Study: Delaware second worst state in U.S. for small business

DOVER — Delaware was rated the second worst state in the U.S. in terms of “small business friendliness” in a recently published study by ValuePenguin — a Manhattan-based consumer research group.

In the study, each state examined was given a ranking in four key categories. Delaware placed 43rd in number of employees working in small business, 49th in small business survival rate, 49th in exports owned by small business and 20th in small business birth rate. Indiana ranked the least small business friendly state overall while Montana took the top spot.

Though the study was designed to examine existing conditions rather than underlying causes, Justin Song, the business analyst responsible for the report, said there were a number of prominent forces working against small business in the state.

“Delaware is traditionally not necessarily known as a large venture capital hub so it can be pretty tough for startups and small businesses to get the financing that they need to launch or continue operating,” he said. “A Small Business Administration study in 2013 pointed out that Delaware’s entrepreneurs lag behind others in neighboring states when it comes to things like securing loans.”

A tricky-to-navigate tax code is also a choke point for small business in the state, claims Mr. Song.

“Delaware has kind of a reputation as a tax haven, especially for individuals, but when you look at the business side, it’s actually notorious for having some of the most complex business tax laws in the country,” he said. “More than half of the Fortune 500 companies are actually incorporated in the state, but most of them can afford certified public accountants and tax advisers to help them navigate all that. This can cause big issues for small businesses who may not be able to afford these services.”

Mr. Song was quick to note that it wasn’t all bad news for the first state. Certain compensatory economic forces help paint a better picture of Delaware’s fiscal future.

“Other metrics we looked at but didn’t publish because they didn’t deal directly with small business friendliness were overall unemployment rates and gross domestic product growth (GDP) — both areas were Delaware is doing much better,” said Mr. Song. “The state’s unemployment rate is down to 4.3 percent — 20th best in the country — and below the national average of 4.57 percent. Delaware’s economic growth indexed against the national GDP growth shows a high 1.5 percent growth rate compared to the national average of 1.1 percent.”

To view the complete report, visit valuepenguin.com/2018/07/best-worst-states-your-small-business-2018.

Study refuted

The recently created Delaware Division of Small Business didn’t find the new report’s findings particularly convincing.

“This study looked only at a few specific indicators, but there are a lot of variables in this picture that need to be examined,” said Michael Chesney, a spokesman with the division.

Pointing to a survey released last October by Thumbtack — a consumer/provider service network — Mr. Chesney said the opposite conclusion was found. That study ranked Delaware as the 2nd most small business friendly state in the country. In the survey, Delaware was given an A+ rating in 9 out of 12 categories including regulations, tax code, licensing and zoning. To view the Thumbtack survey, visit thumbtack.com/survey#/2017/1/states.

Citing another study released in March, Mr. Chesney said the state also ranks highly for number of minority-owned businesses. The study, performed by payroll processing firm Paychex, claims the state is number one in the U.S. in terms of businesses owned by minority women per 100,000 residents and number two in minority-owned businesses per 100,000 residents. That study can be found by visiting paychex.com/articles/management/business-owner-diversity?platform=hootsuite.

Perhaps most notably, Mr. Chesney feels the ValuePenguin study overlooks the state’s industry makeup.

“Keep in mind, we have a lot of really great large businesses in the state like banking, chemical and pharmaceutical companies,” he said. “These corporations employ a lot of people, and in a state the size of Delaware, that’s obviously going to have a significant impact on the percentages.”

Despite the prevalence of big business in the state, Mr. Chesney said Gov. John Carney has set a “laser focus” on spurring and supporting the state’s small business sector.

“Really this was most obvious with the passing of House Bill 226 last June that rolled the old Delaware Economic Development Office into the public/private partnership Delaware Prosperity Partnership and established the Division of Small Business,” he said. “Our mission, broadly speaking, is to advance the interests of small business and foster an environment that they can grow and thrive in.”

An early priority of the division has been to help small businesses and startups access capital.

“We’ve directly supported the new Growth Delaware Fund with $500,000 and put an addition $500,000 into the First State Community Loan Fund — these two organizations are working with businesses on accessing financing,” said Mr. Chesney. “Also, back in May the Angel Investor Tax Credit was signed into law. We’re hoping that it’ll help encourage investors to put money into early-stage technology-based Delaware small businesses in the coming months when we get it off the ground. Investors will be able to apply to be a part of it and small businesses are going to be able to connect with them through the division’s website.”

Policy problems

The Delaware Small Business Chamber — an independent chamber of commerce supported by small business members in the state — is far less enthusiastic about the state government’s interventions to create a nurturing environment for small business. While agreeing that metrics used in ValuePenguin’s study weren’t the best to judge the state by, Chamber CEO Bob Older doesn’t necessarily disagree with the findings.

“It’s not a great representation because our state happens to be one of the banking capitals of the world,” he said. “When you have a banking sector and other big industries like that, it’ll skew the numbers. It makes sense that a place like Montana will be dominated by a lot more small businesses rather that fewer large corporations. However, I do absolutely agree that the state has a lot more work to do to be more small business friendly.”

Poorly thought-out regulations and policies stifle the state’s small businesses by imposing unnecessary costs on them, claims Mr. Older.

“We’ve been pushing for a one-stop licensing shop for all small businesses for almost a year and a half now without any luck,” he said. “People looking to start up a business should be able to go into one location and get whatever municipal, county and state licensing they need then and there — it’d be a much smarter way to do business.”

Simple changes to certain building codes small businesses are subject to could save them money and lower the barriers to entry, added Mr. Older.

“In New Castle County, we’ve adopted the Americans with Disabilities Act (ADA) rules and regulations for buildings and offices,” he said. “If you’re building something over a certain square-footage, you’re subject to a ton of ADA requirements. Most of them I completely understand, but there are a few like being required to install two water fountains — one regular one and the other ADA compliant. The issue with this is people don’t even use them anymore. They’re not seen as being hygienic and people prefer bottled or filtered water, but if a business offers those it doesn’t count. Those water fountains can easily cost up to $6,000 to install.”

In feedback from their members, the chamber has heard of dozens of regulations that have cost them precious capital with little to no return for them or their customers, said Mr. Older.

“Downstate their was a business building a location and regulations required in this particular area forced them to install a sidewalk in front of the property despite having nothing adjacent to it,” he said. “It ran from end to end on the property, probably cost around $8,000-$10,000 to install, and is a sidewalk to nowhere. Regulations like this make no sense and burden small business owners. There are so many of them that should just be eliminated and we aren’t doing anything about it.”

As for the recent establishment of the Delaware Division of Small Business, Mr. Older has lukewarm expectations. He suspects their priorities are misguided and they haven’t sought enough feedback from the small business community.

“We’re the Delaware Small Business Chamber, the only organization in the state focused entirely on the state’s small business community and they’ve never reached out to us, asked us for input or brought us to the table,” said Mr. Older. “Maybe the division will end up being a good thing, but I haven’t been impressed so far.”

A focus on the needs of “truly small business,” businesses that employ 50 people or less, is what’s needed said Mr. Older. He’s also not convinced obtaining financing is as big an obstacle as claimed — but rather the constant “nickel and diming” of startups that creates adverse conditions.

“We have members of our chamber and organizations tell us all the time that they have money to lend to small businesses but no one is coming to get it,” said Mr. Older. “The First State Community Loan program has several millions of dollars to lend with hardly anyone using it.”

Reach staff writer Ian Gronau at igronau@newszap.com

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