Wall Street Suffers, Main Street May Follow

The Dow Jones Industrial fell 4.4 percent on Monday, dragged down by the bankruptcy of Lehman Brothers and the sale of Merrill Lynch. Troubled AIG will not be bailed out by the federal government. Alan Greenspan, ex-chairman of the Federal Reserve, said on Sunday that this may be the worst financial crisis in a century. Although he thinks that the U.S. is now closer to a recession, Greenspan marvels at how other sectors are buoying up the economy.

What does that mean for small business owners? The general rule is that when the economy expands, small businesses gain more than large companies. In an economic downturn, small businesses tend to be hit harder.

Research has consistently shown that the share of employment and sales accounted for by small businesses tends to be more cyclical than for large ones, says David B. Audretsch, a professor at Indiana University and the director of the Max Planck Institute of Economics in Jena, Germany. When the economy expands, small businesses gain more than large companies. In an economic downturn, small businesses tend to be hit harder.

Suffering the most are companies in construction, manufacturing, retailing, finance and overseas travel, says Chad Moutray, chief economist of the federal Small Business Administration. As for location, he says, “small businesses have been hardest hit in areas where the housing crisis is at its worst.”

The biggest concerns of small-business owners now include the rising costs of fuel, supplies and health insurance, said the National Federation of Independent Business, a trade group.

Less obvious factors can also hurt small businesses. Simon Francis, a corporate recruiter in Redwood City, Calif., at CTPartners, says some small companies might not have the financial cushion to stay afloat when their customers postpone payments. Another challenge, he says, is that a large company sometimes stops ordering products from a small business in a sagging economy, fearing the smaller one may go bankrupt. Of course, that very action could push an otherwise healthy company into bankruptcy.

Read the full story at the NY Times