By Elizabeth Renter | NerdWallet

The American entrepreneurial spirit seems to be doing well despite high borrowing costs and consumers burdened by high prices.

New business applications are rolling in at a monthly rate 48% higher than the 2019 average. This surge began in the immediate wake of 2020 COVID-19 lockdowns, and it continues now in both total applications and those considered “high propensity,” which are businesses most likely to result in job creation.

A flood of government funding during the pandemic, favorable programs and strong consumer demand are just a few reasons for the sustained increase in new businesses. The growth of new businesses has likely played a role in continued labor market strength, where job creation remains robust in the face of the Federal Reserve’s campaign to slow inflation through higher interest rates. However, those new businesses should craft contingency plans to weather continued high borrowing costs and softening consumer spending as 2024 wears on.

Applications surge, then remain high

In 2019, 293,000 new business applications — as measured by requests for employer identification numbers (EIN) from the IRS — were processed each month on average. This monthly measure peaked in July 2020 at 546,000. It slowed slightly before peaking again at 503,000 in May 2021 and settling to the most recent 12-month average of 455,000.

These applications weren’t solely driven by lofty fantasies conjured during lockdowns — high-propensity applications, or those deemed most likely to result in having workers on payroll, have risen and remain aloft as well.

The increases have likely been due to a combination of factors: some new entrepreneurs being among the layoffs and business closures of spring 2020; Economic Impact Payments to households helping to seed some of the startup funding; pro-small business policies; and that difficult-to-articulate shift in life priorities that occurred because of the pandemic.

Increased filings translate to increased openings

Early on, there was some debate as to whether these applications would actually result in successful business creation, i.e., would the ambitions of entrepreneurs translate to measures of success such as the hiring of employees? Thus far, the answer seems to be yes.

There is a lag between when a business files for an EIN and when it is measured as a new business or one where employees are on the payroll. In 2018-2019, these establishment “births” accounted for 3.1% of all establishments, each quarter, on average. That share grew to 4.3% in late 2021, and currently averages 3.6% over the past year.

You can also see the increased presence of new businesses when looking at business age data — the share of establishments younger than 2 years grew modestly from 15.5% in 2013 to 16.7% in 2019, before rising rapidly over the next several years. In 2023, the share of young businesses stood at 20.6%, according to Business Employment Dynamics data from the Bureau of Labor Statistics.

Funding is costly and harder to come by

These young businesses are coming of age when funding is expensive. Interest rates on new loans have roughly doubled over the past three years, according to data from the Kansas City Fed. On a loan of $100,000, for example, this difference can mean hundreds of additional dollars on a monthly payment, and tens of thousands in interest over the life of the loan.

New small business lending remained robust in the fourth quarter of 2023, according to the Kansas City Fed, but banks report lower demand for business loans in the first quarter of this year, according to the Federal Reserve. Further, in that most recent quarterly Fed survey of lenders, a moderate share of banks report tightening standards on those loans, making it more difficult for businesses to get approved for the costly funding.

What new businesses can expect in coming months

The remainder of 2024 could prove tough for new businesses. Borrowing costs will likely remain high, and consumer spending could cool.

The Federal Reserve is unlikely to begin cutting interest rates until the third or fourth quarter of the year, and it will probably begin cautiously. So new businesses shouldn’t expect any significant relief from high interest rates on loans through the end of the year.

In addition, the Fed’s efforts to quell demand-driven inflation with higher rates is likely to begin weighing more heavily on household finances in coming months. This means consumer demand for goods and services may not be as robust as it’s been for the previous few years. In fact, it’s already begun slowing, according to the most recent data from the Bureau of Economic Analysis.

New businesses are more likely to feel a negative impact from swings in consumer spending. In contrast, older businesses may have long-standing relationships with clientele — potentially greater customer loyalty — which can help buffer short-term changes in those customers’ household finances. Further, more-established businesses are likely to have more resources and greater insulation to cover periods of slower business.

Owners of new businesses can prepare for the coming months by having a game plan. Businesses that depend on discretionary spending, in particular, should plan for lean times. It’s better to be prepared and not need it than to be caught off guard. Think about where you might be able to cut expenses, consider a line of credit as an emergency fund and know where to go for help when you’re a new business owner navigating new economic experiences.

Elizabeth Renter writes for NerdWallet. Email: elizabeth@nerdwallet.com. Twitter: @elizabethrenter.

The article New Businesses Surge but May Be Tested This Year originally appeared on NerdWallet.

Harris Meyer | (TNS) KFF Health News

Many physicians and nurses are happy about the Federal Trade Commission’s new rule banning the use of noncompete agreements in employment contracts. But they are disappointed that it may not protect those who work for nonprofit hospitals and health care facilities, which provide most of the nation’s care and employ the largest number of medical professionals.

In April, in a 3-2 vote, the FTC approved a final rule prohibiting contracts that prevent an employee from taking a job with a competitor. Calling the noncompete agreements “a widespread and often exploitative practice,” an agency announcement described them as an unfair method of competition that depresses wages and hinders new business formation.

The rule bars employers in most industries, including health care, from using contract clauses that block employees from leaving for other jobs or starting a competing business in the same geographic area for a fixed period of time.

But that doesn’t help many health professionals, because the FTC Act gives the agency authority over companies organized to operate for profit but not over nonprofit, charitable organizations, which are also tax-exempt.

Still, the agency noted some nonprofits could be bound by the rule if they do not operate as true charities. The rule establishes a two-part test to determine if the FTC has jurisdiction over a nonprofit — whether the organization is carrying on business for only charitable purposes, and whether its income goes to public rather than private interests.

“Our rulemaking record includes powerful stories from health care workers who are employed by nonprofits about how noncompetes hurt patients and providers,” said FTC Commissioner Rebecca Kelly Slaughter, one of three Democratic commissioners, in comments before the April 23 vote. “I do not think there is a good justification for them to be excluded from this rule.”

Noncompete contract terms have become increasingly common for physicians, nurse practitioners, and other medical professionals in hospitals and various health care facilities. Some providers say these agreements have forced them to leave their communities and patients behind if they wanted to exit unethical or unsafe workplace conditions.

Nearly 64% of U.S. community hospitals are nonprofits or government-owned, and they employ many of the nation’s medical professionals. As of 2022, nearly three-quarters of U.S. physicians were employed by hospital systems or other companies, both nonprofit and for-profit.

Based on their designation as charities that don’t have to pay income or property taxes, U.S. nonprofit hospitals received a total estimated tax exemption of $28 billion in 2020, according to KFF, a nonpartisan research organization.

That exceeded the estimated $16 billion they spent on charity care for patients unable to afford their medical bills, KFF said.

Physician and nursing groups say it makes no sense to treat nonprofit hospitals differently because they are just as money-driven as for-profit hospitals. Patients, they say, will benefit if providers are free to call out unsafe conditions and change jobs. “Giving physicians freedom of movement will force hospitals to compete to improve working conditions,” said Jonathan Jones, immediate past president of the American Academy of Emergency Medicine.

Chad Golder, general counsel and secretary of the American Hospital Association, which represents mostly nonprofit hospitals, said the rule would increase health care costs and reduce patient access by triggering hospital bidding wars for physicians. He predicted the FTC would try to apply the rule to both nonprofit and for-profit hospitals.

“They aren’t saying exactly what they’ll do, but it’s a pretty significant move for them to say we’ll apply our own test to determine if we can regulate a nonprofit,” Golder said. “Nonprofit entities now will need to be extra careful.”

In addition, some nonprofit hospitals have joint ventures with for-profit hospitals and medical groups. That could create complicated questions about whether their employee contracts come under the rule, said Chip Kahn, president and CEO of the Federation of American Hospitals, which represents for-profits.

The new rule arose from President Joe Biden’s 2021 executive order instructing the FTC to curb the unfair use of noncompete agreements, part of his broader mandate to boost U.S. economic competition and worker mobility.

The FTC argued that banning noncompetes, which it said cover 1 in 5 American workers, would lower health care costs by up to $194 billion over the next decade. It will ensure Americans “freedom to pursue a new job, start a new business, or bring a new idea to market,” FTC Chair Lina Khan said.

The rule also prohibits contract terms that function like noncompetes to stop employees from leaving to work for competing companies or start their own businesses. These might include overbroad nondisclosure agreements, training repayment provisions, and nonsolicitation clauses.

“No one should be trapped in an unsafe job by onerous contracts that prevent them from taking another job,” said Brynne O’Neal, a regulatory policy specialist at National Nurses United, the profession’s largest dedicated labor union in the U.S. Hospitals, she said, use training repayment agreement provisions that require nurses to pay as much as $30,000 in training costs if they leave, essentially locking them in their jobs.

California, Minnesota, North Dakota, and Oklahoma already ban enforcement of noncompete clauses for all employees of both nonprofits and for-profits, while about nine other states prohibit noncompetes for physicians. Even in states without bans, judges have invalidated noncompetes when they have found them to be overbroad or unreasonable.

Hospital executives argue that the noncompete rule will force them to compete against each other to hire physicians and other providers and ultimately cost them more, and that it advantages nonprofits over for-profits. “All it would do is increase the price of labor in a field that already has labor shortages and thin margins,” Golder said.

“The nonprofit hospital across the street could pursue our employees, while their employees would be protected, and that’s a basic fairness issue,” Kahn said.

But Clifford Atlas, an employment attorney with Jackson Lewis in New York, said that argument against the noncompete rule “won’t fly” in court because preventing competition for the services of physicians or other workers is not a business interest that’s protected by law or public policy.

The rule is set to take effect in September, though business groups have filed two federal lawsuits against it in Texas and one in Pennsylvania. Many legal experts predict that conservative judges will strike down the rule on the grounds that it exceeds the FTC’s statutory authority.

Physician and nurses’ groups hope the FTC rule, whatever its fate in the courts, helps persuade hospitals and other health care employers to stop using noncompetes and spurs more states to prohibit them.

“We’re telling our members it could be struck down, but we’re asking them to renegotiate their contracts,” said Jones of the American Academy of Emergency Medicine. “They should be asking their employers, ‘Wouldn’t you like to be on the right side and not to be seen as fighting against physicians and patients?’”

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(KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs of KFF — the independent source for health policy research, polling and journalism.)

©2024 KFF Health News. Distributed by Tribune Content Agency, LLC.