Small businesses are referred to as the backbone of the economy for a reason. They employ 46% of American workers and make up nearly half of GDP, and they boomed during the pandemic as new business applications set records. But things have turned the other direction in the last year, first because of soaring inflation and then major regional bank failures—headlined by the second and third-largest collapses ever, at Silicon Valley Bank and Signature Bank. The specter of banking consolidation is rising, and with it an even more challenging economic environment for small business, raising the questions: What becomes of the entrepreneur if their local bank goes away? Is the banking system stable? And is a credit crunch on the horizon? Underscoring the open nature of this debate, expert opinion is split.
Treasury Secretary Janet Yellen has said that the banking situation is “stabilizing,” and Citigroup CEO Jane Fraser said the recent chaos “is not a credit crisis,” rather just a few banks with isolated problems. But “Dr. Doom” himself, the economist Nouriel Roubini, warned this week that the banking crisis could spark an economic “trilemma” leading to a recession and, eventually, significant credit risk. And finally, Federal Reserve Chair Jerome Powell cautioned last week that the banking collapses are “likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.”
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A credit crunch would be a blow to any company, but is especially deadly for a small business with fewer resources. “Big companies have a lot of internal reserves that they can turn to. They’ve got other sources of finance,” David Audretsch, editor-in-chief of the Small Business Economics academic journal, told Fortune, while small businesses tend to “take the hit” when interest rates rise and liquidity dries up.
The problem is magnified when considering the ongoing troubles at many small banks which have typically been the lifeblood of small business. Years of banking consolidation have caused lending to be dominated by Wall Street behemoths that don’t cater to small businesses, and the recent banking crisis only made that trend worse.
“The bottom line … small businesses are going to be affected,” Audrestch said. “This is a bad time to be a small…
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