Impact of Recession to Small Businesses

Small business has been a great contributor to the economic growth of the country. Many economic experts agree with this observation. According to some economists, this type of business seems to operate in ways which are less affected or even unaffected by recession. However, there are also studies that came out with findings that small business could be the one greatly affected by recession.

The Small Business Research Summary Advocacy which was commissioned by the Small Business Administration conducted a study on the impact of recession on small business last June of 2003. They came out with findings that suggest that tighter monetary policy and adverse conditions in the banking sector reduce economic activity in business of all sizes. Using banks' capital positions and delinquency rates as measures for conditions in banking, the study found that capital pressures at small banks turned out to be particularly detrimental to the performance of small businesses.

It is important to note that the findings suggests first and foremost that recession affects banks and therefore this also reduces the economic activity in businesses of all sizes. They are adversely affected by recession because loans can hardly be paid due to higher interest rates and lesser income in these small businesses. This used to be the way things go but recent observations challenge this notion.

Small business has greater capacity to adjust to challenges brought about by recession. Some even see the downturn by big businesses as an opportunity due to the absence or weakening of competition. They call this cautious optimism. In 2001 small businessmen did not share the fears of big businessmen and expressed confidence they can survive. And they did. Entrepreneurship is noted for their ability to find opportunities even in unfavorable situations like a recession. When traditional sources like banks can no longer finance small business, entrepreneurs turn to other sources like credit cards, commercial lenders and even home equity for financial support.

Recession is a sad reality in the economic cycle. It has been a constant threat to economic growth and progress. There have been so many predictions about when and where it will happen and the gravity of its impact. The consoling fact is that we have survived them all. The cautious optimism of small business and government effort to support it should be constantly practiced in order to minimize or even eliminate the detrimental effect of a recession. The Bush tax plan should already be in place in order to spur job growth thru small businesses which House Small Business Chairman Don Manzallo (R-IL) call the engine of our economy. This reduction of taxes on entrepreneurs will lead to more investment.

The impact of recession on small business is dependent on the initiatives of the entrepreneurs to keep up and make adjustments and the initiative of government to provide the necessary support to the very vital role of small business in the national economy. Lessons learned during the past recessions have taught small how to survive and they did rather well. Government on the other hand has recognized the important role of small business and should now move to provide them with tax cuts to strengthen and protect them.