Lack of credit access is not the only factor for woes that small businesses faced as a result of economic crisis during the period 2007 to 2009. A big reason is continuing uncertainty on the back seat related to economic conditions and poor sales. Small firms experienced greater job decline than larger firms and that is the reason why they were hit harder than bigger firms.
During the period December 2007 and December 2009, small firms with fewer than fifty employees experienced job decline of 10.4 % in comparison to larger ones that experienced 7.5%. It is true that tightened credit did contribute to constrain smaller firms but a more pressing factor remains the decline in new investment and associated financing that is introduced by low consumer demand for firms’ products and services. Limited credit availability remained a secondary driver of the difficulties that small businesses encountered.
Officially recession got started with the nonfarm payroll employment taking on a downward trend in Dec 2007. The National Bureau of Economic Research data reveals that this recession differs from its predecessor in the fact that smaller establishments were deeply affected than the bigger ones. Small businesses suffered overall employment decline of up-to 40% in the recent downturn. This was just 10 % in 2001.
Employment changes during recession revealed that small firm declines are greater than total sectoral percentage declines with manufacturing as the exception. The balance sheet data as presented in U.S. Census Bureau’s Quarterly Financial Report, found that bank loans represent 2/3rd of total small firms debt in-comparison to one quarter for larger firms. The authors point that if credit market conditions deteriorate and bank credit supply continues to dry, cost of external financial rises especially for small firms would face difficulty in raising funds.
Sources have revealed that bank loans have declined since the beginning of recession. Commercial and industrial loans have depreciated 20 % from March 2008 to June 2010. The use of credit cards has contracted for small businesses.
This article was submitted by Raj Tulshan, Director of Business Development of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to