The Top Two Reasons Small Businesses Outperform in Recessions

In the first installment of this four part series highlighting the strengths of the small business market during a recession, we explored the counterintuitive growth and stability of the small business market in economic downturns. In this second article, we will uncover the two main drivers of stability in this market: small business owners' financial independence and ability to change.

1. Small businesses are less dependent on bank lending.
Wall Street rewards enterprise companies for borrowing from banks to improve their return on equity. In good times, large companies use the strength of their balance sheet to borrow at favorable rates and leverage up their returns. Now that the credit markets are all but frozen, large enterprise companies have to borrow at higher rates and/or drastically cut their borrowing.

In contrast, small business owners aren't as dependent on banks to run their businesses. Most small businesses are cash-flow positive enterprises and do not rely on outside capital to start or run. Nearly 80% of employee based businesses and 60% of sole proprietors are self-financed businesses, relying on themselves, their families, and their friends for capital. Only 11% of small businesses rely on bank loans to start or acquire their business.

While it's true that some small business segments like manufacturing rely on outside capital, most don't. And despite the whining rhetoric coming from Washington, D.C., most small businesses will do just fine without borrowed money.

2. Small businesses are nimble.
Companies like GE are market makers. In many ways, they are so big and so diversified, they are the market. And as the market tide rises, they rise. As the market tide goes down, they suffer.

Small businesses, on the other hand, are able to re-invent themselves and tuck themselves into new corners of opportunity as their old business revenue declines. Consider two small business owners we've spoken to over the past 3 months:

A dance studio owner in New York City has historically focused on teaching after-school classes to kids. As the economy declined, parents who consider after-school classes a luxury pulled back and her small business also declined. In talking to the parents of one of her students, the studio owner learned that this couple had enrolled in ballroom dancing lessons at a rival studio. It seemed the couple had been inspired by the TV show "Dancing with the Stars" and had taken up ballroom dancing as a stress reliever. Sensing an opportunity, the owner re-invented her studio into a facility to teach ballroom dancing to New York's stressed-out (and in some cases laid-off) financial workers. Business is booming again.

An architect in Denver spent the last 5 years thriving off the residential housing boom. As boom turned to bust and foreclosures rates swelled to over 40% in newer housing communities, he quickly shifted his business to residential remodeling. While nervous about buying and selling homes, there are still plenty of families in Denver who want and need more living space. The architect now focuses on "pop-tops" - adding a second floor to a ranch style home - and has more business than he can fulfill on.

Predominately, marketers are members of large organizations where change is measured in months. Small business owners, on the other hand, have the control to make huge changes in days. This ability to react almost immediately to market opportunities allows entrepreneurs to weather recessions with relative revenue stability.

Your organization will undoubtedly have to make cuts in overall marketing investments for 2009. Don't treat all your segments equally with blanket budget reductions. Push for differentiated investments in markets with greater potential during this downturn economy; small business is at that top of that list.

Next week's article will highlight targeted sub-segments which will outperform the small business market in the next 24 months. Members can view this series in its entirety by downloading Marketing to Small Business in the USA: an Open Letter to CMO's from www.warrillow.com or by contacting their relationship manager.