The dream of owning a business and working for oneself – an aspiration nearly half of all Americans have according to a recent survey – is becoming more of a rarity in Indiana.
New business starts in Indiana have sunk to the lowest point since at least 1990, and Hoosier businesses are failing at one of the highest rates over the past few decades.
A total of 3,662 businesses have incorporated in Indiana as corporations, partnerships or limited liability companies through the end of July, according to Stats Indiana. New business incorporation statewide fell 22 percent over the same period since 2010, and 44 percent over the last decade.
More than five times as many companies – 20,003 – have dissolved through the end of July. That's a dramatic improvement from the 28,818 that were wound down over the same period in 2013, but it's still the third highest rate of business failure in Indiana since 1990.
Nearly twice as many Hoosiers were launching new businesses during the 1990s, according to the Stats Indiana data, which reflects the number of businesses that registered with the Indiana Secretary of State's Office. Businesses set up as sole proprietorships, a common arrangement where a single person owns and operates a company, are not required to register with the state, spokeswoman Valerie Kroeger said.
A sole proprietorship could be a single person going around and refilling gumball machines in restaurant lobbies, maybe as a side venture. Businesses that must register with the state tend to be larger enterprises that employ more people because their incorporated status makes it easier from them to raise money from investors or get loans from banks.
Reasons behind the dropoff
In Indiana, the number of incorporated companies has been declining since 2000, and has fallen off most sharply since the financial crisis in 2008.
"Business starts relate closely to expectations about the economy," said Micah Pollak, an associate professor of economics at Indiana University Northwest. "Even though there's been some recovery, it's not at the level of 2006 or 2007, before the crisis, because of the level of business confidence."
A number of other factors have contributed to the steady drop-off in business starts, business leaders and professors said. Banks are more cautious about lending money for new enterprises. Property values have fallen, giving aspiring entrepreneurs fewer assets to borrow against. Fewer people are confident enough to venture into business for themselves. Regulations have made the process more cumbersome. The amount of start-up capital required has become a high hurdle to clear.
New niches are hard to come by. Few markets remain untapped. Some of the decline is systemic – mom-and-pop restaurants have a harder time competing with chains, and big-box stores have turned Main Streets into boulevards of empty buildings and sepia memories of bygone prosperity.
The highest recent rate of business starts in Northwest Indiana was between 2004 and 2006, said Lorri Feldt, regional director of the Northwest Indiana Small Business Development Center.
"It is very challenging these days to start a business," Feldt said. "Some of the challenges are finding a good market opportunity and getting startup capital. There are an array of choices for consumers and buyers, so entrepreneurs are challenged to find a niche where they have something that will attract enough of a market to sustain their business."
Opportunities still remain
A lot of opportunity is still out there for entrepreneurs who can offer something to viable markets, Feldt said. Her office has worked with more than 300 clients who plan to start or are running small businesses. Some, such as Michigan City-based Rockzip Highballoons, have turned to crowdfunding to secure start-up capital. The high-altitude balloon maker, which hopes to help academics conduct research in near-space conditions, recently launched a Kickstarter campaign.
Lynn Gandolfi opened a new store, Tasty Olive Company, in the Porte de Leau Plaza last year, after having become enamored with the unique oil olives she found in tourist towns on her travels. She thought foodies might appreciate a shop that offered rare oils and balsamic vinegars from Chile, Italy, Spain, Tunisia and Greece in a more residential area.
"I knew it was somewhat of a risk, but we kept expenses low because we knew we would make if we accumulated enough customers, which we did in a year and a half," she said. "The business has steadily grown. We've been getting our name out there, by going to public chamber events and partnering with the cancer resource center."
People who aspire to own a small business of their own might be nervous about the economy, but they just need be smart, do their research and know their market, Gandolfi said.
"People are getting tired of big-box stores," Gandolfi said. "They want something more personalized, where they walk in and it's like the Cheers theme."
But big-box stores have hoovered a lot of the market share that once belonged to smaller merchants who once lined Main Street across America, said Dushan Nikolovski, director of Purdue University Calumet's Center for Entrepreneurship Success. They are tough to compete against because of their size, economy of scale and pricing. They've got huge marketing budgets. Consumers are used to making one trip to find everything.
Entrepreneurs are still launching new high-tech businesses, but are less likely to open a corner food market or a hardware store. National or regional chain restaurants also are gobbling up real estate where, a generation ago, a family-owned gyros joint might have opened.
"Just look down the boulevard – you don't see these independent mom-and-pop small franchises opening," Nikolovski said. "You see big franchises like Noodles and Co. coming in."
Small businesses are crucial to the economy, because they create around two-thirds of the new jobs, he said. But property values have fallen since the downturn and entrepreneurs do not have as much in personal assets to borrow against. They have had harder time securing capital from banks since the financial crisis made bankers more leery of risk.
Startup businesses have increasingly been pursuing alternative routes, such as accessing home equity as a source of capital or appealing to the Internet masses on crowdfunding sites, said David Bochnowski, president and CEO of Munster-based Peoples Bank. Commercial lending has been on the upswing for the last year or so, but many of the loans are to established businesses that are expanding.
The Sarbanes-Oxley Law has made it more difficult to incorporate new companies, to the point where many are doing it in Europe instead, he said.
In Northwest Indiana in the past, small businesses fed into the steelmaking or automotive manufacturing sectors, Bochnowski said. But those industries aren't as large or as dominant in the region as they once were.
The Indiana state government also focuses on chasing investments from larger companies, and often does not offer the same tax incentives to start-ups, Bochnowski said.
"If we do have a good business environment in the state of Indiana, we could encourage the formation of smaller companies," he said. "We could encourage the entrepreneurial spirit."