The recession of [2007][2008][2009] has been characterized by: (1) a large drop in employment concentrated in small firms, (2) an unprecedented decline in the number of firms, and (3) a slow recovery. This paper develops a heterogeneous firm model with labor adjustment cost, endogenous firm entry, and financial constraints that generates these key facts. The model predicts that a large financial shock results in a long-lasting recession due to limited firm entry. Using confidential firm-level employment data from the Bureau of Labor Statistics, I find support for the model mechanism. In the period of 2007-2009, small and young firms in sectors with high external finance dependence exhibited lower employment growth than those in low external finance dependent sectors. The e↵ect of external finance dependence on employment growth in small and young firms is primarily driven by firm entry and exit.