New Business Applications Up 24% Amid Shaky Economy

Unexpected but true: New business applications were 24% higher in 2020 than the previous year. The Ascent breaks down what’s to come for the 4.4 million new business applications.

The COVID-19 pandemic hasn’t rattled the entrepreneurial spirit, a new analysis of U.S. Census Bureau data reveals.

Business applications notched a record-high 4.4 million in 2020, a 24% increase over the previous year, according to an analysis published Monday by the Economic Innovation Group (EIG). The uptick contradicts what’s happened in earlier recessions, but we already know this one isn’t like the others.

Prior to the pandemic, small businesses accounted for 44% of U.S. economic activity and two-thirds of net new jobs, according to the Small Business Administration, so the increase in applications inspires optimism for the economy’s future. However, most applications won’t turn into businesses with employees, the report warns.

The COVID-19 pandemic has dealt a devastating blow to the U.S. economy. Small businesses have faced significant headwinds, and restaurants are still hemorrhaging jobs nearly a year after the pandemic first shuttered their dining rooms.

A 15% increase in likely employer applications

The Census Bureau counted 1.5 million applications in 2020 from “likely employers,” people it deems likely to bring on employees. That’s a 15% hike compared to 2019.

Newly formed small businesses that hire employees could help fuel the economy’s comeback. And it’s certainly still in need of a boost: More than 10 million Americans are currently unemployed, according to the U.S. Bureau of Labor Statistics’ January report.

The economy shed about 22 million jobs in March and April, so we’ve come a long way. The loss in jobs might have spurred the increase in business applications, EIG posits, as most of the growth in applications came from prospective solopreneurs, such as freelancers.

“As it became clearer that the pandemic was more than a temporary dislocation, entrepreneurs seemed to gain confidence in pursuing new business opportunities,” the report reads.

A 77% increase in non-store retail applications

People are shopping online more than ever, and aspiring entrepreneurs want to cash in. Through October 2020, the Census Bureau saw a 77% increase in applications for “non-store retail trades,” which comprise online and direct-delivery businesses.

That data falls in line with what we know about online sales last year. Etsy posted a whopping $2.6 billion in gross merchandise sales in the last quarter of 2020, a 119% increase compared to the last quarter of 2019. People are buying online, and now it appears that new businesses want a slice of the pie.

The retail sector overall saw the sharpest increase in applications, up 54% from 2019. Applications for wholesale trade and transportation and trucking businesses rose by 29% and 27%, respectively. Somewhat surprisingly, applications for accommodation and food services grew by 17%.

All but three sectors had an increase in new business applications. Utilities, real estate, and oil and gas extraction applications declined by 7%, 11%, and 24%, respectively.

Not like 2008

If you compare the new business applications in 2020 and 2008, you’d think one of the graphs is upside-down.

Likely employer applications in 2008 fell by about 230,000 compared to the previous year. Quite the opposite happened from 2019 to 2020: Likely employer applications rose by 205,000.

The polar opposite effect on small business applications probably has something to do with what caused the recessions in 2020 and 2008. A pandemic induced the 2020 recession, whereas a housing crisis led to the one in 2008. Credit is more ubiquitous now, and the financial markets bounced back within months.

But not everything can be explained by financial markets. The EIG report points to Americans’ growing affinity for self-employment.

“Becoming an entrepreneur is a deeply personal decision,” the report says. “The pandemic may have delivered the push for many to embrace it.”

The growth in likely employer applications wasn’t linear. Unsurprisingly, business applications backed off during the first and second quarters of 2020 while the U.S. economy was in the freezer. July marked the turning point when business applications began to soar, far outstripping 2019’s pace.

A word of caution

Don’t expect new businesses to pop up everywhere you go. While it’s encouraging that new business applications are on the rise, not all of them will pan out.

If history means anything -- and it’s hard to know whether it’s relevant in the unique situation we’re in -- we should expect it to take longer for new business applicants to turn into fully fledged business owners.

“It takes time for an application to actually turn into a new business, and not every application completes the journey,” the EIG report says.