San Jose an uphill battle for small businesses

California is ranked as the 25th least expensive state to start a business, but local business leaders say entrepreneurs in San Jose face significant challenges in launching a company.

A recent study by SimplifyLLC analyzed a variety of factors to rank each state, including business filing fees, labor costs, utility costs, lending rates and start and failure rates of businesses. Despite California landing in the middle of the list, economic experts and business owners in San Jose said the survey doesn’t illustrate the increasing business costs and difficult permitting processes that create additional barriers for local entrepreneurs.

“While San Jose remains a world-class destination for a dynamic customer base and highly skilled employees, we continue to struggle with the high costs of goods and services, slower permitting times and the high cost of housing, which can drive up wages,” San Jose Chamber of Commerce CEO Derrick Seaver told San José Spotlight.

California placed in the middle of the list overall, compared to Nevada at the top and Minnesota at the bottom. The study, which adjusted numbers for population, found California also fell in the middle in terms of lending for small businesses, lending about $37.7 million in 2020 compared to North Dakota, which topped the list at about $67.5 million. Despite its ranking, California had the third-highest utility costs in the nation, with an average monthly commercial electric bill of $992.86.

San Jose is currently home to approximately 60,000 small businesses, with some being threatened by displacement due to new housing and transit development projects. City officials said 98% of San Jose businesses are small businesses with less than 35 full-time employees. Additionally, entrepreneurs fighting to stay in San Jose are battling increasing rents as the city works to offer relief through grants to offset the growing operation costs. Meanwhile, on the government side, vacancies in the city’s planning department have led to a permitting backlog.

Too much red tape

Chandra Brooks, a local entrepreneur and member of the National Small Business Association leadership council, said startup costs and delayed permits are some of the biggest obstacles to getting businesses off the ground in Silicon Valley. The study revealed California’s average business filing fee is $70, but in San Jose the base cost is $210 and can increase depending on the number of employees.

“If you have a brick and mortar (business), it’s definitely very expensive because of rent, utilities and everything you need,” Brooks told San José Spotlight. “When you’re a small business, time is money… We lose a lot of great businesses because people have to wait for this red tape.”

Vic Farlie, an analyst with the city’s economic development department, said San Jose is also facing increasing labor costs, but still remains an appealing place for entrepreneurs to start a business in Silicon Valley. Farlie said the city has multiple efforts underway to keep businesses thriving, including monthly meetings with neighborhood business associations, free workshops and resources for new entrepreneurs, as well as grants for businesses to improve their storefronts to attract more customers.

“San Jose has done well over the past 10 years—more businesses opened than closed,” Farlie told San José Spotlight. “It’s not easy for every business owner, we know that… Small businesses in many of the underserved community areas within the city, that’s our priority at the moment.”

Brooks said entrepreneurs of color are disproportionately impacted in the business landscape, struggling with hurdles like loan rejections. She said historically many banks prefer loan candidates with a business record or financial cushion, things not every new business owner has readily available.

That problem prompted a local Vietnamese food vendor to crowdsource funding instead of going the traditional bank route.

“You have to have a lot of capital upfront,” Brooks told San José Spotlight. “If you don’t have those resources, especially for people of color and families that don’t have that type of money in their families or themselves, it’s almost impossible to even fathom starting a business.”

Silicon Valley Minority Business Consortium founder Walter Wilson said ensuring grants last at least three years is another crucial step in allowing small businesses to get on their feet. Local governments and leaders have to be intentional in supporting racial and gender diversity through the contracting process, he added.

Hispanic Chamber of Commerce Executive Director Dennis King said immigrant entrepreneurs face additional barriers, such as cultural and language differences. For a business to be successful, he said business owners need to rely on the community for support and have a clear path to success in place for them to follow throughout their business journey.

“When people start a business, they’re usually pledging all they own,” King told San José Spotlight. “As a community, we should really appreciate the risk, the energy and effort that’s required to make a business successful.”

Contact Loan-Anh Pham at [email protected] or follow @theLoanAnhLede on Twitter.