12 January 2009 Jose D. Roncal www.financialspeculation.com
The economic downturn has hit businesses both large and small, boosting the number of bankruptcies to levels not seen since 1939. Growing unemployment rolls, losses of consumer confidence, the mortgage crisis and the credit freeze have all contributed to a massive contraction in our economy. Up through November 2008, nearly 58,000 business bankruptcies were filed, a 35% increase over similar filings in 2007.
Most of the media have been focused on large company failures like Lehman Brothers and Washington Mutual, or on the massive amounts of taxpayer dollars spent to bailout financial institutions and automakers. We were told that the bailouts of these giants were necessary to save millions of jobs, and at first glance, that sounded reasonable. Whether or not it actually delivers on that promise remains to be seen.
But there’s another equally important segment of the economy that has largely been overlooked—small businesses.
Small employers account for the bulk of all new-job creation in the U.S. according to the Small Business Administration. Those that operate with 500 or fewer employees make up more than half of the privately held businesses. Many of the companies that employ 100 or less are often in small towns where the citizens rely on those businesses for their basic needs.
When larger companies shut down, the ripple effect is felt far and wide, right down to Main Street, the small businesses, and the families that either run or are employed by them. Large business failures affect suppliers and auxiliary entities, which in turn creates more job losses and more failed businesses. The important thing to remember is that the failure of too many small companies will have as much of a negative impact on the economy as the failure of larger ones.
Rising unemployment figures often portend a rise in the number of business failures. In the retail sector alone, 66,600 jobs were cut in December, bringing the year’s retail job loss total to 522,000 and more cuts are expected.
The economy is like a loosely woven web that runs on a never-ending loop with each component intrinsically linked to the rest. The housing crisis led to foreclosures that left the banks with bad debt on their balance sheets and banks stopped lending. The government did their so-called bail out to get the lending process moving again. So far, it hasn’t worked. Small businesses couldn’t get credit to make their payrolls. They even had their lines of credit slashed which stunted growth and any prospects of future hiring. People lost their jobs and could no longer pay their mortgages. With no income, they stopped spending which led to a slow down in sales of products and services. And round and round it goes and where it stops nobody knows.
That brings us back to our original statement: Rising unemployment figures often portend a rise in the number of business failures. It is now estimated that more than 60,000 companies may close their doors in 2009—that’s 30% more than closed in 2008.
Is it time for a small business stimulus package? The National Development Council’s president thinks so. He’s proposing that the Obama administration create a cabinet-level position to coordinate federal resources for small businesses, and that $75 billion gets spent on a small business stimulus package. The National Small Business Association asked Nancy Pelosi to earmark 25% of TARP funds for small business lending and part of the stimulus infrastructure funds to include a bailout.
But none of that is likely to happen. Just the sheer scope and diversity of small businesses is too unwieldy to lump it all into a single category like banks or automakers are. We’re still waiting to see what Obama has in mind, what Congress will approve, and what it might mean for small businesses.