ECONOMY

Market update

Small firms weather the recession

Last Updated: Monday, September 27, 2010 | 8:41 AM ET

By Philip DeMont, CBC News

Many of Canada's smaller firms were able to keep their collective heads above water during the financial ups and downs of recent years. (iStockphoto)

A walk on Roncesvalles Avenue in Toronto underscores the difficulty in untangling the effects of an economic recession on small business.

Down the main street in this quaint neighbourhood in the city's west end, a number of shops have shuttered their doors in recent months.

The tailor next to the popular candy store closed up, saying he was retiring after 45 years at the same spot. The ladies clothing boutique disappeared one weekend in August, moving to another area in Toronto.

"Against all odds Canadian small- and medium-sized enterprises were [able] ... to outperform their large, more established peers." —Benjamin Tal, CIBC Economics 2009

Months earlier, a trendy café near to the tailor decided to move further down the street, closer to Lake Ontario. Then back in the spring, a well-regarded bakery closed with the owners saying they wanted new challenges.

Now one could argue that each business shut down because of idiosyncratic reasons, a separate rationale for each entrepreneur.

Alternatively, one could say that these closures were in fact the result of a difficult economy with each firm holding out as long as possible until the cash dried up.

Then again, they might have decided to call it quits for economic reasons but not from the international recession. Instead, Roncesvalles has been the scene of rampant street construction for more than a year, decimating drive-by customer traffic.

Figuring out exactly how and to what magnitude economic conditions hurt or help small enterprises is no easy feat, experts say.

"Thousands of businesses enter and exit the marketplace throughout the year. Keeping track of these births and deaths is no easy matter," noted Industry Canada's Small Business and Tourism Branch in its key small business statistics publication for July 2010.

Small versus big

The fluid nature of Canada's enterprise sector often means that what affects big firms might not change the fortunes of smaller companies.

In fact, the smaller sector sometimes can sidestep a trend that sweeps up larger companies, especially firms that rely upon international markets for credit and customers.

So while the global financial meltdown of 2008-09 certainly affected local commercial enterprises, Canada's smaller firms were still able to keep their collective heads above water.

"Against all odds Canadian small- and medium-sized enterprises were not only able to endure the recent recession with less damage than in any other post-war recession, but also to outperform their large, more established peers," wrote Benjamin Tal, an economist with CIBC Economics in 2009.

Expanding in a recession

According to Tal, Canada's small business sector actually grew during the economic downturn of 2008 and 2009.

The number of small firms that declared bankruptcy dipped in 2009. (Paul Sakuma/Associated Press)

In addition, fewer employees at smaller firms lost their jobs as the workforces at small-and medium-sized companies decreased by approximately one per cent versus 15 per cent for Canada's largest enterprises.

Ottawa's figures back up the CIBC analysis.

According to Industry Canada, over the past 18 years approximately 12,000 small companies declared bankruptcy, peaking at 14,000 in 1997.

However by 2009, the number of these type of companies closing their doors for financial reasons slipped to 6,700, less than one-half of the previous high.

Different gauge, same result

Using a different yardstick for measuring small-business changes — number of employees — yields a similar trend.

A small manufacturing company is commonly defined as a firm that employs 100 or fewer workers while a small service firm has 50 or fewer employees.

Industry Canada calculates that the country's small business cohort shrank by approximately 14,000 companies between December 2007 and December 2008.

Over the next twelve months, however, Canada's SME sector gained back more than 56,000 smaller service and manufacturing firms.

Canada's advantage

The country's small business sector grew relatively rapidly in 2009, mainly because of its reliance upon domestic consumers, economists said.

Essentially, small firms get most of their cash flow from flogging their goods in Canada rather than in international markets.

The Canadian Federation of Independent Business (CFIB) estimated that 16 per cent of small- and medium-sized firms sell their goods in the United States while another four per cent sell their services south of the border.

With relatively little exposure in the United States and overseas markets, smaller companies are less worried about issues such as recessions in other countries, which could cut the demand for Canada's exports, and a higher Canadian currency, which has the effect of curtailing foreign trade.

For example, in the CFIB's July 2010 barometer of small business confidence, 45 per cent of respondents were worried about insufficient domestic demand while only 11 per cent expressed concerns about foreign sales.

Canada's retailers paid even less attention to foreign economies as only six per cent of firms cited fears of falling international sales as a major problem.