Economic slide ranks as top concern
The bad economy is old news to automobile dealer Nick DePasquale, president of Fairview Ford Sales Inc. in San Bernardino.
Although a survey released last week by Union Bank of California showed that the condition of the state’s economy had bumped workers’ compensation insurance as the top concern for small-business owners, DePasquale is already 21 months into a sales slump that he blames on the deflated housing bubble.
“We can track it back to June of ‘06, when we saw the thing just fall off the cliff,” DePasquale, who is also co-owner of the business that was founded in 1972.
It’s the first time since 2003 that workers’ comp didn’t take the No. 1 spot as the biggest challenge for small business in the annual survey.
One-third of the 2,000 firms interviewed reported that customers were spending less money with them because of the sub-prime mortgage crisis. About one-quarter said they were seeing fewer customers.
Those numbers were higher in Riverside and San Bernardino counties, which have been hit harder and longer by the sub-prime loan fallout: 39% of the Riverside small businesses said customers were spending less while 45% in San Bernardino said so.
DePasquale’s dealership has seen its employee count drift down to 115 from a peak of 125, he said, as some “luxury positions” were cut and some lower-performing commissioned salespeople left.
After several years of zero-percent financing and rebates of $3,000 to $5,000, he said he didn’t have many incentives left to lure cautious customers.
And those that might be interested are finding the values of their high-end trade-ins dropping fast because of higher gasoline prices and low demand. As with the housing slump, many consumers now owe more on their vehicles than they are worth.
“I think we are going to be in this funk for a little bit,” said DePasquale, who is hoping for a bounce in consumer confidence and spending after the presidential election.
Los Angeles small-business owners aren’t feeling the pinch as badly, according to the survey. Just 27% have seen lower spending and 16% have noticed a drop in the number of customers.
The bank’s January phone survey targeted businesses with revenue of $15 million or less; most had annual revenue of less than $5 million. The San Francisco-based bank has conducted the survey for eight years.
The poll has a margin of error of plus or minus 3 percentage points.
Southern California Union Bank executive George Ramirez said customers in his three-county region told him there was a spot recession going on that could spread.
“Our customers believe that things will get a little bit worse before they get better,” said Ramirez, senior vice president and market president for Orange, Los Angeles and Ventura counties.
The worry showed in hiring and spending plans.
Just 49% of Los Angeles County small-business owners polled said profits would be higher this year, down from 72% who said the same thing in last year’s poll. That’s the largest drop among the five Southern California counties.
Statewide, 52% expect higher profits compared with 67% a year ago.
It’s not surprising then that just 23% of the state’s small businesses expect to hire more employees, down from 30% last year. In Southern California, the numbers ranged from a low of 13% for San Bernardino County small businesses to a high of 33% in Riverside County. Just 20% of the small businesses in Los Angeles said they would increase staff this year, compared with 29% last year.
Plans also were off for increasing capital spending -- money spent on assets that would be used for a long time, such as buildings, equipment, furniture and fixtures. About 26% of California’s small businesses expect to boost capital spending this year. Last year, 35% anticipated higher spending, according to the survey.
Small-business owners’ caution is spilling over into loan demand.
After a jump in requests for lines of credit at the end of last year, there has been a slowing demand for small-business loans at Union Bank as business owners take a wait-and-see approach, Ramirez said.
Those who take out loans are finding “a little bit tighter” credit requirements, said Ramirez, who is also a small-business owner. He and his wife, Julie, own three preschools in Alpine, Calif.
The dollar volume of loans guaranteed by the Small Business Administration was down in the last three months of 2007 for the agency’s Los Angeles district.
These loans are guaranteed by the SBA but made by commercial lenders.
The lenders usually set up a separate group of employees to handle the specialized requirements of the loans that are meant for small businesses that don’t qualify for conventional small-business loans.
Union Bank makes SBA loans but has temporarily halted making the so-called 7(a) loans because of personnel changes, the banker said. The bank still offers the SBA-guaranteed 7(a) express loans and the 504 commercial real estate loans.
It may be a while before demand for those SBA loans picks up. As DePasquale explained: When money gets tight, people pay late, so their credit score suffers and then they don’t have the buying power they want and the economy needs.
“It’s been a long time since I took Econ 1A,” DePasquale said. “But when things get tough, it just gets tougher in all areas.”
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California outlook
Here’s a look at how small businesses in five Southern California counties see 2008 unfolding, based on a newly released survey by Union Bank of California.
Percentage of employers who expect to make more profit or hires
*--* -- More profit in: -- Increased staff in: -- -- 2008 2007 2008 2007
Los Angeles 49% 72% 20% 29% Orange 58 67 26 42 Riverside 56 69 33 38 San Bernardino 51 61 13 26 San Diego 51 67 25 32 Statewide 52 67 23 30 *--*
Source: Union Bank of California
