This is the best city for small business in America: Survey

Silicon Valley is still the epicenter of innovation in the world, but China — and, increasingly, India and other emerging markets — is catching up.
Geri Lavrov | Getty Images
Silicon Valley is still the epicenter of innovation in the world, but China — and, increasingly, India and other emerging markets — is catching up.

San Jose, California, has regained its crown as the best place to start a business in America in the annual ranking conducted by Biz2Credit. The Silicon Valley hub with a diverse metro-area population of about 2 million people was ranked in 18th place last year because of the high cost of doing business. However, the tech boom has driven the turnaround.

Following its lead: New York (No. 2), the San Francisco–Oakland area (No.3), Miami-Fort Lauderdale (No. 4) and Los Angeles (No. 5).

The results were surprisingly considering a number of other surveys on the best U.S. cities to start a business by companies like Wallethub and Thumbtack have not given San Jose high marks. This is due to the fact that San Jose has some of the highest annual salaries in the country.

Top 10 Metro Areas by Annual Revenue

Annual Revenue
New York, NY $1,421,959
Riverside-San Bernardino, CA $1,045,820
San Jose, CA $801,064
Seattle, WA $702,693
Los Angeles, CA $612,415
Tampa-St. Petersburg, FL $606,833
Miami-Fort Lauderdale, FL $571,014
Chicago, IL $548,548
Washington D.C. $547,296
San Francisco-Oakland, CA $535,998
Source: Biz2Credit

The annual "Best Small Business Cities in America" ranking of 25 cities is based on a weighted average of data on Biz2Credit's customers across the country. It looks at the health of small businesses in each metro area, the rate of small-business creation and the economic ecosystem for entrepreneurs, including the cost of doing business, tax climate and local talent pool.

Biz2Credit analyzed more than 55,000 businesses with fewer than 250 employees from across the country. These firms were in operation for more than a year and had less than $10 million in annual revenues.

San Jose shot to the top spot after scoring in the top five in average credit score, average annual revenue and Biz2Credit's proprietary BizAnalyzer score, which takes into account local economic factors, including the cost of doing business and tax rate. San Jose edged New York by a point in the BizAnalyzer analysis; ranked third in average annual revenue, with $801,064; and its business owners had the highest credit scores, at 644, compared with 626 for New York, which ranked second.

Biz2Credit analyzed companies in San Jose that applied for loans on its platform, and more than 55 percent of loan applications were made by companies in business for less than three years, according to Biz2Credit research.

According to Biz2Credit figures, of the 268 applications for funding in San Jose, 148 were from newly formed businesses. This clearly shows San Jose as one of the leading cities for new-company formation, thanks to a vibrant economy. GDP growth in San Jose was 6.2 percent, according to the California Legislature's Legislative Analyst's Office. This figure far surpasses the 2.4 percent GDP growth of the United States as a whole.

Silicon Valley is known for its thriving start-up culture, proximity to leading business schools, such as Stanford and U-Cal Berkeley, and its venture capital and angel community. IT giants based nearby — Google, Apple, Facebook and others — are investing heavily in innovation and stoking the entrepreneurial ecosystem.

At the same time, other forces are at work helping to improve the climate for small business. The real estate market in California has rebounded greatly. In many areas, real estate prices have risen above 2007 levels. Meanwhile, gas prices plummeted in 2015, which benefits consumers who take that disposable income and spend it. Spending makes people feel good, which helps the economy.

Surprisingly, New York ranked second in the Biz2Credit study, although it ranked highest in average annual company revenue, at $1,421,959. It tied with San Jose in the average age of business, at 64 months.

The high cost of doing business in the Big Apple was the factor that nixed New York from the top spot. High rental and construction costs, as well as high payroll and sales taxes, factored into the BizAnalyzer analysis. Because it is expensive to live in the New York metro area, salaries have to be higher in order for small firms to compete for talent. The fact that the minimum wage has been increased to $15 an hour also will be a burden for many small-business owners, particularly ones that operate on lower margins. This in turn could be a deterrent to hiring at the entry levels.

Other hot spots

In third place in the city survey, San Francisco–Oakland is another hotbed of tech-driven innovation that is attracting STEM talent from across the United States and abroad. Like New York, it is a major destination for business travelers and vacationers. Many Asian companies are establishing footprints in the Bay Area. These confluence of factors is driving GDP growth, which is 5.2 percent in the San Francisco–Oakland area.

Biz2Credit analyzed 416 companies in the Bay Area and found that 244 applied for funding — almost 60 percent.

According to the Biz2Credit research, the San Francisco–Oakland area had the most mature businesses. Companies averaged 67 months in operation, and many of the loan requests were for expansion or capital improvements rather than for start-up funding.

The average annual revenue for Bay Area companies was $535,998, while their personal credit score was 607, according to the Biz2Credit study.

Other entrepreneurial enclaves include the Miami–Fort Lauderdale area and Los Angeles, which ranked fourth and fifth in the survey, respectively.

The Miami–Fort Lauderdale area is thriving because of a construction boom and its growth as a tourist destination. Additionally, Miami acts as a gateway to Latin America, and the city is encouraging small-business development. That may be why it had a BizAnalyzer score of 54, tied with San Francisco. The average age of business was 52 months, while the average annual revenue was $571,014. Meanwhile, the average credit score was 608.

In fifth place, Los Angeles is home to many growing companies in the aerospace and defense, biosciences, transportation, fashion, food manufacturing, trade and logistics and hospitality and tourism industries. The city benefits from a wealth of capital resources for small businesses including accelerators, angel investors, corporate venture capital funds, and hedge funds. LA-based small businesses ranked fifth in annual revenue ($612,415), ninth in credit score (604), and 23rd in age of business (65 months).

— By Rohit Arora, CEO of Biz2Credit, a leading online lending platform for small businesses based in New York City