Do Small Businesses Suffer More in a Depression?
Success in small business as well as in large depends on more than doing a job well. Every enterprise operates in a complicated national or even world economic system, and the experience of the last two or three hundred years has shown how easy it is for something to go wrong in the profitable working of that system. Even in peacetime we have regularly climbed up through prosperity to a boom which sooner or later collapsed into depression and despair. Then we gradually crawled out into prosperity again and repeated the whole cycle of ascent and decline.
At the end of a war we have experienced a brief boom in some lines for a year or two, then have toppled over and only gradually adjusted ourselves to a new “normalcy” or a reasonable facsimile of the old. But new or old, it has been the same sort of thing. The normal condition is that business gets better, gets ready to get worse, gets worse, and then gets ready to get better.
There are scores of explanations for these ups and downs. Some economists today believe they know enough about the causes of business fluctuations to hope that they can prevent a postwar slump and can iron out, the ups and downs a little in the years ahead. We may wish then good luck in the effort, but still have some private doubts that they will be fully successful. Meanwhile we have to consider the effect of these fluctuations on the kind of business you might set up.
One of the weakest parts of the small businessman’s armor is often his small supply of capital. He rarely starts out with enough funds of his own to pay for all the equipment he needs and still have any left over for operating expenses. He therefore has to borrow. He mortgages his land or buildings, gets a loan from a bank, and buys on credit from the manufacturer or merchant who supplies him with his stock in trade. The more he sells goods rather than services the larger may be his dependence on the use of other people’s money.
If times are good and he seems to be doing well, he may want to expand rapidly and may find that his creditors are willing to let him borrow more and more. But if a general crash comes he is caught heavily in debt, the value of his stock or produce declines, his borrowing power is cut down n or even cut off, and his creditors press him to reduce his debts.
If the pressure becomes great and breaks him, there is no limit to what the small proprietor may have to hand over to pay his debts. His stock, his own capital goods, his house and other physical possessions—all that he has must be turned into cash, and this in days when prices are low. His liability is almost unlimited. He may be completely cleaned out.
The wise policy for any small businessman is therefore to depend as little as possible on borrowed capital, to take from his earnings as little as he must for personal expenses and to plow back into the business every dollar he can spare in order to reduce his indebtedness. A GI who is thinking of going into business for himself should give much thought to this question of credit. His local banker is one of the best sources of advice as to what the prospect of success may be.
The national debtor habit
Visitors from Europe have often been surprised at the extent to which we Americans live and buy on credit, whether in developing our land or in buying cars and mechanical refrigerators. In part this was an inevitable result of our pioneer abundance of resources and lack of capital. We had to borrow and then hope to repay the loans out of the production they made possible. Or we had to pay out of income since we had not yet got any savings. But our indebtedness usually made our depressions much more severe than in countries which had more accumulated funds and did not need to mortgage their future so heavily.
By now the country at large has a superabundance of capital. The great corporations have built up such large reserves that they may no longer need to go to the bank for much of the funds they require. Yet in new small businesses the lack of money is still a common feature, and the risks of disaster remain great until the little man can look round his farm, store, or plant and say, “All or most of this is really mine.”