John Mayer's Real Estate Blog: This recession isn’t being kind to entrepreneurs

This recession isn’t being kind to entrepreneurs

So you want to be an entrepreneur? Read this.

WASHINGTON – June 8, 2009 – Many unemployed Americans are looking to escape the bleakest job market in a generation by launching businesses.

Easier said than done.

Studies show entrepreneurs have it tougher in this recession than in past downturns, largely because of a credit crisis that has made financing scarce. One in four workers who have not found jobs are considering launching a business, a survey says.

At first blush, some are succeeding. An average 0.32 percent of adults – or 320 out of 100,000 – started a new business each month in 2008, up from 0.3 percent in 2007, a Kauffman Foundation study says. But the gains came from low- and middle-income enterprises such as beauty salons and day care services.

Rates for high-income concerns – such as factories and doctors’ offices – fell from 73 to 69 per 100,000 adults. Those types of ventures are more in need of start-up money and far more likely to hire workers and grow the economy, says study director Robert Fairlie, economics professor at the University of California-Santa Cruz. Small businesses can’t “lead us out of the recession when they can’t get capital,” he says.

Yet even low- and middle-income firms face a tough road. About 15.4 million people were self-employed in May, down from 16 million in December 2007 when the recession began, according to the Bureau of Labor Statistics (BLS). Many entrepreneurs are self-employed. The figure hovered near 16 million for much of 2008 until dipping to 15.8 million last September as credit markets froze.

So while more people started businesses last year, an even larger number shuttered. That means many of those launching lower-income ventures likely will fail within months as they struggle to raise cash, says Scott Shane, entrepreneurial studies professor at Case Western University.

After losing his computer job, Dean Romero of Phoenix decided to sell a product he invented – soft covers for iPod earbuds, called Breppies. But after investing $6,000 of his savings, he has been unable to raise $250,000 to manufacture and market them. Banks ask, “What collateral do you have?” says Romero, 43. “Well, therein lies the Catch-22.”

Small Business Administration loan volume has risen 34 percent since the economic stimulus boosted incentives in March. But Shane says the impact on entrepreneurs nationwide is limited.

Recessions are often launchpads for the mavericks, as the jobless have little to lose. The ranks of the self-employed rose from 14.7 million when the last slump began in March 2001, to 15.4 million in June 2003, when unemployment peaked, BLS says.

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Comment balloon 0 commentsJohn Mayer • June 10 2009 12:55AM