Study: The Top 10 States For Small Businesses

Entrepreneurship has skyrocketed in the aftermath of the COVID-19 pandemic. Just ask Morgan Lynch, owner of Jupiter’s Eye Cafe in Spokane, Washington. Lynch witnessed the phenomenon firsthand in her hometown and recently joined the city’s effort to revitalize its downtown.

“Our downtown has gone through a lot of ups and downs over the years, and it’s going through a revitalization post-COVID,” she says. “I wanted to leave my mark on it.”

She’s one of the millions of Americans who’ve started their own businesses in the years following the global shutdown. Over the last year, Lynch learned how to build a business plan, project cash flow and secured financing for her bookstore cafe, which will open by January 2025, thanks to the help of a free state resource known as the Washington Small Business Development Center.

“I could not have gotten where I am now without it, and the fact that it was free is amazing,” Lynch says.

It got us wondering at Bankrate: Are certain states in the U.S. better positioned to promote small business growth, especially in the years following the pandemic?

We investigated this question by analyzing over a dozen data points to rank all 50 states based on their small business environments. In Bankrate’s new Small Business Study, Washington landed the top spot as the friendliest state for small businesses because of its strong small business environment, skilled workforce and ample small business funding. Louisiana came in last for its small business environment.

Which states are better positioned for small business growth?

Small businesses aren’t that small in terms of their economic impact. According to the U.S. Chamber of Commerce, they employ nearly half of all U.S. workers and account for nearly 44 percent of America’s gross domestic product (GDP).

That said, every state’s small business environment looks different. Some states have local economies concentrated in certain industries, like the entertainment and tourism industry in Las Vegas, Nevada. Some states have more robust economies. Some have better tax policies, more available workers for hire or better ecosystems for small business financing.

In our state ranking, the 18 data points we examined fit into these broad categories: robustness of small business activity, availability and quality of labor, business costs, access to capital, infrastructure and policy and regulation. While no state can tick all those boxes, states with relatively favorable conditions in many of these categories were most likely to rank higher on our list.

Here’s where states landed in the top 10 and bottom 10 of our ranking:

Western states have the friendliest small business environments

Many Western states, including Utah, Wyoming, Idaho, Nevada and Oregon, ranked in the top 10 for their small business environments. Washington took the No. 1 spot.

“Generally speaking, these states are tax-friendly, they have good infrastructure and a more educated pool of prospective employees,” Rossman says. Washington, Idaho and Oregon have less favorable business tax environments than Wyoming, Nevada and Utah.

Why Washington ranked No. 1 for its small business environment

Washington stands out in three categories we examined: access to capital, the robustness of small business activity and the availability of skilled workers. Washington’s biggest areas for improvement in our rankings are its business costs and tax policies.

Here’s a further breakdown of Washington’s small business environment:

Access to capital

Washington has over 600,000 small businesses and was approved for almost $965 million in 7(a) loans through the Small Business Administration (SBA) during the 2024 fiscal year. That put Washington in the No. 2 spot in the nation for access to capital for small businesses, after Utah. The 7(a) SBA loan program is the SBA’s primary business loan program for providing financial assistance to small businesses and one of the most popular small business loans.

Robustness of small business activity

Roughly half (49 percent) of Washington’s workforce was employed by small businesses as of 2021, according to the U.S. Census Bureau’s Statistics of U.S. Businesses. Washington’s per capita real gross domestic product (GDP) in 2023 was $86,682, the third highest in the nation. Between March 2021 and March 2022, 29,963 small businesses opened and 13,419 closed, for a net increase of 16,544. That puts Washington in the top 10 for the largest net increase of small businesses per capita.

Availability and quality of labor 

According to the Bureau of Labor Statistics’ (BLS) Business Employment Dynamics data, small businesses in Washington contributed a net increase of 161,791 jobs between 2021 and 2022.  That’s 86.2 percent of total net job creation in Washington, one of the highest percentages among all 50 states. Washington also has one of the highest ratios of available workers for every job opening amid a nationwide worker shortage crisis, according to the U.S. Chamber of Commerce. Besides the abundance of available labor, Washington also appears to have some of the most capable workers in the country, according to at least one measurement. When the National Center for Education Statistics measured the education level of adults living in the state, it found that Washington’s adults were more literate and more capable at math than their counterparts in other states.

Business costs

Washington’s hourly median wage, once adjusted for the cost of living ($26.24), is higher than most of the country. Higher wages can reduce profits for small business owners because they often have smaller profit margins. It’s also harder for small business owners to pass on added expenses to their customers to make up for those labor costs compared to large corporations.

Policy and regulation

Washington scored well for business policies. According to the SBE Council’s 2019 Small Business Policy Index, Washington is one of the most entrepreneur-friendly states for policy because it imposes lower governmental burdens on entrepreneurship, business and investment.

However, the state did not fare as well when it came to its tax environment. It has lower individual income tax rates than other states; however, the Tax Foundation says Washington imposes gross receipts taxes on businesses instead of corporate taxes, which are “generally thought to be more economically harmful.” Overall, the state lands in 35th place on the Tax Foundation’s 2024 State Business Tax Climate Index.

Infrastructure

Washington ranks 17th for infrastructure. While the state has strong internet speeds and robust electric utility performance, it falls short on its road and bridge conditions. Solid infrastructure is important for businesses, as it supports smooth operations, efficient production, reliable communication, access to resources and growth.

These states struggle with their small business environments

Many states, particularly in the South, didn’t fare well in our ranking. The states in the bottom five spots on our ranking include Louisiana, Mississippi, Rhode Island, West Virginia and Hawaii.

There are a few commonalities among states at the bottom of the ranking: They have higher poverty rates, lower levels of small business activity, weaker economies, more severe worker shortages and less educated workforces. Some states at the bottom of our ranking are also more prone to natural disasters, which can financially devastate small business communities and impact small business growth.

Why Louisiana came in last for its small business environment

Louisiana is the least friendly state for small businesses of all 50 states, ranking poorly in several metrics we analyzed. Here’s a detailed breakdown of its small business environment:

Access to capital

The total amount of Small Business Administration 7(a) loans approved based on the number of small businesses in the state is low, ranking 35th. This reveals a gap between the available capital for small businesses in Louisiana and the entities that can actually access that funding. The state received over $333 million in SBA 7(a) loans in fiscal year 2024 and has over 450,000 small businesses.

Bryan Greenwood, state director at the Louisiana Small Business Development Center, says capital is readily available in Louisiana, but many residents who want to open businesses may struggle to qualify for financing because of the state’s higher poverty rates. According to the nonprofit Louisiana Budget Project, the overall poverty rate in Louisiana was 18.6 percent in 2022, the second highest in the nation.

Robustness of small business activity

Louisiana is the only state that experienced a net decrease in small businesses between March 2021 and March 2022. State experts at the Louisiana Small Business Development Center pointed to Hurricane Ida as a likely reason. They said small businesses affected by the hurricane faced storm damage and a lack of power, water and internet service. Louisiana also landed in the bottom 15 states for the lowest per capita real GDP, signaling a weaker overall economy.

Availability and quality of labor

Louisiana is facing a worsened worker shortage, evidenced by the fact that there are only 55 workers for every 100 open jobs, according to the U.S. Chamber of Commerce. It also has some of the lowest average literacy and numeracy scores for adults in the country, compared to other states. BLS data shows Louisiana added the second-fewest small business jobs to its economy between March 2021 and March 2022.

Business costs

When adjusted for the cost of living, Louisiana’s hourly median wage ($21.93) is lower than in most states. This is the only metric in which Louisiana scored considerably better than other states. States with lower priced-adjusted median wages generally scored better on our ranking because employee wages can be a significant cost for small business owners.

Policy and regulation

Louisiana ranks poorly for its tax environment and is in the middle of the pack for its small business policies. Over the last two years, Louisiana made some significant changes to its business tax structure by lowering corporate and personal income tax rates and eliminating the corporate franchise tax. However, the state still ranks 40th for its overall business tax environment in the Tax Foundation’s 2024 State Business Tax Climate Index. The state’s business policies are also structured in a way that imposes on small business growth, ranking 29th in the SBE Council’s 2019 Small Business Policy Index.

Infrastructure

The state’s poor infrastructure — from internet speed to road condition to overall utility performance — also dragged it down on the ranking. It ranks 48th in this category.

The bottom line

There’s no denying that some small business owners have it better than others simply because of where their business is situated.

The location of your business can affect everything from business costs to what you pay in taxes, making it one of the most crucial factors that drives its success. Of course, location will matter more if you’re opening a business that relies on in-person interactions, like a retail store or restaurant, compared to an online-only business.

We’re not suggesting small business owners flock to the top states on our ranking. Rather, it’s important for them to understand that their state’s small business environment presents its own unique challenges and opportunities. Understanding these differences can help small business owners make better, more informed business decisions in their respective states.