Small-business bankruptcies have increased 48 percent since the Federal Reserve began its credit-tightening policies last October, according to a Small Business Administration report.
About 133,000 small businesses are expected to fold because of the new credit policies started last October, in addition to the 400,000 that fail each year. Another 133,000 could fail because of the Federal Reserve's March 14 credit policies, the report said.
In March the Federal Reserve stepped up its anit-inflation drive by placing restrictions on some consumer credit and bank loans. Last October the Fed began raising interest rates.
"Assuming that the average firm which failed has 12 employes and sales of $855,000, then the impact of tight-money policy is likely to mean a loss of 3.2 million jobs and $228 billion in lost sales," said a study prepared by SBA Chief Economist Robert E. Berney.
Berney said that the estimates are "crude approximations" but are the best projections possible.
Small businesses are also hurt because they "are more dependent upon debt instruments than the largest U.S. firms and therefore are more sensitive to a tightening of credit supplies and the increased cost of credit," the report said.
The debt-to-equity ratio -- for small manufacturing firms is five times larger than that of the largest firms, the report said. In construction the smallest firms have a debt-equity ratio more than three times that of the largest firms, the report said.
The impact of tight credit "appears to be most severe for the small firms connected with the housing industry, the agriculture sector and automobile manufacturing and sales," the report continued.
The report, presented to Congress by Milton D. Stewart, the SBA's chief counsel for advocacy, included suggestions for helping small businesses during the recession such as expanding small business credit through use of the secondary market and increasing the number of banks giving SBA guaranteed loans. The SBA should also give high priority to helping small businesses survive, the report said.