How to Spark Small Business Growth in America

The structure offered by the franchise business model in conjunction with the support of local mentoring resources can significantly lower the barriers to youth entrepreneurship and catalyze local economic growth.

Given the important role of small businesses and the sobering survival rates of new firms in the current recessionary environment, it is essential to create programs that address the unique set of challenges that small business entrepreneurs face and to promote youth entrepreneurship. Linking the young entrepreneur to mentoring resources and franchise opportunities will improve the success rates of new businesses, leading to increased economic growth in local communities. 

At 14.4 percent, the youth unemployment rate is significantly higher than the national rate of 8.5 percent.  With this in mind, we tailored our research to target young entrepreneurs in our local community of New Haven, CT. The racial make up and low education level of residents make New Haven an especially challenging environment for entrepreneurship. As of the 2010 census, New Haven’s population was 27.4 percent Hispanic and 35.4 percent black—two minority groups that statistically face tougher odds opening new businesses than their nonminority counterparts.  The odds of a minority opening a business may be as much as 55 percent lower than those for a nonminority.  Additionally, there is a critical link between education and entrepreneurial success: one marginal year of schooling may increase entrepreneurial income by as much as 5.5 percent.  Among New Haven residents, however, about 31 percent possess a bachelor’s degree and roughly 80 percent have graduated from high school. A partnership among community organizations and community development banks can make entrepreneurship more feasible, especially for young adults. 

Analysis 

Compared to starting an independent business, franchise entrepreneurship offers new business owners substantial advantages: an established business structure, pricing scheme, and recognized brand name. Raising start-up capital is the largest and perhaps most obvious initial challenge that entrepreneurs face. The average cost of starting a new business from scratch is estimated at a little more than $30,000, which is comparable to start-up costs for many franchises. For example, the initial franchise fee for one food truck franchise is $25,000.  Although there are additional cash investments totaling $75,000 and monthly franchising fees of $500-$1500, the franchise eases the financial burden on its entrepreneurs by helping them apply for SBA guaranteed loans. In general, franchises can also be used to subsidize building costs, train staff, and establish products and pricing, all of which reduces the capital required over the first several months of launching a business. Potential lenders view franchised businesses as lower risk because of their guided structure and the fact that the business model has been tested elsewhere. This enables franchisors to receive larger loans on more favorable terms. Moreover, there are special forms of financial support available for franchises at the local and national levels. 

After securing startup capital, entrepreneurs struggle to thrive under competitive market conditions. New entrepreneurs frequently fear they lack the experience and knowledge necessary to successfully bring the right product to the right market. It is essential, therefore, that formal mentor relationships and support networks be coupled with this franchise model to help entrepreneurs work through the many challenges that arise when starting a business. Local experts from organizations such as SCORE, the Chamber of Commerce, and the Small Business Association can serve as exceptional pools from which mentor programs can be created. 

Local mentors can advise on neighborhood demographics, local real estate, potential competitors, and useful contacts. New Haven’s START Community Development Bank recently began implementing such a program to assist entrepreneurs in opening new franchises in some of the city’s least developed neighborhoods. As the city has high unemployment and a lack of commercial diversity, this program to assist entrepreneurs can have a large impact on the New Haven community. 

Next Steps 

In many cities similar to New Haven, organizations that, like START, not only provide loans, but also focus on development, can help increase the success of new businesses by implementing this information sharing model. To do this, it is important to analyze the local market, compile the best support sources in the community, and provide this information in free guidebooks to entrepreneurs looking for loans at local banks. Such seemingly simple efforts to improve entrepreneurs’ access to local resources can truly have an impact in helping communities overcome stagnant employment rates and in driving economic development.