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The best city for small business in America is not in Silicon Valley

New York City surpassed Silicon Valley to become the top city for small business, according to Biz2Credit's annual study of the Top Small Business Cities in America. New York's growth has been fueled by the booming real estate market and the construction industry, banking and finance (including fintech), and the city's thriving technology sector.

New York City overtook last year's small-business city leader, San Jose, the hub of Silicon Valley, which dropped to the No. 4 spot on the list. Technology companies in Silicon Valley are still thriving, but it's the supplementary companies that are faced with challenges of growing. The skyrocketing cost of living in Silicon Valley impedes the profits of many firms. Commercial rents, housing and labor costs weigh down non-tech businesses dramatically. Furthermore, taxes are higher in California, in general. Lacking that economic balance in the area has prevented San Jose from reigning as the leader in top small-business cities this year.

Historically a melting pot, New York is a diverse metropolitan area, which translates well for entrepreneurs of all ethnic backgrounds. Of the approximately 8.5 million people living in the city, more than one-third are foreign-born, the highest rate in more than a century, according to data from the New York City Department of City Planning. Immigrants bring an entrepreneurial spirit and diligent work ethic to America's shores.

"The density and diversity of New York City is unparalleled to anywhere in the country," said Steven Cohen, president of Excelsior Growth Fund, a nonprofit Community Development Financial Institution that provides loans and advisory services to New York small businesses. "There are large numbers of women, immigrant and minority entrepreneurs, and they are growing at record numbers."

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"There's a great entrepreneurial spirit and community in New York City that really reflects the global nature of the city," added Cohen, whose organization also connects small firms to a wide range of business resources. "You have businesses in all industries and so many businesses and resource providers in one place. This means it's easier to network and connect with mentors, business support organizations and other business owners."

Following New York are Miami-Fort Lauderdale (No. 2), Austin (No. 3), San Jose (No. 4) and Los Angeles (No. 5). For this analysis, Biz2Credit analyzed nearly 30,000 small businesses with fewer than 250 employees. Firms identified in the study must have been in operation for at least a year and had less than $10 million in annual revenues. The Top 25 Cities for Small Business in 2017 are:

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. The study looks at the health of small companies 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. The results are tallied by Biz2Credit's proprietary BizAnalyzer tool, which then ranks the cities.

The top 10 metro areas by average annual revenue

  1. New York ($979,674)
  2. Miami-Fort Lauderdale ($800,024)
  3. Austin ($750,023)
  4. San Jose ($640,334)
  5. Seattle ($632,114)
  6. Los Angeles ($542,712)
  7. Washington, D.C. ($542,674)
  8. San Diego ($527,957)
  9. Dallas-Fort Worth ($513,533)
  10. San Francisco ($511,991)

New York improved to the top spot after registering the highest-average annual revenues, with $979,674, and its business owners had the highest credit scores, at 646, compared to 640 for Miami, which ranked second. The city also placed atop Biz2Credit's proprietary BizAnalyzer score, which considers local economic factors that may not be applicable in other areas such as cost of doing business and tax rate.

The New York Small Business Development Center and the New York City Small Business Services have fueled small-business growth and entrepreneurship through various initiatives. These are backed by Mayor Bill de Blasio, who tasked city agencies with fighting inequality and fostering a city where everyone has an opportunity to succeed, per New York City's Small Business Services Commissioner Gregg Bishop.

Over the last year, New York City's Small Business Services has served more than 8,900 businesses, including more than 1,500 immigrant entrepreneurs. Additionally, they've certified more than 4,500 minority and women-owned firms, a 20 percent increase over just two years. They've provided New Yorkers with training and tools to succeed as entrepreneurs and have invested more than $130 million in community-based organizations help grow local small businesses in the community.

"The beautiful thing about starting a business in New York City is that you practically have a built-in market with such a high-density population," said Sarita Ekya, owner of S'Mac NYC, a restaurant that has been in business for over a decade in Manhattan's East Village and specializes in macaroni and cheese. "However, there is always a lot of competition, as well."

"If you can differentiate yourself, that's a game changer," continued Ekya, a first generation Indian immigrant entrepreneur who received funding through Biz2Credit in 2014 to pay for equipment and renovation expenditures. "Another great thing about having a business in New York City is that there are a lot of government resources available at low-cost or free to help new business owners out."

The top 10 metro areas by average credit score

  1. New York (646)
  2. San Jose (644)
  3. San Francisco (640)
  4. Miami-Fort Lauderdale (640)
  5. Riverside-San Bernardino, CA (627)
  6. Los Angeles (625)
  7. Indianapolis (622)
  8. Seattle (622)
  9. Austin (621)
  10. Houston (616)

Businesses in the New York metro area were more established than those throughout the country and typically higher credit scores comes with the territory. There is also a correlation between higher credit scores and businesses with better longevity. Many of the cities in the Top 10 were represented by longer operating businesses.

Other emerging hot spots

The annual survey revealed other interesting trends.

One of the top vacation destinations in the country, Las Vegas, has emerged as the fastest-growing start-up city. Entrepreneurs are taking advantage of the stream of visitors that continue to flock to Vegas and its relatively low cost of living that make Sin City an attractive location to start a business. Nevada is one of seven states that does not collect income tax. This stimulates companies to hire more workers and generate more revenue to fuel the economy. Immigrants from Latin America and Asia, in particular, are moving in and starting businesses.

Rising to the second spot in the Top Cities list, Miami-Fort Lauderdale has emerged as a hotbed for entrepreneurs and, more specifically, Latino small-business owners. In fact, it is often regarded as the unofficial hub to Latin America, and Latinos have accounted for more than half of the U.S. population growth over the last 15 years. Additionally, the recently restored relations with Cuba, in combination with the surge of Latino immigration, will only benefit the South Florida economy.

Just four years removed from Chapter 9 bankruptcy as a result of the auto bailout, Detroit is on the rebound. Last year was a banner year for automakers, and car manufacturers are incorporating technological advances into their designs. Car buyers want the latest gadgets. Motown has risen to the top 15 of this year's study.

Among the notable movers on the list was Indianapolis, which has emerged as a Midwestern hub for entrepreneurship. It is a low-cost city with thriving e-commerce and logistics sectors that has made it an attractive destination city for immigrants and people from other areas of the country seeking better opportunities. Look for this area to continue booming as entrepreneurs seek other alternatives, especially those that can conduct business from remote locations.

— By Rohit Arora, special to CNBC.com