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Columbia Missourian

Small businesses' slow recovery could mean trouble for small towns

By Anthony Schick
July 1, 2012 | 6:00 a.m. CDT

FULTON — Small businesses have been slow to recover here, as they have in many small towns across the country. Fulton's downtown, which spans little more than six city blocks and clings to the brick streets of its more vibrant youth, has more than a dozen empty storefronts. The ongoing problem here has not been business closures so much as finding new ones to fill the void, said Tom Riley, a local attorney and the commissioner of the Downtown Fulton Brick District Association.

"You not only have the poor appearance created by empty buildings, but you also lose the participation of the owners and employees who could work there," Riley said. "An empty building represents a new task for us in filling it, but takes away resources with which we could try to do it."

Political dialogue about small businesses

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Yet Fulton has fared better than many other towns across the state and nation. With two colleges and a state hospital providing stable jobs in the town of 12,790, its unemployment rate of 6.9 percent is below the national average, which is just over 8 percent. Across Missouri, main streets in small towns are spotted with vacancies as small business struggles to recover.

Small businesses are upheld as saviors during economic recession. In the past, they were the first businesses to recover, and their growth helped pull the rest of the nation into stability.

That is not happening this time.

Signs of recovery have not come from small business despite tax breaks, fewer restrictions for small business lending and various reforms to help small banks, small businesses and startups. Businesses with 50 or fewer employees grew at a rate barely a quarter of those with 5,000 or more employees, according to experimental data from the Bureau of Labor Statistics gathered as part of the Job Openings and Labor Turnover Survey.

Those small-scale employers have remained on their heels because of a tightened credit market and uncertainties in health care, taxes and economic stability, said Brad Jones, the Missouri director for the National Federation of Independent Business, which recently released data indicating small business hiring slowed nationally in April compared to previous months. A Gallup poll from earlier in the year showed 85 percent of small businesses were not looking to hire.

Small businesses can range to operations as high as 500 employees in some industries and 1,500 in others, with annual revenues up to $21 million in some cases. By those definitions, small businesses account for more than 90 percent of all businesses in operation and employ half of all private employees, according to the Small Business Administration. Over the past 15 years, they have generated nearly two-thirds of all new jobs.

And when small businesses hire, many of them hire young.

"They do tend to hire younger people," Jones said. "Most business owners really get a kick out of teaching younger people about business and about how to run a small business."

The sluggish recovery of small business comes at a time when one in every two recent college graduates is jobless or underemployed, and youth unemployment in the U.S. is 18 percent, up from 12 percent a decade ago. That percentage has been as high as 33 percent for those with a high school diploma as their highest level of education.

The roughly 4 million unemployed 15- to 24-year-olds have spurred renewed interest in youth entrepreneurship, as surveys suggest a quarter of unemployed youth attempted to start their own business. Last year, the Small Business Administration began hosting the "Young Entrepreneur Series," a cross-country traveling forum, because of the recognized "need to promote and better support the efforts of young people to create jobs for themselves and others."

Politicians at the highest altitude preach small business and youth entrepreneurship — and attack each other's policies on the issues — but experts say local efforts do far more to foster a healthy small business community than large-scale government actions.

This is particularly true in small towns, where small business is often the only business and communities lacking the amenities of larger cities struggle to attract young entrepreneurs. In some small towns, economic downturn can knock that codependence off balance and into an unhealthy downward cycle.

The benefits of small businesses goes beyond employment figures, studies show.

Communities with vibrant small business sectors are healthier, with lower rates of mortality, obesity and diabetes, according to research published last year in the Cambridge Journal of Regions, Economy and Society. They also have more social capital, higher incomes and fewer uninsured.

"When you look at economic indicators such as unemployment, income growth and poverty, the same concentration of small, locally-owned businesses is much more beneficial for small towns," said Carson Mencken, professor of sociology at Baylor University and co-author of the study.

A vibrant small business environment also reduces a town's vulnerability to losing a major employer, said Molly Brogan, spokesperson for the National Small Business Association.

"Small town small firms provide jobs for the people in that town which provide those folks with money to then shop at other small businesses," Brogan said. "It's a very important cycle."

In a poor economy, that cycle looks more like a spiral.

The recession's tightened credit market has forced small business owners to use more of their personal assets to finance business, according to research from Tansel Yilmazer, an economics professor at MU. That risks loss of personal assets and damaged credit scores, aggravating economic woes.

"Business is inherently risky," Yilmazer said. "And financing with owner resources extends risk to the household in ways that owners may not be adequately considering."

The prevalence of this practice, specifically in small towns, is the subject of Yilmazer's current research.

"My initial reaction is that the small business owners in small towns are more credit constrained than their counterparts in bigger towns," she said. "Therefore they need to use more of their own resources."

Such is the case for Jody Paschal, the 34-year-old owner of Gidley's Shoe Store in downtown Fulton. Paschal put a house he inherited up as collateral on a $45,000 credit line to buy Gidley's about three years ago. He has since put enough money into the store to buy a second house, he estimates. He took on that financial burden because he did not want Fulton, where he grew up, to lose a store it had known for more than 40 years. His story illustrates another trait common to small business owners in small towns: a sense of social responsibility.

"I felt very responsible for keeping it going," Paschal said of purchasing Gidley's. "Not only for the people of Fulton but for the other businesses downtown. If one business closes it's a huge hole in the business district, because it's one less thing for people to come downtown for, and it's one more vacant building."

Last year, 80 percent of small business owners in small towns made community contributions like donating to the local Little League or leading a redevelopment project, according to research published in April by Terry Besser, a professor of sociology at Iowa State University. Most of them expected it would prompt an increase in profits — though the data shows it rarely does — and 40 percent felt a moral obligation to contribute.

In small towns, the fates of the community and of small business are tethered to one another. The pull of social responsibility can force business owners into situations they can't afford, particularly if they have personal funds tied into the business.

"These aren't just people who are your customers or your financiers," said Besser. "These are your neighbors. Your kids go to the local school. And if you refuse to promote the local Little League, there are ramifications for you personally."

Thus the potential exists for a risky cycle: Business owners see a struggling town and resolve to invest in it at personal risk. And when those businesses suffer, so does the town.

When a town falls into that downward economic spiral, the result can be too few residents to fully support local fire departments and medical services. That attracts fewer people and guts both customer and labor bases. Business then suffers, and the cycle repeats and deepens.

Many resources are spent to help small communities move to a healthy small business environment, ranging from the Small Business Administration to the Department of Agriculture, said Carson Mencken of Baylor. Most important to fostering this growth, he said, is for local entrepreneurs to provide leadership on identifying community issues, and building consensus on the most effective ways to deal with these issues.

"Neither state nor national government can create this culture," Mencken said. "It has to come from the local stakeholders, the people who have lived and invested their lives in these communities."

Even among very small towns, organizations devoted to economic development, like a Chamber of Commerce, go a long way toward helping existing businesses, bringing in new ones and ensuring a good environment for entrepreneur, said Brogan.

Fulton's Chamber of Commerce and its Brick District have made slow progress on this front, particularly in developing its downtown. Since 2008, the town has been part of the state-run Downtown Revitalization and Economic Assistance for Missouri (DREAM) program, which helps with the technical and financial aspects of redevelopment. Tom Riley, commissioner of the Brick District association that arose out of the DREAM program, envisions a downtown complete with a community theater, restaurants and antique and boutique shops. Fulton is nearing the end of the DREAM process, and there has been good progress in laying the groundwork for business recruitment, Riley said. His association has not yet begun to bring in new business, but he said he hopes to begin doing so by the end of the year.

The first step is collaboration between business owners, customers, the city and others.

"To the extent that we can build a group that can effectively plan together and work through consensus, that's vital," Riley said.

But that's easier said than done with hundreds of different voices to consider — hundreds of voices whose fates depend on small business, and who control the fate of small business.