2011 Outlook For Small Businesses

By Marc Davis | May 12, 2011 AAA

As the U.S. economy continues its slow but steady recovery from what some economists have called the greatest economic crisis since the Great Depression, small businesses nationwide are beginning to reap the benefits of the American Recovery and Reinvestment Act of 2009.

TUTORIAL: Starting A Small Business: Introduction

The Importance of Small Businesses
Over half of America's private work force is employed by small businesses - that is, companies with less than 500 employees. Small businesses represent 99.7% of all American businesses, according to government research. When small businesses flourish, the nation's economy and its consumers prosper. (For more, see 10 Breakout Ideas For Small Businesses.)

About 216,000 new jobs were added to payrolls in March this year, mostly to small businesses, bringing unemployment down to a number not seen since March of 2009. With more people back at work, consumer spending has increased and small businesses have seen increases in revenue and a healthier bottom line. Unemployment, however, remained high in April at 9% and more jobs are needed before the economy can be restored to robust good health.

Small Business Funding
Banks which previously were reluctant to lend have begun lending to small businesses more generously lately. With the easing of credit, consumers have been borrowing for mortgages, home equity lines, auto loans and credit card expenditures, according to data released by the New York Federal Reserve bank. The Recovery Act has also provided for increased loan guarantees to small businesses backed by the U.S. Small Business Administration. More than $28 billion in loans has been granted so far, with more expected to be approved going forward. Further stimulating borrowing is the reduction in borrower fees, also provided for in the Recovery Act. (For more, see Consumer Credit Report: What's On It.)

Consumer debt rose in the first quarter of 2011, the first such increase after nine consecutive quarters in which consumer debt fell, impacting almost every sector of the economy. Among the many beneficiaries of the new surge in borrowing are the small businesses that provide goods and services to homeowners. For example, consumers were buying large ticket items on credit again after a sharp decline during the economic downturn.

Less Debt Trouble
Small businesses also benefited from the easier availability of capital for their expansion and improvement, the purchase of new equipment and inventory, and the hiring of new personnel. Another sign of the economic recovery is a decline in overdue consumer debt balances and delinquencies, down 15% from the same period last year. Small business cash flow has improved and net profits should increase as a result of the reduction in troubled debt.

Although new residential foreclosures were down 17.7% from the last quarter of 2010, they were still high at 368,000. But the trend was definitely on the decline. Bankruptcies were also down in the first quarter this year, with 434,000 representing a decline of 13.3%. The decline in bankruptcies, including those for small businesses and start-ups, also reflected the general upswing in economic conditions. (For more, see Build Your Small Business During Downswings.)

Consumer Confidence on the Rise
Consumer confidence has also increased somewhat, indicating that consumers are more inclined to borrow and spend, are less worried about job security and think the economy is going to get even better. Large segments of the population, however, along with many economists and public officials – both elected and appointed – still worry about government spending and the massive U.S. debt. Adding to the general economic worry was the spike in oil and gasoline prices, although by April the cost of gas at the pump had dropped again as consumption slumped and surplus inventory accumulated. Small businesses are especially sensitive to gas prices because the high cost of fuel impacts almost of every sector of the economy, raising prices for commodities, transportation, shipping, distribution and energy including electricity, among other essential items.

Health Reform
Of major benefit to small businesses, according to Eric Zarnikow of the Small Business Administration (SBA), is the Affordable Care Act - also known as the health care reform act. Under the new legislation, small businesses will have access to "better options through state-based exchanges" and costs will be reduced through $40 billion in tax credits that some four million small businesses are expected to use, said Zarnikow. (For more, see The Small Business Jobs Act: Make It Work For You.)

Bottom Line
Things are looking up for small businesses as consumers return to the shops and workers land jobs. Easier access to credit and some upcoming tax breaks included in the Affordable Care Act should help small businesses add some fuel to the economic recovery.

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