, compared to $35,205 for African-American-owned businesses.

Starting a business in a poorer community makes getting a loan even harder.

Immigrant and minority business owners disproportionately start businesses in poorer communities and urban areas. Only a very small percentage of minority-owned businesses open in predominantly white neighborhoods. Research on how location affects a small business owner's ability to get loans and funding shows that loan applicants in white neighborhoods were approved nearly 60 percent of the time in 2010, whereas applicants in minority neighborhoods were approved a little more than 45 percent of the time. The Small Business Administration reports that where the business is located is a better indicator of whether a loan will be approved than the racial background of the business owner.

Recognizing the uphill battle many communities are facing, JPMorgan Chase & Co. recently announced PRO Neighborhoods, a $125 million investment to help disadvantaged neighborhoods all over the country. In addition to boosting small businesses, JPMorgan Chase will work with organizations working to solve issues of blight and affordable housing, and will work to bring community services and healthier food to places that need it.

Looking at the health of the entire neighborhood improves not only the lives of those who live there but the economy as a whole.

New, non-traditional funding methods are helping address these disparities.

Community-development financial institutions (CDFIs) are mission-based lenders that offer financial and strategic support to underserved communities, particularly to women, minorities, and veterans. A CDFI can be a bank, credit union, loan fund, or venture capital fund. In some cases, CDFIs also provide workforce training and assistance as entrepreneurs work to launch their enterprises.

Private institutions are also getting involved in big ways, trying to create more economic access for these groups. In 2015, the Valley Economic Development Center (VEDC), a CDFI, started the National African American Small Business Loan Fund with $3 million in seed money from JPMorgan Chase. The $30 million fund will provide loans, advice, and strategic support to African-American-owned businesses trying to get off the ground. Another $1 million grant to VEDC allowed the CDFI to expand its business across eight states, and examine how to better serve African-American and veteran small business owners.

JPMorgan Chase has supported CDFIs around the country. In 2014, the bank's foundation invested $33 million to help create a nationwide network of CDFIs across 21 states. That investment attracted additional funding — a staggering $226 million — for key projects across the country, creating jobs and boosting businesses. For example, a collaborative of four CDFIs that received JPMorgan Chase funding worked to streamline the loan application process in Detroit, Milwaukee, New York City, Buffalo, Seattle, Denver, and Chicago, and plans to provide $81 million in small-business loans in these cities.

Technology is helping small businesses get off the ground.

Small business owners are still turning to both large and community banks for traditional loans, but online lending alternatives — while still a small part of overall financing — are rapidly growing.

For small businesses that need smaller, short-term loans, accessing cash through an online lender is an attractive option, as such lenders can often approve loans very quickly. Crowdfunding and peer-to-peer lending are also playing important roles for younger firms. These funding mechanisms aren't taking the place of traditional banks, but they're helping level the playing field for many entrepreneurs looking to start a business.

As more business moves online, traditional banks are meeting their customers there as well. Earlier this year, JPMorgan Chase launched an entirely digital small business loan platform with the online lender OnDeck. Chase customers can quickly apply for new business loans. If approved, they'll typically receive their funding in one business day.

Entrepreneurs can work from virtually anywhere, and technology has enabled more people to start businesses than ever before. Recognizing these significant advances, Chase has hosted Startup Weeks in cities across the country, including Detroit, Denver, Phoenix, Dallas, Columbus, Tampa Bay, and Seattle. These events bring together hundreds of entrepreneurs and local leaders for five days of networking and educational programming to help business owners harness the technology they need to succeed.

Business ownership among young veterans grew

According to the Small Business Administration, the share of veterans under age 35 who started a business grew from 4.6 percent to 7.1 percent in 2012, a period during which business ownership among that age group overall declined. The share of women veteran business owners, like women business owners in general, has also increased, from 2.5 percent in 2008 to 4.4 percent in 2012.

This is in part due to the fact that the transition from a military career to a civilian one can be tough to manage. Many veterans say that explaining how military skills translate to a civilian job was their greatest challenge in finding a job — so they create their own. As of 2012, there were 2.4 million veteran-owned businesses in the United States.

Veterans tend to have high entrepreneurial drive, but have trouble accessing capital or finding the support they need to get their businesses off the ground. When they do, however, they are more likely to own multiple businesses than the non-veteran population. Their businesses also have staying power: Almost 89 percent of veteran-owned businesses are three or more years old, compared to 78.4 percent in the rest of the population.

Many entrepreneurial veterans don’t know where to start, but mentorship and guidance matter.

The Small Business Administration says that veterans are 45 percent more likely to be self-employed than the rest of the population. Still, only 9.1 percent of veterans own businesses, though many more say they would like to. A quarter of veterans who served following 9/11 say they want to start a business, but only 6 percent will go on to do so.

Why don’t they? A lot of veterans don’t necessarily know where to start. There are special loans for service members through the SBA, as well as educational resources, including the "Boots to Business" program that helps veterans start businesses. But connecting veterans with others who have been successful as entrepreneurs is also critical. Bunker Labs, started in 2014, is a national nonprofit that helps veteran-owned businesses with funding, education, and mentorship.

JPMorgan Chase recently invested $1.5 million in Bunker Labs, which helped the group launch a nationwide tour to highlight veteran entrepreneurship and spread awareness of the services it offers. To date, Bunker Labs says it has helped raise more than $23 million in capital for veteran business owners. The companies the group has helped start have generated over $17 million in total revenue.

With the right guidance and tools, veterans prove to be one of the most entrepreneurial groups of the population.

They just need the right help to get started.

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