Pa’s climate ripe for small business, area experts weigh-in

A recent study shows Pennsylvania ranks high among the states to start a small business in due to state incentives and loan availability.

In 2021, Americans submitted a record 5.4 million small-business applications, according to the Census Bureau, and followed that up with 5 million last year.

Lendio.com, an online loan marketplace targeting owners of small businesses, rated each state by nine metrics. The study found that Pennsylvania ranks 12th.

Among the metrics the study evaluated were small business lending, cost of living, real estate data, educated worker migration, corporate tax rates and state-level incentives for business owners.

What is driving small business?

Parker Marsh, financial advisor for Stonebridge Financial Group – which has offices in Harrisburg and Lancaster — said that part of Pennsylvania’s high ranking can be contributed to the state’s strong regional bank presence. Marsh added that regional banks are more likely to lend to small businesses than larger, national banks, making the business climate attractive.

“It seems more clients are willing to open a small business than they were five to 10 years ago,” Marsh said.

As stated previously, 10 million small businesses have opened nationally in the last two years with annual revenue reaching $13.3 trillion, according to the Small Business Administration. However, only 48.9% will survive five years as owners battle inflation, recession fears and colossal shifts in how Americans work and live, said the Lendio.com report.

Pennsylvania had a 54.2% five-year survivor rate for small business startups between 2016 and 2021, more than $6.4 million in small business loans per 100,000 residents in 2022, and $7,430.30 in venture capital dispersed per $1 million GDP in 2021. It also has 81 incentive programs for small business and an 8.99% corporate tax rate.

People looking to start a business look at Pennsylvania because costs are lower than other states, Marsh said. He cited lower taxes and office space costs. And that government programs like the State Small Business Credit Initiative are attractive.

Gus Faucher, chief economist for PNC Financial Services, said he gets a sense that some small business startups were born out of the pandemic when people were working from home and looking to do something else.

March agreed, saying people are happy to be out of the pandemic and may be looking for something different than their traditional job. Savings rates are also better than when the economy bottomed out in ’08, he added.

“The pandemic made it okay to take a lower income to be one’s own boss,” he said. “Some people start a business to create a lifestyle over income.”

Since the pandemic, Faucher said he is seeing startups in the tech industry, where there is less of a trend in the retail, leisure and tourism industries.

A mild recession expected later this year could create its own hesitations for new ventures, however, many are confident they can increase prices and profits as the economy is expected to pick up by early 2024, said Faucher.

How the commonwealth compares

Texas, Florida and Ohio rank at the top of the Lendio.com list due to low taxes, educated workers moving in, sufficient business funding, and having more than half of their startups survive at least five years.

“When looking at rankings like these, it is best to look under the hood and see what is driving the ranking, and how we compare to benchmark states,” said Ryan Unger, president and CEO of the Harrisburg Regional Chamber and CREDC. “… I think there are some real bright spots for Pennsylvania. We rank high in educated worker mobility and have a strong survival rate for our small businesses. This tells me we have strong cities, communities and regions that individuals and businesses want to be (in).”

And in areas where the commonwealth does less well, “there is significant momentum to improving,” he said. “Pennsylvania’s high corporate net income tax has been reduced within the last year and is slated to reduce 0.5% each year until 2031, when it will be 4.99%. This would put us within the 10 lowest of states with a (corporate net income tax).”

Unger said additional capital being deployed for small business lending should also lead to a rise in the state’s rating.

“It is great to see Pennsylvania ranked No. 12 as best states to do business,” said Heather Valudes, president and CEO of the Lancaster Chamber. “We show up as a state with a high number of small business incentives and a strong five-year survival rate for startups and mom-and-pops shops. Here in Lancaster, we are proud to have a robust and thriving small business community, with thousands more across the state, but we know the path isn’t always easy here.”

Valudes, like Unger, pointed to the current 8.99% corporate income tax, which lags behind other states. Clearly reflected as a detriment in the data, it hurts the small business community and impedes the state’s competitiveness, she said.

But while the tax rate will be decreasing in coming years, loss of population to other states — almost 40,000 residents in 2022 — is a bigger concern, Valudes said.

“People in their 30s and 40s tend to start businesses,” he said. “Pennsylvania is lacking in that demographic,” Faucher said.

“The highest ranked states have large influxes of new residents with reasonable costs of living, whereas Pennsylvania is ranked in the bottom of 10 for migration,” said Valudes. “It’s an issue Pennsylvania desperately needs to address, because raising and educating our children here, for them to leave and find better opportunities elsewhere is not reflective of our values and potential in the commonwealth. We need to make significant strides in retaining our talent here and attracting future talent to meet the needs of our workforce today and into the future.”

For Faucher and Marsh, another roadblock will continue to be the success of the country’s labor market.

“The employment issue is multi-faceted,” Marsh said. “There are fewer employees with Baby Boomers retiring and the lack of legal immigrants, which businesses rely on.”

And while it is easier for U.S. citizens to find jobs right now, they are demanding more pay, which cuts into a company’s bottom line, Marsh said.

“We’re hoping that this clears up in the next few years,” Marsh said.

On the positive side, Marsh said, small businesses can find funding, build relationships and build revenue, which makes the prospect attractive.