Survey Ranks Most (and Least) Small Business-Friendly States, Cities

A new survey of nearly 8,000 small businesses rates state and metro area business climates, providing clues to what these economic engines value most.
by | April 2, 2013 AT 12:15 PM

When it comes to how business-friendly an area is, smaller companies care about much more than just taxes.

A new survey of nearly 8,000 small businesses throughout the country rates business climates of states and metro areas, providing clues to what these economic engines view as top concerns.

Utah earned the highest overall small-business friendly rating of any state, followed by Alabama, New Hampshire and Idaho. Rounding out the bottom of the list, which did not include nine states with insufficient numbers of respondents, were Rhode Island, Maine and Hawaii.

Thumbtack, an online marketplace for businesses, surveyed its clients and partnered with the Kansas City-based Ewing Marion Kauffman Foundation for the report.

Training and networking programs were found to be the best predictor of overall scores, followed by a state’s economy and licensing requirements. Professional licensing -- a source of frustration for many business owners -- was 30 percent more important than tax codes in determining business-friendliness, the study reported.

In fact, the majority of businesses surveyed didn’t think their taxes were unfairly high. The larger the business, though, the more negatively it perceived its tax rates.

Nathan Allen, who co-authored the report, said licensing requirements stood out as an important factor in a state's overall business-friendliness. More than half of companies surveyed reported being subject to at least one licensing agency, and many of them must adhere to mandates set by multiple levels of government.

“It’s something they really have to contend with and stay up on,” Allen said. “The time they have to spend on it can become a serious burden to their growth.”

The survey also assessed the small business climates of 57 metropolitan areas. The Austin, Texas, area topped the overall rankings, earning high marks for ease of starting a small business, training and networking programs. Four of the top 10 areas netting the highest scores were from the Lone Star state.

When a small business owner decides where to set up shop, they’re most likely to choose where they already reside. For this reason, taxes typically aren’t their chief concern initially, said Katie McConnell, a senior associate with the National League of Cities’ Center for Research & Innovation.

Licensing requirements often stem from state-level agencies. But this doesn’t mean local governments can't help to expedite the process. McConnell, for example, said some local agencies provide clarity and work to streamline requirements across multiple offices.

“Trying to make sure [licensing requirements] are not barriers, but just steps, is what a lot of local governments are looking at," McConnell said.

The city of Chicago launched a restaurant start-up program, outlining information on site selection, licensing, inspections and other information for prospective restaurant owners.

What’s more, state and local governments can link business owners to a vast array of resources within their own communities. Universities may provide training programs. Business associations also frequently facilitate networking opportunities.

“A lot of these companies don’t have connections to city hall because they’re busy growing their business.” McConnell said.

The Scottsdale (Ariz.) Public Library system recently announced plans to participate in an initiative offering learning opportunities for entrepreneurs and small businesses.

In Seattle, the city's Office of Economic Development regularly meets representatives of the business community there, answering questions and helping entrepreneurs establish connections.

It’s also important local officials understand that the needs of each small business, particularly rapidly-growing firms, are unique. Increasing companies' exports, whether it’s expanding a market outside a region or overseas, is one area where public agencies are focusing their efforts, McConnell said.

NLC’s toolkit for supporting small businesses lists numerous other suggesstions and lessons learned for local officials.

The vast majority of the nation’s employers are small businesses, so as regions look to expand their economies, supporting their growth looms large.

“Cities are really trying to concentrate on small businesses because of the recession and there are less big projects to land,” McConnell said.

State Rankings

Source: Thumbtack survey

Of the 57 metro areas surveyed (some larger areas weren't included), the following recorded the highest overall average scores:

  1. Austin, Texas
  2. Virginia Beach, Va.
  3. Houston, Texas
  4. Colorado Springs, Colo.
  5. San Antonio, Texas
  6. Nashville, Tenn.
  7. Dallas-Fort Worth, Texas
  8. Raleigh-Durham, N.C.
  9. Columbus, Ohio
  10. Salt Lake City, Utah

A few notes on the survey results:

-- States with fewer than 20 respondents were excluded from the results.

-- Locations and sizes of businesses in the sample were fairly representative of the nation as a whole. However, the types of small businesses were not. Professional/nonprofessional services make up a large share of Thumbtack’s clients, so fewer manufacturers and retailers were surveyed.

-- Rankings were based on average scores from survey questions, listed in the report.

View complete metro area and state rankings