Research Confirms Small Businesses Hit Harder By the Recession
In a recent article from the Wall Street Journal, research from the Fed was cited indicating that the negative effects of the recession, the worst since the two recessions in the early 80’s, had a disproportionate impact on smaller businesses (in this case, businesses with 50 or fewer employees). These businesses were cited as experiencing an approximately 5-10% worse drop in job creation, paired with a slowdown on the creation of new businesses by 25%.
Financing constraints pointed to as one of the root causes of small business stagnation. The credit crunch which accompanied the recession has been cited as one of the causes of the lack of growth coming from the small business sector, with former SBA chief Karen Mills also pointing to lack of loan accessibility as an adverse condition for small businesses. Without reliable access to financing, businesses have a hard time expanding beyond the constraints imposed by their cash flows and ability to borrow from friends and family or out of personal savings.
Innovation from alternative capital providers may hold the key to easier credit access. In particular, business owners with bad credit and a need for financing are able to use alternative capital as an outlet for financing, which due to an intolerance for credit issues from major lenders, allows this segment of the market to still access liquid capital. However, the innovations in underwriting process and speed brought to bear by providers of alternative capital may hold promise for wider disruptive change in the way that banks provide business loans, with faster and better underwriting processes emerging on a wider scale in the future that can eliminate the waste associated with underwriting smaller loans that makes them less palatable for larger banks.
Photo Credit to Simon Cunningham on Flickr