economic impact on small businesses

The Economic Impact on Small Businesses

What happens in the economy affects all businesses. Small businesses are often the most impacted by the economy, whether it is an upswing or a downswing. In a strong economy, small businesses see an increase in business that correlates to the amount of free income consumers are willing to spend on luxuries. In a weak economy, small businesses are hit the hardest by things like layoffs, conservative spending and overextension.

Economic Impact in an Upswing

All types of business tend to thrive during an upswing. Businesses have higher disposable income to put towards growth opportunities, hiring booms, expanded product menus and more. Since unemployment is lower during economic upswings, consumers also have more disposable income that they are willing to put toward non-essential products and activities. The growth in consumer traffic leads to growth in business opportunities which leads to company growth. The downside to this chain is that when the economy hits a downswing, small businesses that experienced rapid growth are more likely to find themselves overextended. This can lead to business failures and layoffs.

Economic Impact in a Downswing

Small businesses are typically hit the hardest in a downswing. Higher unemployment rates mean that consumers are less willing to sink money into luxury expenditures. They will seek out only the essentials and lower priced items. This means that small businesses see lower profit streams and may seek out financial aid. Lower profit and higher rate of borrowing dominoes into decreased ability to pay off creditors and lenders which can affect long-term financial viability. A downswing that comes directly on the heels of a period of high economic prosperity can also leave small businesses overextended. As mentioned, this results in layoffs and business failure. A smaller workforce leaves small businesses with a reduced ability to serve their clientele. Therefore, further slowing their ability to keep up with their payments or business goals.

Improvise, Adapt, Overcome

Some small businesses actually thrive in bad economies. The small businesses that do thrive often fill a niche in a high-demand industry. However, many small businesses rise to meet the demand of the slow economy. For example, during the COVID-19 pandemic, many businesses filling luxury niches in the economy turned to mask and hand sanitizer production to remain financially salient. The ability to adapt and adjust to the circumstances give small businesses an advantage over larger companies. Small businesses face significantly less red tape when looking to make a change in how they run their business. There is no need for stockholder meetings. The leadership base is smaller, which reduces the need for mass approval when looking to make a change. While small businesses are affected more by shifts in the economy, they also have a greater ability to adjust to the changes as they come.  

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