Small Firms Hit Hard After Crisis

With recent studies showing small-business confidence levels shaken by the Sept. 11 attacks, and post-attack revenues down by as much as 30%, Congress will consider stepping in to bolster the sector’s fortunes.

Two bills introduced last week are aimed largely at easing a cash crunch that’s growing as skittish consumers delay purchases, banks tighten up on credit and venture capitalists pull in their purse strings.

The measures, which are expected to proceed along a fast track, come amid fears that the devastating effects on the nation’s psyche will only add to the pain felt by the country’s smallest entrepreneurs for most of the year.

“For months, the nation’s small businesses have been struggling with the slowing economy, and the recent terrorist attacks have made their situation even worse,” said Sen. Christopher S. Bond (R-Mo.), who introduced a package that would provide tax relief, emergency loans and new opportunities to do business with federal agencies.

“Make no mistake, small businesses are struggling to keep a footing on a slippery slope.”

In the House, Rep. Nydia M. Velazquez (D-N.Y.) introduced a measure that would give small businesses access to low- or no-interest loans, loan forgiveness and extended payment periods.

Even before the deadly assaults on the Pentagon and the World Trade Center, the economic downturn--with its daily litany of layoffs and barely perceptible growth--was causing grief for the little guy.

But the tide seemed to be turning in August, with small-business owners queried by the Nashville-based National Federation of Independent Business reporting increased sales and profits and, as a result, expressing growing confidence that things would pick up in the months ahead.

“There were some good signs in the August report,” said William Dunkelberg, chief economist for the federation, which takes the pulse of the nation’s small-business owners each month. “Now I don’t know where we’ll be. My guess is that we’ll be down again.

“This is very depressing. And not a trivial amount of firms were hurt by this,” he said.

A Plunge in Optimism

A special September report by the federation shows that small- business optimism after the attacks fell to its lowest level since 1993. That report, the first major post-attack survey of small-business owners, found fewer businesses planning to hire and to make major purchases, and found a substantial drop in the number of business owners expecting an increase in sales, compared with the weeks before the attack.

And among businesses surveyed by the Small Business Legislative Council, September sales and revenue were down between 20% and 30% compared with September 2000.

One mitigating factor, Dunkelberg and others said, is that jobs and business will be generated in several post-attack boom sectors, including cleanup, construction and security services.

“With the construction needed to rebuild New York, that will be a major job for the next 20 years,” said Eugene Marsh, president and chief executive of New Jersey-based Construction Project Management Services Inc.

While many construction firms, large and small, have been reporting double-digit sales growth this year compared with last, the mood among manufacturers has been decidedly more glum.

Now, small businesses related to travel, tourism and fine dining may be added to the “suffering sectors” column, small-business experts said.

“We were already numb,” said Roxana Lewis, president of Inglewood-based Chartwell Travel Services Inc., noting that airlines cut travel agency commissions by 60% in the weeks before the attack. “This was just another shot of Novocain.”

Between canceled bookings--which means no commissions--and decreased leisure travel, Lewis estimates that her business will fall by about 25%.

Travel-related firms are not the only ones feeling the strain.

For the first half of 2001, business bankruptcy filings were up slightly compared with the first half of 2000 and 1999--to 20,335 from 18,699 and 19,558, respectively. (Even so, that’s a drop of nearly 18% from the nearly 24,000 bankruptcies logged in the first half of 1998.)

Nearly 85% of those insolvent firms are small ones, said Samuel J. Gerdano, executive director of the American Bankruptcy Institute.

Also, there’s been about a twofold increase in the level of “distressed sale” activity at Santa Monica-based USBX, a company that runs a listing service of businesses for sale and also helps companies seeking a new partner or owner.

“We saw early signs of it last summer [of 2000], but the activity really picked up in the first quarter and second quarter of this year,” said John E. Mack, chief executive of the 2-year-old company.

In the tech sector, the boom in distressed sales--sales by companies in danger of collapse--is almost off the charts, Mack said.

“There were very few [distressed sales] in the first quarter of 2000 and God knows how many in the first quarter of 2001.”

Quicker Reactions in Changing Markets

Small business is not totally adrift as the rough economic waters swirl, experts said.

For one thing, with their size and relative lack of bureaucracy, small businesses often can react more quickly than giant firms to changes in market conditions.

“If a small business wants to go into another market, they can go for it,” said Damon Dozier, a spokesman for National Small Business United, one of the oldest advocacy groups for small business. “Small businesses are very, very flexible.”

Still, observers say there are several factors putting the squeeze on small business, especially those in technology-related fields.

Demand is down and financing from venture capitalists and banks is harder to come by.

“The banks are becoming more collateral-conscious,” said Sharon Evans, president and chief executive of the Business Resource Group, a Los Angeles-based nonprofit that helps small and minority-owned businesses get funding.

“They’re taking liens on homes. They want more security for their position.”

And with the funding spigots turned down, many small businesses, especially those with lower rainy-day reserves, were left stranded.

Add to that a drop--perhaps temporary--in cash receipts.

“For a lot of small businesses, a lot of their customers are putting off purchases and putting things on hold,” said Darrell McKigney, president of the Washington-based Small Business Survival Committee. “People are holding back to see what happens.”

In few sectors is the pain more apparent than in tech.

“They’re either failing entirely or just limping along,” said Patrick von Bargen, executive director of the National Commission on Entrepreneurship, a Washington-based think tank. Or they’re looking for someone to buy them out.

On the opposite end of the economic spectrum is construction, where a growing number of housing starts and continued building in the commercial sector are leaving some firms hustling to boost staffing levels.

Before the attacks, Marsh, of Construction Project Management Services, was estimating that sales at his 3-year-old company would jump from about $200,000 last year to an estimated $500,000 for this year.

Now, he said, there’s no telling.

“There will be tremendous opportunities for a lot of firms, and a lot of minority-owned firms in New and the New Jersey area as well,” said Marsh, an African American entrepreneur.

Maxine Ransom von Phul, owner of Winmax Construction Corp. in Leimert Park, said this year’s slowdown has not had an impact on the bottom line at her seven-person shop.

“Construction is doing well,” said Von Phul, whose projects include Chesterfield Square, a 32-acre retail complex under construction on Slauson Avenue. Even with the slowdown, she anticipates that 2001 sales will rise by about 50% over the 2000 figure of more than $5 million.

“Now, there are a lot of public works projects available,” she said. “Next year may be a different story.”

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Karen Robinson-Jacobs covers small business for The Times. She can be reached at karen.robinson @latimes.com.