The Economy Hits Small Businesses

Employment at small businesses with 500 or fewer employees decreased by 614,000 positions in March, marking one of the sharpest drops yet in 14 consecutive months of declines, according to an employment report released Wednesday by payroll processor ADP (ADP, Fortune 500).

The numbers indicate that small businesses (which employ half of America's work force) are currently taking the brunt of the recession. Compare their numbers to businesses with more than 500 employees who lost (only?) 128,000 jobs over the same time frame.

Though downsizing is said to be a last resort for businesses, banks are still hesitant to lend to companies, consumers are spending less, industries are cutting back and business customers are taking longer to pay.

There is a large dominoe effect that affects businesses. You can take any market, the laws apply the same. Lets take... um... (picks one out of the air) restaurants for example. The restaurant is affected by layoffs of businesses near them. Less customers during normally busy lunch hours. Less corporate accounts. Less expensive dinners. Less high end purchases on the menu. The restaurant now faces reduced income. They in turn, not only, order less from their suppliers, but take longer to pay.

The wholesalers, who usually have a robust business selling their goods (tomatoes, meats, tables, table cloths etc) to restaurants, are now seeing that they are are getting less orders and are being paid slower than normally. So the guy who sales table cloths is now seeing a 10% decline in his business. With the lower income, and inability to get a new line of credit... he lays off some of his work force. More people who can't afford to go to the restaurant. He's buying less cotton from the cottom distributor, and whereas his "terms" for payment with the cotton factory use to be 30days, now he requires 45 days to pay. Now the cotton factories invoices are coming 50% later than usual. So on and so on and so on...

Businesses are looking for additional business loans, because they need loans now more than ever to cover their "pay gaps". However, banks (who are gun shy of more defaults) are less likely than ever to give out business loans. Loans are going to be based on collateral, (something that can be "liened against" and seized in the event of a default) but, how many businesses... SMALL businesses in particular... are going to be likely to have increased their assets in the last year? And from the bank standpoint...

"...if you only qualified for $20,000 worth of loans 18 months ago, in your current condition, what makes you think we're going to risk giving your $32,000, now?" - loan officer

We're not even going to speak about employer offered health insurance. According to statements from President Obama in March, the current pace of loans to small businesses is half of what it was last year. How these small businesses plan to survive with half the access to funding they had only a year ago...

...nobody knows.

But, as the employers of half the nation's citizens, one thing we do know... what affects small businesses, does affect us all.