Place Matters: Small Business Financial Health in Urban Communities

Abstract

While many researchers have observed overall heterogeneity in the small business sector, existing data sources provide limited information about community-level differences in small business financial outcomes. In this report, we use de-identified transaction data from business deposit accounts to identify small business financial outcomes in ZIP codes across 25 U.S. metropolitan areas. While the majority of small businesses were profitable, many had limited cash liquidity. Moreover, community-level differences in small business profitability and cash liquidity were persistent from 2013 to 2017. We also found that small business cash liquidity and profitability were correlated with other community-level indicators. Small businesses held more cash and were more profitable in communities with higher home values, higher shares of college-graduates, and smaller shares of non-White residents. Finally, we found that larger high-tech and other professional services firms were less prevalent in communities where small businesses had limited profitability or cash liquidity. These community-level differences suggest that place-based small business economic development programs may contribute to broad-based economic growth, that policies that address household financial wealth and education might also benefit small businesses, that programs could be targeted to the needs of small businesses most prevalent in majority Black and Hispanic communities, and that both high-tech and lower-tech firms can serve as anchor institutions in supporting community economic development.