American Banker: New census data hints at slower pace for small-business formation

American Banker:  New census data hints at slower pace for small-business formation
Vijay talks to American Banker about a potential slowdown in small business creation.

By   John Reosti November 15, 2023, 9:07 a.m. EST

Fresh data from the U.S. Census Bureau indicates a 3-year-old boom in small-business formation may be losing some of its steam. 

Data from a Census Bureau report released Monday indicates the 3-year boom in small-business startups may be losing steam heading into 2024.

According to the bureau's Monthly Business Formation Report, released Monday, there were approximately 473,000 startup applications filed in October. While the overall number was even with September's result, the number of so-called high-propensity applications — defined as those likely to result in businesses that create jobs — fell 3.3% month over month to 154,200.

Any long-term falloff in startup activity would be problematic for banks and credit unions, given the importance that small business plays in their operations. "Small businesses are highly dependent on bank loans since they lack access to broader capital markets," Thomas Hogan, an economist and senior fellow at the American Institute for Economic Research, wrote Tuesday in a statement to American Banker.  

Those sentiments weren't necessarily misplaced. Despite the hiccup involving October high-propensity applications, startup numbers for 2023 remain positive. Overall applications through October totaled 4.6 million, an increase of 7% over the first 10 months of 2022. Similarly, high-propensity applications through October totaled 1.48 million, up 7% from the first 10 months of 2022.

Small-business banking is incredibly important to financial services firms. Critical issues affecting this area are being discussed during American Banker's Small Biz Banking 2023 conference, which is being held in Nashville this week.

Startup activity, moreover, remains significantly elevated over pre-pandemic levels. Total applications for all of 2018 were 3.5 million, compared with 5.1 million for full-year 2022.

Small-business applications spiked upwards in 2020 due in part to pandemic spending by the federal government. The high levels of startup activity continued in 2021 and 2022, with applications totaling 10.5 million, the highest two-year figure in U.S. history, according to the Small Business Administration. 

Still, some observers are forecasting a slowdown in the pace of startup formation, citing factors such as inflation and higher interest rates.

"With the rapid rise in rates back to their natural level, there is absolutely going to be a slowdown in job creation and startups from the levels we've seen the past few years," Vijay Marolia, managing partner and chief investment officer at Regal Point Capital in Orlando, Florida, said Tuesday in an interview.  

Vijay Marolia: 2023
Vijay Marolia

Patrick Reily, cofounder of Toronto-based Uplinq, a credit assessment and scoring platform for small-business lenders, termed the October Monthly Business Formation Report an "inflection point." Reily noted Tuesday in a statement to American Banker that some individual states have begun to experience year-over-year declines in startup activity, even as the national figure continues to reflect an increase. 

According to Reily, higher-for-longer interest rates along with high inflation are cutting into cash reserves while elevating credit card borrowing, trends that make it tougher for individuals to act on their startup dreams. At the same time, distress among existing businesses has risen substantially in the past year. 

"As we can now see, the thrill is gone," Reily wrote. "Young and inexperienced business owners are quickly learning the challenge of crafting a successful business." 

Higher interest rates have slowed lending, "which will likely put a drag on business formation going into 2024," according to Hogan of the American Institute for Economic Research.  

There could be a silver lining, but it depends on whether the Federal Reserve is able to avoid recession and engineer a soft landing for the economy, added Hogan, a former chief economist for the Senate Banking Committee. "Most economists wrongly predicted a recession in 2023. A continued boom in 2024, for new businesses and the economy, is not out of the question," Hogan wrote.

John Reosti