Small Business Feels the Credit Crunch
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The news is filled with stories about the sub-prime mortgage debacle and its effects on our economy and on overextended home buyers. But, what is not often mentioned is the devastating effect the credit crunch is having on small businesses.
“Credit, be it credit cards, bank financing, home loans or other sources of capital, is already a big issue for many small businesses,” notes Scott Hauge, president of Small Business California, a small business advocacy organization. “The sub-prime meltdown is having a substantial impact in the credit market, and this is adversely affecting small businesses.”
Surveys Show Adverse Impact and Decline in Business Confidence
Unlike large enterprises, small businesses are disproportionately dependent upon personal sources of credit for funding. A recent survey by the National Small Business Association (NSBA) found that 44 percent of small businesses rely on credit cards as the primary source of outside financing, followed by bank loans (29 percent) and private loans (22 percent). In fact, 71 percent said that they were carrying a month-to-month credit card balance, and 53 percent report that their credit card terms have gotten worse in the past five years. While small businesses are incurring credit card debt, the survey also showed that only 29 percent of small business owners forecast economic expansion for the year 2007, down from 62 percent in the year 2000.
“Because traditional bank loans are difficult for a small business owner to get, and small businesses rely more heavily on personal credit than large businesses, the ramifications of a credit-crunch are significant,” says Molly Brogan, vice president of public affairs for NSBA. “In our survey, we found that when businesses can’t get financing, 40 percent are forced to hold off on expanding their business. Not a pretty picture for entrepreneurs looking to start or grow their emerging business.”
Recent small business surveys by Visa USA, Discover Card and Wells Fargo show similar drops in economic confidence and decisions to postpone capital investments and economic expansion. Thirty-five percent of owners in the Discover Card survey say that recent changes in the housing market have had a significant adverse impact on their businesses.
Businesses Suffer From the Impact on Clients
Martha Doster, the owner of Body Bueno, an Albuquerque, NM, retail store selling body care products, has been forced to use her credit cards in order to finance the recent remodeling of her new store. “Interest rates are going though the roof, credit card terms are tightening up, and affordable financing terms are now impossible to find,” says Doster. “The higher rates mean that I am unable to pay down my balances fast enough, and the onerous terms being offered are putting my business operations at risk.”
