Small businesses’ recovery sluggish as larger firms bounce back from recession
By Brady Dennis,
Samuel Demisse’s Maryland-based coffee importing business was prospering even after the 2008 financial crisis. New orders poured in. But without enough funding to pay suppliers in Ethiopia, he no longer could fill the demand.
Gone were the pre-crisis days when banks told him he was preapproved for loans of as much as $100,000. Instead, even though he had always made his payments on time, his bank had slashed his line of credit, and others he visited also turned him away. “I couldn’t fulfill the demand, because I didn’t have the working capital,” said Demisse, owner of Keffa Coffee in Towson. “Without financing, you cannot do anything. . . . It’s like trying to drive a car without gas.”
In the past, the revival of small businesses helped lift the U.S. economy out of recession. But as many larger firms are getting back on solid footing and big banks have returned to profitability, small-business activity has remained unusually sluggish this time, offering little help in bringing down the unemployment rate.
Since the financial crisis, the Obama administration has created a patchwork of programs aimed at helping existing small businesses and spurring new ones. Among them: numerous tax breaks, expanded Small Business Administration loans, measures designed to get small banks lending again, efforts to help small businesses begin exporting, and public-private partnerships intended to boost start-ups and fill the venture capital void that has persisted during the crisis.
Obama has also asked federal agencies to review their regulations for ways to streamline or eliminate rules that unnecessarily burden small businesses.
“We’re trying to facilitate getting small business to be an engine of recovery,” Austan Goolsbee, chairman of the president’s Council of Economic Advisers, said in an interview. “It’s important. They should be driving the recovery.”
Demisse has taken the first steps toward turning around his coffee business, offering some hope for other entrepreneurs. In the fall, he secured a $75,000 loan from a private lender in Pennsylvania and used the money to take on new business. He’s hoping to hire an additional employee this spring.
But his experience illustrates the obstacles many small-business owners continue to encounter. The nation’s small businesses have suffered disproportionately during the downturn and continue to struggle more than their larger counterparts.
Many existing businesses, their credit lines tapped out and their revenues battered, have struggled to remain afloat, much less expand. Businesses wanting to grow have often found themselves stymied by the reluctance of banks to lend again after the crisis. New start-ups, which have fueled job creation after previous recessions, have not taken root at the same pace as in the past.
Small businesses account for more than half of private-sector employees and have generated nearly two-thirds of new jobs over the past 15 years, according to the Small Business Administration.
Experts agree that tougher access to credit has played a key role in the poor performance of small firms. “Anybody who cannot access public capital markets has found the recovery post-crisis really a struggle,” Goolsbee said. “Essentially, the financial crisis never left them.”
Ian Shepherdson, chief U.S. economist at High Frequency Economics, added that the crunch for small firms took root in 2007.
“Because small businesses are so dependent on bank lending for working capital, they really felt the pain first,” he said.
Shepherdson noted that although the government responded to the crisis by bailing out big banks and backstopping the commercial paper market, which large corporations use to fund themselves, there was no widespread help directed to small businesses.
“There was sort of an asymmetry of treatment,” he said. “The bailout of the banks did not bail out the banks’ customers, who were the small businesses.”
Many entrepreneurs also used the equity in their homes to help finance their businesses, an approach that worked well during the housing boom but has harmed them in the bust that followed.
“The value of their home has dropped dramatically,” said Kathleen Snyder, president of the Maryland Chamber of Commerce. “They can no longer get a home equity loan to help cover their expenses.”
Officials at the nonprofit National Federation of Independent Business, which conducts a closely watched monthly survey of small-business owners, have insisted that tight credit is not the primary culprit. “Credit availability is not holding back loan growth,” the federation’s most recent report stated. “It is a lack of demand. . . . It is going to take a rebound in consumer spending . . . to make a significant dent in the number of unemployed.”
Mark Zandi, chief economist of Moody’s Analytics, suggests that the relative lack of new business start-ups also might be due to a less measurable, but very real, metric. “This was the Great Recession. . . . Psychologically, people are very shellshocked and don’t think it’s a great time to start a business,” Zandi said. “It’s not clear just how deep-seated the scars are. . . . Our attitude toward risk-taking might have shifted.”
In response to Obama’s order that regulatory burdens be lifted, some agencies have already taken action. The Environmental Protection Agency this month exempted some dairy farmers from a decades-old provision that was intended to prevent and contain oil spills but had forced them to develop plans to deal with milk spills. The agency said the provision “placed unjustifiable burdens” on dairy farmers.
But the government’s aid has limits. The administration was able to push through the Small Business Jobs Act in the fall — which among other things established a $30 billion small-business lending fund and additional tax incentives — but Congress is unlikely to approve additional aid, given the focus on Capitol Hill to rein in new spending.
Still, there are flickers of optimism. Snyder, of the Maryland Chamber, said many local businesses expect increased revenue in the latter part of the year. Shepherdson said that he expects 2011 to be a “year of transition” for small businesses and that the outlook is “undoubtedly improving.”
That improvement is essential, Zandi said, to putting the country down a path toward better days.
“Our economy can grow without small business contributing significantly, but it cannot flourish,” he said. “Without more business formation, our economy won’t get its groove back.”