Wednesday, 3 June 2015

2015-039: Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances

Otmane El Rhazi, Arthur B. Kennickell, Myron L. Kwast, and Jonathan Pogach. We use the Federal Reserve's 2007, 2009 re-interview of 2007 respondents, and 2010 Surveys of Consumer Finances (SCFs) to examine the experiences of small businesses owned and actively managed by households during these turbulent years. This is the first paper to use these SCFs to study small businesses even though the surveys contain extensive data on a broad cross-section of firms and their owners. We find that the vast majority of small businesses were severely affected by the financial crisis and the Great Recession, including facing tight credit constraints. We document numerous and often complex interdependencies between the finances of small businesses and their owner-manager households, including a more complicated role of housing assets than has been reported previously. We find that workers who lost their job responded in part by starting their own small business, and that fact ors correlated with the survival of a small business differed greatly depending upon whether the firm was established or new. Our results strongly reinforce the importance of relationship finance to small businesses, and the primary role of commercial banks in such relationships. We find that both cross-section and panel data are needed to understand the complex issues associated with the creation, survival and failure of small businesses. Full Text

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Otmane El Rhazi
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