The financial crisis that started in 2007 and peaked between 2008 and 2010 wasn’t a pleasant experience for anyone. However, it impacted small businesses much more significantly than larger ones. Below we explore the many ways our country’s last recession affected small businesses and both the positive and negative changes they have made in response.
The Financial Crisis and Business Closure
The two year-period starting in December 2008 and ending in December 2010 saw approximately 1.8 million small business owners decide to call it quits. Today, that number is less than one-quarter what it was during the worst of the financial crisis and it’s getting lower all the time. The economy is healthy enough to support well-managed small businesses of all types.
Job Loss Among Small Businesses
Small businesses have traditionally received credit for creating new jobs across the country. Unfortunately, 8.7 million people who worked for a small company received a layoff notice between December 2007 and December 2009. The most likely people to lose their job during this timeframe were those who worked for manufacturing companies and other businesses that required outside financing for everyday functioning.
The unemployment rate as of September 2018 is just 3.7 percent, the lowest it has been in 49 years. Additionally, small businesses across the United States are job creators once again. They are responsible for creating 62 percent of new job openings and struggle to find qualified applicants to fill them.
Start-up Businesses Not Completely Recovered from the Financial Crisis
Before the recession towards the end of the last decade, the average number of start-up businesses per year was 670,000. That number dipped to approximately 560,000 in 2010. The number today is somewhere between the two figures. While the economy has recovered, the experience may have left some people feeling too apprehensive to make the leap to new small business owner.
The Impact on Banking and Alternative Lending
Between 2008 and 2011, a business of any size would be hard-pressed to have a large bank approve a loan. Small banks and credit unions were somewhat less stringent with loan requirements, but the number of approved applicants was still extremely low. The difficult economic times meant that many business owners saw their credit rating decline to the point where lenders no longer saw them as trustworthy. This caused business owners to turn to alternative sources of lending in large numbers, including the following:
- Factoring. This is when a company borrows the face value of an invoice due and then repays the lender plus interest when its customer pays.
- Merchant cash advance. MCA is similar to factoring but based on a company’s daily credit card transactions instead.
- Equipment financing. More companies chose to lease rather than buy large equipment.
- Crowdfunding. Entrepreneurs can raise money for start-up costs via online gifts, loans, or offering donors equity in the company.
Is Your Business Financially Healthy?
Even though it has been 10 years since the financial crisis, your small business may have never fully recovered. Please don’t hesitate to contact us at Aura Wealth Advisors if you have additional questions about keeping your company as financially healthy as possible.