Is Small Business Next On The Economic Guillotine?

The next sector to be hurt by the housing slump? Small businesses, according to USA Today.

A ripple effect could threaten small companies when larger companies–such as homebuilders and developers–see losses and cut jobs, says James Barrood, executive director of Fairleigh Dickenson University’s Rothman Institute of Entrepreneurial Studies.

The effect a reduced housing demand has on builders and developers spreads directly to building material suppliers and vendors; which then decreases business activity in industries like travel and business equipment.

Just look at California. The state’s weakening housing industry is expected to slow payroll employment growth in the state for the next two years and drag down overall growth, according to BusinessWeek.

If the country falls into a recession, retail, business-service and housing-related smaller businesses are in trouble; but they’re already not faring well. The newer victims would be businesses of all kinds with 20 to 30 employees, which depend on second mortgages and equity loans for finance money, according to Todd McCracken, president of the National Small Business Association trade group.

The country’s 26 million small businesses can actually pull the economy out of a recession, McCracken says–but only if they have the money to invest in themselves. Yet small business owners don’t seem to be feeling in control: A recent National Federation of Independent Business survey showed industry optimism hit its lowest level last month since 1991.

And, unfortunately, 30 percent of banks have been restricting their commercial and industrial small company loans this year–making it harder than ever to lean on small business as our economic savior.

It would seem that it’s time for small businesses to start investigating other financing sources–with as small a connection as possible to the mortgage market–and to start reaching out to new clients in different markets. Many lenders now wish they’d insulated themselves better before the subprime collapse; but there’s a reason people say hindsight is 20/20.

And really, the housing decline can’t be blamed for putting all small businesses in danger. In the end, tenacity, resourcefulness and smart planning will make or break a business–regardless of a strong economy or a soft one.

On Forbes‘ recent list of the best–and worst–small businesses to start, real estate services (which included appraisers and property managers) landed at No. 4.

But small lending institutions–community banks, credit unions and other deposit-based organizations–were No. 10 on the best businesses list. True, they deal with mortgages and mortgage-related finance–but they also run a tight ship. Only 48 cents of every dollar goes toward overheard, according to Forbes.

Why, despite a national housing slump, would small banks who provide community members with funding for homes, cars and other expenses do well, and the real estate industry–which helps people spend that money on their biggest investment–suffer?

"In some industries, knowing an area, its people and its geography matters more than scale," James Nolen, professor of finance at the University of Texas at Austin, told Forbes. "Smaller companies can also respond to changing industry dynamics [better] than their larger counterparts."

Which would mean small businesses probably could do more to protect themselves from the housing decline’s effect than some of the larger lending institutions and real estate companies ever could have. That’s great news. Because if small businesses do manage to successfully safeguard, they could save themselves–and the U.S. economy.