Thread: Crisis Batters American Small Business

* DECEMBER 26, 2008

Slump Batters Small Business, Threatening Owners' Dreams

By SIMONA COVEL

After spending nearly 20 years building her own business, Cookie Driscoll thinks it might be over.

Ms. Driscoll owns C. Cookie Driscoll Inc., of Fairfield, Pa., which sells animal-themed gifts and office-promotional products. In the past year, she has seen nine of the mom-and-pop shops that buy her goods shutter -- often without paying their outstanding invoices. Her bank revoked her credit line. She expects revenue to be under $60,000 this year, down from a peak of nearly $230,000 a few years ago. She is taking almost no income from her business and paying bills with the last $16,000 from her retirement account.

"I'm as close to a panic as I've ever been," says the 57-year-old Ms. Driscoll. "This is the most terrified I've ever been in my life." [Cookie Driscoll]



Cookie Driscoll

For many small businesses across the country, these are scary times. The dramatic pullback in consumer spending is only the latest blow threatening to push some strapped small businesses out of existence. Customers are paying their bills late, cutting off cash flow, the lifeblood of a small business. Even healthy companies are being choked by the lack of credit lines and bank loans. Others are still reeling from several years of high raw-materials prices.

In a recent survey from the National Federation of Independent Business, more than a quarter of small business owners said the current economic downturn is threatening their ability to survive. Nearly half of respondents said slow or lost sales are their most immediate problem.

In the months ahead, "we are going to see small businesses that were marginal go out of business," says William Dunkelberg, NFIB's chief economist. "We've never seen sales trends as weak."

Small businesses are a driver of the U.S. economy. In the past decade, small businesses -- those with fewer than 500 employees -- have created 60% to 80% of the nation's net new jobs each year, according to the Small Business Administration. More than half of Americans are employed by a small business, and these companies are responsible for more than half of the nation's nonfarm private gross domestic product.
Small Reserves, Little Fat

Most small businesses don't have big cash reserves like larger companies do. And they don't have lots of excess costs they can cut.

Many are frustrated that Washington is bailing out some of the largest companies and banks. "Our members are angry that the federal government is giving taxpayer money to big companies that have been horribly irresponsible while small businesses are not getting the money they need to keep their doors open," Margot Dorfman, chief executive of the U.S. Women's Chamber of Commerce, told the House Small Business Committee earlier this year. The government should set aside money specifically to assist small businesses, she said.

It's always challenging to run a small business. More than a half-million small businesses close each year, according to the SBA. Two-thirds of new businesses survive at least two years, while just 31% survive at least seven years.

But as the U.S. suffers its worse recession in a generation, entrepreneurs are battling a number of forces at the same time.

For John Colón, who co-owns Bella Diamonds, two jewelry stores in northern Virginia, it was the sharp increase in metals prices two years ago that dealt the initial blow. Mr. Colón worked in sales for large jewelry companies before opening his business in 2005.

As prices for his products rose, local real-estate prices started to struggle. Last year, as consumers became more cautious, his business "hit a brick wall," Mr. Colón says. He saw more people who wanted to sell their gold jewelry than those who wanted to buy.



This year, he and his business partner cut their salaries to about $60,000, he says, from $90,000 or $100,000 in better times. They worked seven days a week at the stores. Mr. Colón already had a second mortgage on his home. Banks wouldn't extend more credit.

Though platinum and gold prices have fallen in recent months, some jewelry designers kept their prices higher, hoping to recoup losses, he says. Mr. Colón says he hasn't been able to bring his prices down. A few designers explicitly prohibit him from discounting their items because they want to maintain a luxury image.

Foot traffic in his stores has trickled to as few as one or two customers a day, from 40 or 50 a year-and-a-half ago.

The upshot: The owners are liquidating the two stores, which will close at the end of January. Mr. Colón, 38, sold his home in a short sale -- where the proceeds weren't enough to pay off the mortgage -- and filed for personal bankruptcy several months ago. The stress and financial strain affected his family life, he says, and he recently divorced.

The experience "ruined my spirit. It crushed me," Mr. Colón says.

Even some small businesses that have seen a rise in demand are struggling, due to the credit squeeze. In October, the most recent data available, the Federal Reserve Board reported that 90% of U.S. banks had tightened lending standards on small businesses in the previous three months. That hurts young businesses that need to finance growth.

Susan Knapp once sold yellow-pages ads to small businesses, meeting people who had turned their dreams into companies. It inspired her in the late 1990s to turn her love of making pear jelly into a side business. For years, she had collected pears from a Northern California farm, whipped up batches of jelly and passed it out at holiday time. In 2003, she quit her job and became a full-time entrepreneur, using credit cards, personal savings and an equity line against her home to get going.

By 2007, her company, A Perfect Pear, was reporting $700,000 in sales. She says she is sitting on $100,000 in orders from specialty stores and grocers who want to buy her jellies and salad dressings. On the company's Web site, many items are on back order.

And yet Ms. Knapp can't fill those orders: She doesn't have the money to buy the 300 cases of vinegar and 200 cases of olive oil she needs to make the products, and she hasn't been able to find funding.

Ms. Knapp, 56, says she has gone from making six figures to not taking an income. For the first time, she and her husband, a self-employed chiropractor, are without health insurance. In the past year-and-a-half she has nearly drained her $190,000 retirement account to pay for operations and two-part time employees.

Her biggest mistake, she says now, was not securing a line of credit before she actually needed it.

Though real estate in Napa Valley, where she lives and works, is still strong, her bank won't consider expanding her home-equity line, she says.
Looking for an Angel

These days, she spends time calling "angel" groups -- investors who specialize in fledgling companies -- searching for funding. Some have told her they have too much money tied to real estate or the stock market; others are focused on tech. She placed ads on two peer-lending sites but has only gotten a few questionable propositions, including an "investor" who asked for a $67,000 payment before he'd turn over any financing. She uses credit cards regularly, but one of her issuers recently changed a no-limit card to a $1,200 ceiling.

Without capital, she had trouble filling orders for Christmas -- her busiest time. Customers were calling her small commercial kitchen directly, she says, asking why they couldn't order products. She explained that "we've run into a challenge economically."

She has applied for a $300,000 loan from the SBA, and is pinning hopes on that. "I'm a really, really positive person," she says. "I've got pictures of hundred-dollar bills all around my desk, for the power of positive thinking." If the loan doesn't come through, she says, A Perfect Pear may have to close temporarily.

For all the positive thinking, Ms. Knapp hesitates when asked if she'd do it all again. "The last thing I want to do is stomp on someone's dream," she says. But knowing how hard it's likely to be, "I hate to see businesses trying to start right now."

Some companies that are able to maintain credit lines still face other problems. One of the most prominent: increasingly slow-paying customers. Small companies don't have huge reserves, and even a delay of a few days can hurt cash flow.
Delinquent Customers

Workplace Integra is a Greensboro, N.C., company that helps manufacturers adhere to workplace-noise restrictions. The 13-employee firm is protected somewhat by the nature of its business; its customers must comply with government rules.

But that doesn't mean those customers will pay on time. As food companies, wood-products manufacturers and carpet makers face economic headwinds, they're taking longer to pay Workplace Integra for its consulting and software services, the company says. Over the course of this year, the average number of days the company waits to get paid has shot to the mid-50s, from 39.

Customers "are hoarding cash," says Gregg Moore, the company's 45-year-old president. Because his company isn't getting paid on time, that means Mr. Moore can't use those funds to pay the company's own bills. So he's been forced to dip into the company's $100,000 line of credit -- something he hasn't done before. The balance is now around $30,000.

"It's made for some harrowing months," Mr. Moore says.

The lack of cash flow is stifling the company's growth. Though it has added customers, it can't afford to add staff. It has postponed plans to expand, and salary increases "are pretty much out," Mr. Moore says. "Right now we're hunkering down and weathering the storm."
First to Feel Pain

Many small businesses may not have the luxury of waiting it out. The smallest companies are often first to feel all the pressures, struggling with higher costs, unwilling lenders and disappearing consumers all at once. Ms. Driscoll, in Pennsylvania, is one of those.



As with many entrepreneurs, her one-woman business was the culmination of a lifetime of dreams. Tired of sales jobs where she didn't care about what she was hawking, such as a job selling ads for a radio station, in 1990 she poured her savings and her love of animals into her enterprise, at first running it out of her home. Eleven years ago, she bought property with a home, a small warehouse where she stores pet-themed window decals and corporate promotional items, and a nine-stall farm, where she boards horses. The boarding operation provides about about 20% of her income.

Though income hasn't always been steady -- peaking at the end of the 1990s -- she was able to work near her now-grown son. She relishes the ability to hop in her pickup truck on her own schedule when it's time to call on customers.

The trouble started, she says, with rising health-insurance costs. Then came higher electric bills. Two years ago, she stopped heating her office, wearing sweaters and a coat to work in winter. Last year's soaring gas prices brought shipping surcharges. Those ate into Ms. Driscoll's bottom line.
Can't Pass Along Costs

Like many small-business owners, she couldn't pass the increased costs on to her customers. Her customers are small pet stores and tack shops that buy her animal-themed decals and gifts, and small professional practices that buy personalized pens and mugs imprinted with corporate logos.

Now, a weak economy means customers are taking longer to pay -- about 12% of her customers are 30 days late on bills, she says, more than double the usual amount. Some have simply disconnected phones and walked away from their obligations, she says.

In recent months, Ms. Driscoll says her phone rings with a customer canceling a pending order as often as new orders come in. She says a client who boarded a horse at her facility couldn't pay the $350 monthly bill any longer, and recently abandoned the horse with Ms. Driscoll.

The credit squeeze has dealt a severe blow. In recent weeks, her credit-card company raised her rate, now at 23% from around 20%. Her bank converted her $16,000 credit line to a loan. With her health insurance now up to $600 per month, rising energy costs and mounting costs for hay for her boarding facility, the credit crunch has pushed her business to the edge.

"Not many people have a grasp on the downhill slide [in small businesses] that I've seen for the last two years," Ms. Driscoll says. "It has been a steady slope down -- and it recently fell off the cliff."

In addition to working on an e-commerce site to bolster her business, she's looking for employment on the side, perhaps lecturing on equine management, or caring for show horses. Working for someone else isn't her first choice, but "I can be a good little employee," she says.

She hopes to keep her business going long enough to get past the current crisis. "I've worked my whole life to have my own business and drive my 18-year-old truck," Ms. Driscoll says. "It's just astonishing to see it slip out of my hands."

Write to Simona Covel at simona.covel@wsj.com

http://online.wsj.com/article/SB1230251 ... b_page_one

What many small business owners do is not take a serious look at overhead. The renting of that space for the fabulous shop is a horrendous expense; besides the rent, there are other things like utilities, insurance and the bite that taxes will take. There are too many business owners whose dream were not based in hard financial reality. And the same applies to major corporations that never looked at a possibility of a severe downturn of consumerism, but just kept building and supplying more stores on borrowed money that they can no longer access.
Trend predictor Faith Popcorn said years ago that Americans would start to retreat to their homes and do their shopping on the Internet. She called it cocooning and I think that is what is happening nowadays.