The r-word - recession - what does it mean small businesses? Unsurprisingly, economists are divided in their opinions on this topic. This disparity could be likened to the chicken and the egg conundrum. Does small business suffering contribute to a recession or does a recession cause suffering to small businesses?
There is a clear relationship between small business and the economy in general, especially in the in United States because much of economic growth is fueled by startup business. In spite of the hype about the internet startups, new companies come from every sector of the economy and every part of the world. All told, these small firms make a significant contribution to the economy simply by hiring one or two employees.
The belief that small businesses fare poorly in economic slowdowns is a common misconception. Most solidly run small businesses actually hold their own during downturns. One reason for this misconception is that entrepreneurial ventures experience a different growth curve than more established businesses.
Few businesses fit the popular "increasing returns" model in which a market leader can increase sales faster than expenses. Most entrepreneurs are seeing costs keeping pace with sales at least for the first few years. Unless a business is well run, it folds rather rapidly. One indicator that small business is doing well is that new ventures continue to be formed while the rate of failure has been relatively stable.
Because of their size and atunement to their customers, new businesses are more flexible and quick to respond than many established businesses. By the very nature of their learning curve, well-run, new businesses are in tune with what their market is doing and adjust accordingly. Even mom and pop businesses who have been operating with a static clientele are more aware and able to be more flexible than many large businesses. One could even make the case that boom times when larger businesses are expanding are more of a threat to new businesses because of the intensity of the competition in the marketplace and the greater resource base larger businesses can draw from in a robust economy.
One reason many small businesses do well is that there has been a shift away from traditional sources of capital for small business. In spite of the efforts by the Small Business Administration to support loans for small business from traditional lenders, many businesses have not found success through this path or have found the obstacles too big of a challenge. Consequently, many entrepreneurs turn to credit cards, home equity, commercial lenders, and angel investors for their funding - and even in a good economy, they are not turning to traditional sources of funding. Therefore, when those sources dry up in a recession, small business is not affected.
A number of entrepreneurs, in fact, see a downturn as a time of opportunity. Not only do they have excellent employee choices, but as other areas of the economy tighten, many larger businesses are outsourcing services that small business can step in to supply. Entrepreneurs, after all, are noted for finding opportunity in the most unlikely places - why not a recession?