Small businesses, by definition, have fewer than five hundred employees, but represent approximately 99% of all employer firms and create more than half of nonfarm private gross domestic product. Such small companies are also responsible for paying nearly 45% of the total U.S. private payroll. With over 27 million small businesses in this country, their importance to our economy is critical, but right now many are teetering on the verge of bankruptcy.
Due to their extreme abundance, the failure of a single small business rarely makes headlines. However, the financial crisis is having an enormous impact on the way that they operate. These businesses rely heavily on bank loans for financing, and have therefore suffered deeply as credit has tightened severely. Many of these banks have failed, or are in danger of failing, making it much harder for business owners to acquire the capital they need to grow. Banks have grown hesitant to extend credit to such small customers due to heightened risks, which makes it very difficult for small businesses to pay existing loans.
If small businesses do not have sufficient funds to operate, they may be forced to operate on low profit margins, and may eventually fail. The $700 billion bailout and the subsequent lowering of interest rates was expected to stimulate lending and increase liquidity but so far has failed to achieve those goals. John Hole, the 32‐year owner of John’s Tile Center, is worried that he may have to use his personal savings to keep his business from failing. “At my age, the last thing that I want is to be injecting funds into my business,” he said. He hopes to keep his four staff members, but says “I’m taking it day by day.” Banks have used bailout money to bail themselves out but have been unsuccessful thus far at using that money to rejuvenate small businesses.
The financial problem that small businesses face has been further exacerbated by the $700 billion bailout. Although the bailout was intended to stimulate banks into granting new loans, it has largely failed to do so. For small businesses that are not able to attain necessary loans, any increased taxes on the businesses’ existing assets are remarkably painful. For example, a developer may have bought several pieces of land before the financial crisis with the intention of building homes or a mall. Now, with the economy in recession, banks won’t give money to fund the building projects on the land because they know that fewer people will be spending on new homes and luxury items. This presents the developer with a significant problem: he or she cannot develop the investment, but at the same time must pay significant property taxes on the land. Instead of the land generating profits, it now faces taxation and thus negative cash flow. Eventually, the developer may choose to sell his land at a loss and close his small business to avoid losing more money.
A development firm is just one example of a small business type strained by the current financial crisis. Restaurants, retail stores, architecture firms, hotels, and entertainment venues are all suffering, or even failing, due to the severe drop in consumer spending. Nick Economos, owner of the Fishbone Grille in Fort Mill, NC had to close his restaurant because, “People just quit coming.” He said, “People just got scared with their 401(k), and during that time it was just bad news… [the] stock market dropped like a rock and here we couldn’t get gas. That was everyone’s first priority. It added to the anxiety.”
Because small businesses employ so many people and are responsible for such a large percentage of our GDP, the failure of these companies will only continue to hurt the economy. Until consumer confidence returns, many small businesses will continue to spiral downward toward bankruptcy.