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The State of Small Business: Michigan

The State of Small Business: Michigan

As part of our yearlong project "The State of Small Business," Business News Daily plans to report on the small business environment in every state in America. In this installment, we asked a few of Michigan's nearly one million small business owners about the challenges and opportunities of operating in their state. Here's what they had to say.

It's no secret that Michigan's economy took a big hit after the 2008 financial crisis, with the damage centering on the automotive industry in Detroit. But entrepreneurs now report the state is coming back strong. Where prospects once seemed dismal, small businesses are now optimistic for the future.

The Great Lakes State boasts a low cost of living and manageable corporate income tax rates, and while the real estate market is on the rise again, it remains affordable to secure both homes and commercial space. Entrepreneurs in Michigan can also take advantage of initiatives and assistance at Michigan State University and the University of Michigan.

However, the road to recovery is not without its bumps. Michigan's labor market is not sufficient to support the newly increased demand for employees. Small business owners said people are trickling back into the state, but not quickly enough to fill all of the open positions. Even worse is the state's inability to retain the college graduates it produces, deepening the labor shortage. Some entrepreneurs also told Business News Daily that the state's tax incentives tend to favor big businesses over smaller ones. Entrepreneurs find themselves trying to navigate these pitfalls as the state continues its road to recovery. [See Business News Daily's complete coverage of the State of Small Business in the U.S.]

In 2013, the state government replaced the Michigan Business Tax with the Corporate Income Tax (CIT), which stands at a six percent rate across the board. Michigan's small business owners said the rate is manageable, and the simplicity of the CIT is an improvement over the old Michigan Business Tax.

"Our government instituted a flat six percent corporate tax, among the country’s lowest, and that's helped Michigan become a great place to open a new business or expand a current one," B. J. Lennon, director of business operations for recruiting and staffing company Aerotek, told Business News Daily.

In addition to the CIT, Michigan also levies a six percent sales tax and a 4.25 flat personal income tax rate. 

Michigan's entrepreneurs are enthusiastic about the trajectory of the economy. While they were recently staring down the barrel of anemic growth, business is regaining traction throughout the state. With a growing technology industry in places like Ann Arbor and manufacturing and entrepreneurial successes in Grand Rapids, the state's economy is diversifying. Meanwhile, Michigan's mainstay in the automotive industry is back on its feet and helping propel the economy forward.

"We are seeing a big resurgence in automotive manufacturers, especially in the area of autonomous and electric vehicles," Lennon said. "The tech industry in Michigan is also booming – IT, software, hardware, defense. We are very fortunate to have a large pool of technical talent, which is very attractive to employers."

While Michigan's per capita personal income is just 89 percent of the national average, it has consistently ticked upward since 2012. As of 2014, Michigan was the 13th largest economy in the U.S. at $448.2 billion. The state boasted the nation's ninth-largest economy prior to the financial crisis, so it's evident how significant the damage was, but the economy is continuing to grow now, albeit at a modest pace.

"After the Great Recession, there has been an increase in emerging small businesses," said Todd Heyboer, owner of the online boutique ClosetBarcode.com. "There has been a great deal in improvement as you can see in the falling unemployment rate and the rise in median incomes."

One of the most important sectors of Michigan's economy is manufacturing. According to the Bureau of Economic Analysis (BEA), 16 percent of Michigan's economy is predicated on the manufacturing industries, compared to just 7 percent of the national economy.

Michigan is an extremely affordable place to live. Entrepreneurs enjoy low real estate costs and moderate taxes. The cost of living index compiled by Sperling's Best Places measures different cities and states as compared to the nation's average cost of living; Michigan was found to be significantly less expensive than the U.S. as a whole, particularly when it comes to housing costs.

"There is still a big surplus of available office space, and thus, low rental prices," said Monte Falcoff, principal at Harness Dickey law firm's Detroit office.

Falcoff added that the housing market is showing signs of recovery: "The residential housing market has definitely come back, although not quite to the ridiculous highs before the recession."

According to MIT's living wage calculator, a single adult without any dependents would be able to meet all of their needs in Michigan on a wage of about $10 per hour.

Entrepreneurs reported great difficulty finding the employees they need. Michigan experienced a flight of labor during the recession and the labor force has only started to recover. Compounding the labor troubles is the tendency of students graduating from Michigan's colleges and universities to move out of state, rather than seek employment nearby.

"It's a challenge to find and keep good people," Andrea Funk, owner of Too Cool T-Shirt Quilts, said. "When you can find them, they always end up going to someone who is larger and can pay more than a small business."

In 2006, Michigan's labor force had well over 5 million people, but that number plummeted to below 4.7 million by 2012. Now, workers are slowly moving back into the state, and the labor force has increased to about 4.85 million people, according to the Bureau of Labor Statistics. But with the unemployment rate at 4.8 percent and still falling, small business owners remain concerned the returning workers won't be enough to meet the demand. Fortunately, the last months of 2015 and first months of 2016 have seen a spike in the number of workers joining the labor force.

It is also worth mentioning that Michigan is home to a large amount of technically-skilled workers, be it in engineering or chemistry.

"Michigan has a history of entrepreneurship and engineering, and a large concentration of engineering talent and manufacturing resources are present within a quick drive," Falcoff said. 

Accessing capital for startups or expansions in Michigan is a little more difficult than on the coasts, though small business owners said as the economy grows access is improving. Still, young companies should prepare for a difficult time finding investors and plan accordingly. Heyboer noted that rapidly-growing startups encounter many pain points, since access to venture capital is not as great in Michigan as it is in other parts of the country.

While some VC money is available here and there, it's not widely accessible, so many entrepreneurs turn to local federal credit unions and SBA loans for financing options.

"[Michigan State University's] Federal Credit Union is awesome," Funk said. "But I have only had a few times that I needed capital. I have built my business by slowly reinvesting earnings."

If you're a small business owner in Michigan looking for resources to help you move forward, here are a few organizations you might want to learn more about.

Michigan SCORE

SCORE's volunteer business professionals and expert "mentors" give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are entirely free and volunteer-driven. Here are some of the chapters in Michigan. 

Traverse City SCORE

Ludington & Scottville Area

Tip of the Mitt SCORE

SCORE Muskegon

Grand Rapids SCORE

Holland SCORE

U.S. Small Business Administration District Offices

The U.S. Small Business Administration (SBA) offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance in the wake of natural disasters.

U.S. SBA District Office

Michigan Small Business Development Centers

Michigan hosts a number of development centers for small business. Each is dedicated to supporting the development and retention of small businesses, helping entrepreneurs do everything from crafting business plans to navigate the state's tax code. You can find your region's small business development center at the link below.

Michigan SBDC Network

Adam C. Uzialko

Adam C. Uzialko, a New Jersey native, graduated from Rutgers University in 2014 with a degree in Political Science and Journalism & Media Studies. In addition to his full-time position at Business News Daily and Business.com, Adam freelances for a variety of outlets. An indispensable ally of the feline race, Adam is owned by four lovely cats.