Small Businesses' Gloomy Outlook Could Affect Economy

A recent survey says small businesses are “clutching to a branch jutting out over the fiscal chasm.”
May 07, 2013

What economic challenges are small businesses facing this coming year? A survey of small-business owners polled for the 2013 Small Business Economic Forecast & Pepperdine Private Capital Access Index Quarterly Report shows business owners are mostly pessimistic—and that negative outlook is trickling down. Here are some of the key points from that report:

Small-business owners are feeling more pessimistic than they were last year. The survey was conducted right after the fiscal cliff issue was resolved, but two-thirds (66 percent) of respondents said their business’s financial outlook had not changed for better or for worse after the fiscal cliff was averted. In fact, the report describes small-business owners’ condition as still “clutching to a branch jutting out over the fiscal chasm.”

In the prior survey, conducted at the beginning of 2012, 54 percent of small and mid-sized business owners said they were more or somewhat more confident about their business growth prospects for 2012. But this year, just 45 percent feel more or somewhat more confident about their growth prospects. In fact, more than one-third (36.2 percent) of respondents are concerned about the possibility of a recession this year, up from 28.4 percent in the prior year’s survey.

Small-business owners feel thwarted by government. Small-business owners are feeling better about the national economy than last year—just 9 percent cited the domestic economy as the main impediment to growth compared with 21 percent in 2012.

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However, they are citing government regulations as the big hindrance to small-business growth this year—almost two-thirds (62 percent) of respondents said Washington’s instability is negatively affecting their ability to hire. Four in 10 (41 percent) named government regulations—specifically, taxes and health care—as the biggest impediment to GDP growth in 2013, compared to 32 percent who cited these factors in 2012.

The Affordable Care Act has small businesses worried. The Affordable Care Act (ACA) is a big factor in small-business owners’ negative outlook about the government and their own prospects for 2013. Four in ten (42 percent) believe the Affordable Care Act will increase their company’s health-care costs. To deal with these changes, one-third will make changes to their business health-care plan that will negatively impact employees, including:

  • Keeping their current employee health-care coverage but reducing coverage (16 percent).
  • Dropping employee health insurance coverage and paying the employer penalty (9 percent)
  • Keeping their current employee health-care coverage but cutting other employee benefits (5 percent)
  • Changing to a defined contribution health-care plan (3 percent)

Pessimism is trickling down to compensation. Six in 10 (61 percent) small-business owners say they personally aren’t making any more money than they did last year. Maybe that’s why just 39 percent plan to give employees a raise this year, compared to 41 percent who planned to give out raises in 2012.

Small-business owners are pessimistic about financing. Just 28 percent of small and mid-sized businesses had tried to raise outside financing in the three months prior to the survey. More than seven in 10 (71 percent) say it is hard to raise equity financing. Fewer business owners were trying to obtain bank loans–this figure dropped from 63 percent in the first quarter of 2012 to 54 percent at the end of 2012. Instead, more business owners were trying to use credit cards to finance their businesses (up from 38 percent in Q1 of 2012 to 44 percent at the end of 2012).

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As financing remains difficult, small-business owners are increasingly relying on their own savings and assets to power their businesses. The percentage who transferred personal funds into their companies increased to 77 percent at the end of 2012.

John Paglia, founding director of the Pepperdine Private Capital Markets Project, says small-business owners are exhibiting a “foxhole mentality” that could stifle the fragile economic recovery. This outlook is especially notable given how optimistic small-business owners normally are.

Read more articles on small-business finance.

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