The Impact of Recession on Small Business in America

The United States is in the worst recession since the Great Depression of the 1930's, terrifying for individuals and businesses alike. Prices are on the rise, the dollar value is decreasing, businesses are closing, stock market investors are bailing out, and banks are going bankrupt. No one is immune to these frightening changes, not even small businesses. What does this mean for the nation's small businesses? This is a nightmare economy. Small businesses represent 99.7% of all employer firms and employ nearly half the country's working population. Economic indicators paint a bleak picture of the current state of our economy, one that leaves small business hurting.

While much of the focus on the financial crisis has been the impact on banks and major financial institutions, sales and earnings at small businesses have taken a hit as well. The percentage of small business owners who said that finding new business was the most challenging aspect of new business more than doubled from June 2007 to June of 2009. In fact, business failure rates have jumped, according to the Office of Advocacy of the US Small Business Administration. Business bankruptcies increased 79% from the first quarter of 2007 to the first quarter of 2009. Hence the number of entrepreneurs has fallen.

Its plain to see, just in the local economy. Many of the small auto dealers are closing, or have already closed. With current credit limitations and the rise in prices of everything, people will fix an old car before they buy a new one. Thus, the small dealers are going out of business. In some cases, people opt for public transportation rather than even fix an old car, thus forcing some auto shops out of business. Many smaller business, from restaurants to simple retail shops are closing their doors. After spending hard earned money on living expenses, most people have very little to spend elsewhere. Thus, the smaller the business, the more quickly they will close their doors.

The self-employment rate is now below pre-recession levels. Also, these self-employed who managed to remain in business have been forced to reduce their work hours. Sole proprietors income has fallen, More small business owners reported an earnings drop in the three months prior to July 2009, a reversal of the situation at the end of 2007.According to US census data, the number of people starting businesses has declined. Recession has left an increasing number of small businesses financially challenged. An increasing number of businesses are reporting concerns about cash flow and ability to pay bills on time.

The small business sector has experienced severe job loss. More than half of the jobs lost in the first half of 2008 were in small business companies. There are no plans to add back those jobs any time soon. Rather, they are decreasing all hiring practices. Decreased profits have forced many small businesses to lay off workers and abandon expansion plans. Small businesses are less optimistic of their financial future, unwilling to expand now or take on new employees. In fact, one-third of small business owners report the uncertain economy is the biggest challenge to growth. Until small business owners feel more optimistic in the near and long term, this economy will continue to drag. Economic indicators paint a bleak picture of the current state of our economy.

The problem of a "credit crunch" has also hit small firms. Because small businesses rarely issue equity or debt securities, lending has historically been their primary source of capital. Businesses rely upon this financing to make necessary purchases, execute expansion plans, and hire new employees. Consequently, the availability of affordable financing is a critical factor in fueling the small business.

Most small businesses use traditional types of credit, including fixed-term loans, fixedrate lines of credit, mortgages, equipment loans, or motor vehicle loans. Small

businesses also make prodigious use of alternative credit products-- particularly credit

cards to finance business expenses. Recent economic conditions--however, have led to

several troubling patterns in credit availability and credit costs for small firms.

As outlined below, small businesses have seen that it has become more difficult to secure capital. At the same time, the terms of loans are higher than in previous cycles. These factors have contributed to a precipitous decline in small business lending - a problem which could impact the ability of small businesses to grow and expand.

The credit conditions for small firms are less than optimal for small businesses. A recent study by the National Small Business Association found that over a third of business owners expressed the most significant concern over access credit. Additionally, in an American Express OPEN Economic Pulse Report issued in October, 63% of small businesses reported being impacted by tightening credit conditions. This is up from 50% just two months earlier. Until credit conditions rebound, it will prove difficult for small businesses to start expanding and creating jobs.

In 2008, small business lending fell for the first time since 1993. Lending standards to small businesses tightened dramatically. Loans have become less available and borrowing needs have not been satisfied. With capital difficult to access, owners changed how they finance small business. Many use personal and private funds to address cash flow challenges. Across commercial and industrial as well as alternative sectors, statistics reflect an environment where the supply of credit for small business is lower than its ever been in history.

Thus, economic conditions need to improve for small business to generate economic recovery. Small business have the ability to create jobs in those sectors of the economy that drive the economy: manufacturing, construction, and retail. They also comprise a significant segment of businesses operating fields like health care and financial services. Entrepreneurs do not expect the poor financial conditions to improve in the near future. Adverse economic conditions have led many small business owners to de-emphasize growth. Fewer small business owners are making growth an important priority.

In order to improve these economic trends, policies must be enacted that are quick acting and timely. There must be a focus on stimulating consumer demand, while restoring confidence in our financial markets. The economy generally-- and small businesses specifically-- will benefit from an increase in consumer spending. Consumer spending can be improved through an extension of unemployment benefits, an expansion of food stamps, and grants to states and localities for infrastructure. Much of this funding will flow through to small businesses, including retailers, contractors, and manufacturers, resulting in job creation and increased economic activity for local communities.