Best & Worst Small Cities to Start a Business

Size matters when choosing a city in which to launch a startup. As many veteran entrepreneurs — and failed startups — understand well, bigger is not always better. A city with a smaller population can offer a greater chance of success, depending on an entrepreneur’s type of business and personal preferences. The best cities can help new businesses survive economic shocks such the COVID-19 pandemic, which caused hundreds of thousands more businesses to close permanently than would have closed during normal conditions.

Every small city offers unique advantages and disadvantages to new business owners. Some benefits include lower overhead costs, stronger relationships with customers and the potential to become a big fish in a little pond. But there are plenty of drawbacks, too. For one, entrepreneurs who want to build a large professional network aren’t likely to make as many connections in a town with fewer residents. Other restrictions might include limited industry options, a less diverse customer base, and difficulty attracting and keeping top talent.

To determine the best small cities to start a business, WalletHub compared the business-friendliness of more than 1,300 small-sized cities. Our data set of 18 key metrics ranges from average growth in number of small businesses to investor access to labor costs.

Main Findings

Best Small Cities for Starting a Business

Ask the Experts

Entrepreneurs who lack expert guidance are more likely to struggle. For insight into starting a business in a small city, we turned to a panel of experts for their thoughts on the following key questions:

1. In the context of the ongoing pandemic, what are the pros and cons of starting a business in a small city?
2. Would some types of small businesses – i.e., a retail store, restaurant, or tech startup – do better than others in a smaller city?
3. What tips do you have for an entrepreneur starting a business in a small city?
4. Has the migration determined by the pandemic affected in any way the business climate in small cities?
5. What can local authorities do to encourage entrepreneurial activity in their small city?

Ask the Experts

Robert Sprague
Professor of Legal Studies in Business, Department of Management & Marketing, College of Business – University of Wyoming
Read More

Shaker A. Zahra
Robert E. Buuck Chair of Entrepreneurship, Professor of Strategy & Entrepreneurship, Strategic Management & Entrepreneurship Department, Carlson School of Management – University of Minnesota
Read More

Pauline Assenza
Professor, Management - Small Business Entrepreneurship, Ancell School of Business, Western Connecticut State University
Read More

Lori K. Long
Ph.D. – Burton D. Morgan Endowed Chair in Entrepreneurial Studies, Professor, School of Business – Baldwin Wallace University
Read More

Richard Ryffel
Professor of Finance Practice (Part-time), Olin Business School – Washington University in St. Louis
Read More

Keith J. Kelley
Ph.D. – Associate Professor of International Business, MWIN Faculty Innovation Fellow, Department of Accounting, Finance, and International Business, School of Management – University of Michigan-Flint
Read More

Methodology

In order to determine the best small cities in which to start a business, WalletHub compared 1,334 cities across three key dimensions: 1) Business Environment, 2) Access to Resources and 3) Business Costs. For our sample, we chose cities with a population of between 25,000 and 100,000 residents. “City” refers to city proper and excludes the surrounding metro area.

We evaluated each of the three key dimensions using 18 relevant metrics, which are listed below with their corresponding weights. Each metric was graded on a 100-point scale, with a score of 100 representing the most favorable conditions for launching a business.

We then determined each city’s weighted average across all metrics to calculate its overall score and used the resulting scores to rank-order our sample.

Business Environment – Total Points: 50

• Average Length of Work Week (in Hours): Full Weight (~5.56 Points)
• Average Commute Time: Full Weight (~5.56 Points)
• Average Growth in Number of Small Businesses: Double Weight (~11.11 Points)
• Startups per Capita: Double Weight (~11.11 Points)
• Average Revenue per Business: Full Weight (~5.56 Points)
• Average Growth of Business Revenues: Full Weight (~5.56 Points)
• Industry Variety: Full Weight (~5.56 Points)

Access to Resources – Total Points: 25

• Financing Accessibility: Double Weight (~5.56 Points)
  Note: This metric was calculated as follows: Total Annual Value of Small-Business Loans / Total Number of Small Businesses.
• Investor Access: Double Weight (~5.56 Points)
• Human-Resource Availability: Full Weight (~2.78 Points)
  Note: This metric was calculated by subtracting the “unemployment rate” from the “number of job openings per number of people in labor force.”
• Higher-Education Assets: Full Weight (~2.78 Points)
  Note: This metric is based on WalletHub’s “College & University Rankings.”
• Workforce Educational Attainment: Full Weight (~2.78 Points)
  Note: This metric measures the percentage of the population aged 25 and older with at least a bachelor’s degree.
• Working-Age Population Growth: Full Weight (~2.78 Points)
  Note: “Working-Age Population” includes those aged 16 to 64.
• Job Growth (2020 vs. 2016): Full Weight (~2.78 Points)

Business Costs – Total Points: 25

• Office-Space Affordability: Full Weight (~6.25 Points)
  Note: This metric measures the per-square-foot cost of commercial office space.
• Labor Costs: Full Weight (~6.25 Points)
  Note: This metric measures the median annual income.
• Corporate Taxes: Full Weight (~6.25 Points)
  Note: Data for this metric were available only at the state level.
• Cost of Living: Full Weight (~6.25 Points)

Sources: Data used to create this ranking were collected from the U.S. Census Bureau, Bureau of Labor Statistics, Federal Deposit Insurance Corporation, AreaVibes, Yelp, Indeed, Tax Foundation, LoopNet, and WalletHub research.

Supporting Video Files:

• YouTube (for web embedding)
• Raw video files (for editing into clips)