The credit crunch defining the financial meltdown threatens to derail small business activity in the United States. Many small firms rely on credit for everyday operations because they lack the liquidity to fund their business activities. As entrepreneurs find it increasingly difficult to obtain necessary seed money, potential startups may remain stillborn.
Many economists predict the credit crunch will lead to higher unemployment; overall, small companies create many more jobs than do big corporations. But faced with the current financial crisis, small businesses are expected to cut back on jobs or close their doors completely.
This credit crunch, economists say, is substantially bigger and more complex than the last major financial crisis: the savings and loan (S&L) bailout of 1989 and the recession that followed a year later. The price tags also were much smaller, maybe as much as $200 billion to cover the cost of about 1,000 failed S&Ls, historians estimate. By contrast, what many think of as the Wall Street bailout will cost a minimum of $700 billion, a figure that does not include shoring up Fannie Mae and Freddie Mac with combined assets of more than $2 trillion.
Small businesses are coping with the crisis by cutting back on marketing and advertising, delaying new hires, keeping inventories low and reducing health coverage for employees.