On the Road to Economic Recovery, There Are Numerous Positive Signs

Leonard Ortiz knew the economy had finally turned the corner when his Huntington Beach company picked up Northrop Grumman Corp. as a customer last summer after knocking on the aerospace giant’s door for five years.

“Business is gearing up again,” said Ortiz, owner of Novacoat Inc., a 15-employee epoxy coatings company. “At the very minimum this year we expect to double our sales.”

That would put the family-owned business at the $4-million annual revenue mark and on track to meet its three-year goal of $10 million in annual sales.

Ortiz is not alone. Small business, which President Bush has called the engine of economic growth, is beginning to rev up again after downshifting during the 2001 recession and fitfully idling in recent years.

That’s good news for California, where businesses with one to 99 employees account for 98% of all companies and employ about 40% of the state’s workers. They also generate jobs and breakthrough innovations at a faster clip than big companies, according to state and federal figures.

“Small business is very critical to the economy,” said Barbara Hoose, executive vice president at Union Bank of California and the head of its small-business services group.

The bank recently launched new loan products in the increasingly competitive small-business market, including some aimed at entrepreneurs who are disabled veterans.

Money to start and run small businesses also is more readily available from venture capital firms eager to capture a piece of the growing small-business segment of the economy.

Other positive signs: Workers’ compensation insurance premiums -- a stubborn headache for small firms in particular -- dropped in price last year after business groups pushed through hard-won reforms.

About 40% of small businesses statewide plan capital expenditures this year, according to a recent Union Bank survey.

And despite their sometimes bumpy ride in a state known for its regulatory zeal, California small-business owners continue to rank “opportunities for growth” as the No. 1 reason for opening their businesses here, the survey found.

At the same time, resources for small-business owners and entrepreneurs may take a hit in the next federal budget. The Bush administration’s proposed budget for fiscal 2007 would cut or eliminate 75% of federal small-business programs -- including several dozen that benefit California companies, according to a report released this month by Democrats on the House Small Business Committee.

Despite touting small business, Bush submitted a budget that again would cut funding for the Small Business Administration. His proposed SBA budget: $624 million, versus $900 million in 2001. Critics fear that Bush’s goal is to eliminate the agency. But the SBA has said it is simply operating more efficiently under its leaner funding and notes that the value of loan guarantees it issued for small businesses last year set a record.

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Three Key Issues

In any case, small-business advocates are keeping close tabs on the emerging recovery of such firms. Here is a closer look at three important issues:

* Access to credit: Nationwide, the number of SBA loans jumped 27% in the 12 months ended Sept. 30 to 105,094, said Frank Brancale, spokesman for the SBA’s Los Angeles district office.

After dropping dramatically three years ago, the number of small-business loans (loans of less than $1 million) nationwide has increased, the SBA said. Venture capital also has rebounded, especially for California’s vital small-business technology sector.

In Southern California, the number of deals last year jumped to 203, up 7% from 2004, but the $2.09 billion invested was off 5%, according to VentureOne and Ernst & Young. When the number of deals increases but the dollar amount invested shrinks, that usually indicates that smaller deals for start-up companies are on the increase, such as seed and first-round financing.

“Tech is back; VC is back. There is plenty of financing available for early-stage ventures,” said Jerome Engel, executive director at the Lester Center for Entrepreneurship & Innovation at UC Berkeley.

Although he is concerned about the effects on small business of what he calls overspending and under-taxing by the federal government, Engel sees fundamental positive trends that he expects will keep the small-business recovery rolling ahead.

* Regulations: With a recent victory under his belt in the continuing battle to control workers’ compensation insurance costs, Martyn Hopper, California director of the National Federation of Independent Businesses for 26 years, seems almost giddy with relief.

“There is a fresh breeze blowing through the cobwebs of political reality in Sacramento,” Hopper said. “Not only is this governor able to govern from the middle,” he said, referring to Gov. Arnold Schwarzenegger, but “he is able to influence the path of legislation so there is now much more discussion early on as opposed to the previous antagonism between his office and the Legislature.”

Hopper is gearing up to halt new efforts to revisit the overhaul of the workers’ comp system, proposed health insurance mandates, business tax increases and the widening use of eminent domain. But he is still optimistic, pointing to what he sees as state legislators’ renewed focus on small business as a creator of jobs.

* Healthcare: More than half of California’s smallest companies, 52%, no longer offer healthcare benefits to their employees, according to Union Bank’s recent survey of almost 2,000 business with annual sales of less than $10 million.

The message is clear: Healthcare is increasingly out of reach of small-business employees. The survey found that among companies that offer health plans, 25% have shifted more of the cost to employees while reducing health benefits. That’s an 11-percentage-point increase since 2003.

Of the 49 million uninsured Americans, 51% are small-business owners, their employees and dependents, according to the independent business federation.

Hopper and his group are pushing for passage of legislation that would allow small businesses to participate in association health plans as a way to cut insurance costs. A key U.S. Senate committee is expected to vote today on the plans, which are being touted as small-business health plans. Opponents say the plans are a ruse to escape costly but necessary state insurance regulations.

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Cleareyed View

Despite the continuing battles, small-business owners remain optimistic and determined to optimize their chances for success.

New leaders at the Latin Business Assn. in Los Angeles, for example, have pushed initiatives including the group’s first trade mission to China.

“All of our trends at this point are very positive,” said Rick Sarmiento, new chairman of the association.

Yet Sarmiento, owner of a Valencia consulting firm, Ultimate Partnership, offers a caveat: Today, more than ever, it takes a strategic approach, an understanding of what’s going on in the economy and a cleareyed view of the competition to survive and thrive as a small-business owner.

“If you ignore those elements, it’s going to be very hard to maneuver through,” Sarmiento said. “And that’s one of the greatest advantages to being a small business: the ability to maneuver quickly.”

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Cyndia Zwahlen can be reached at cyndia.zwahlen@latimes.com.