For Small Businesses Recession Isn't Over
Wednesday, July 06, 2011
For Small Businesses, Recession Isn't Over
By: Dana Mattioli and Sarah W. Needleman, Wall Street
Journal
Many big public companies are likely to report strong
second-quarter profits, but that isn't the story on Main Street,
where small businesses are grappling with jittery customers, rising
costs and tight credit.
The owners of many small businesses say economic uncertainty and
inflationary pressures have led them to delay hiring and capital
expenditures. Seventy percent have no plans to expand their staffs
over the next 12 months, according to a recent U.S. Bancorp survey
of 1,004 U.S. companies with annual revenue of $10 million or
less.
While about half projected higher revenue a year from now, 78%
said the U.S. economy is still in a recession, and many expected it
to remain there next year. In May, for the third month in a row,
the optimism index of the National Federation of Independent
Business declined.
At big public companies, cost-cutting and a rebound in sales,
particularly overseas, have provided a boost. But because small
businesses account for more than half of private-sector employment
and gross domestic product, their owners' caution bodes ill for the
broader economic recovery.
Last year, Tribute Inc., a developer of inventory-management
programs, thought it was seeing a rebound when the time required to
close deals improved. But by the end of the year, sales had leveled
off and the recovery had faded. Now, getting new contracts across
the finish line is taking as long as six months.
"Given what our customers perceive as a flattening in the
economy, they're being very cautious on capital expenditures," says
Tim Reynolds, president of Tribute, which is based in Hudson, Ohio,
and sells its software to small industrial distributors. Tribute is
continuing to require its 35 employees to take a day of unpaid
vacation every month, a policy it implemented during the recession,
as it waits for sales to pick up. Mr. Reynolds is also delaying
investment, putting off buying software that would help him manage
his sales prospects and customers but could cost as much as
$50,000.
"Small businesses aren't hemorrhaging, but they're still waiting
for that significant uptick," says Todd McCracken, chief executive
of the National Small Business Association.
One issue is credit. Small businesses are still having a hard
time getting bank loans. Lending to them fell 2.4% in the first
quarter, the Small Business Administration's Office of Advocacy
reported last month.
BleachSafe Towel Co. negotiated a larger line of credit in
August, but it was only enough to keep the business afloat, not to
help fund more hiring, beef up inventory or make other long-term
investments.
"Small business is really affected by the bank teller," says
Morris E. Sitt, founder of the New York company. "I've never seen
banks like this. It's so hard to get the proper financing."
The company is also juggling rising commodity costs. BleachSafe
expects its revenue to rise 20% this year, but its cotton costs are
up 30%. The company, which has its towels made at a factory in
China, is also grappling with the strong Chinese yuan, which is
pinching margins.
With these pressures on profit, Mr. Sitt says he's waiting for
further improvement in the economy before investing in more
workers. BleachSafe, which has 21 employees, recently hired one
part-time employee rather than the two full-time salespeople it
wanted, and Mr. Sitt cut back on an order for a new spa product
he's testing.
"These days, I'd rather take it slow than go out like
gangbusters and have a problem six months from now," he says.
Phoenix Products Inc., an Avon Lake, Ohio, faucet maker, is also
proceeding with caution, putting hiring, system upgrades and
product updates on hold to conserve cash in case of another
downturn.
"Things are OK right now, but I'm acting as if we're in the
midst of the recession because of all of the economic uncertainty,"
Phoenix President Raymond Arth says.
His caution stems from recent unemployment and housing-market
data, as well as the growing federal deficit. Phoenix's main
customers make recreational vehicles and factory-built housing, and
if RV buyers get spooked by bad economic news, he worries
that orders for his faucets will eventually suffer.
So far, sales are up 7% from a year earlier. But Phoenix's
copper costs have increased 35% during the period, and prices for
the plastic it uses are also rising. In May, the company pushed
through its first price increase in three years, but it's reluctant
to raise prices further even though its input costs continue to
rise.
"If we increase prices again, we're afraid it will affect
sales," Mr. Arth says.
Small companies also aren't as adept at tapping the fast-growing
emerging markets that larger companies are relying on to increase
sales. Tribute's Mr. Reynolds says he couldn't expand overseas
without rewriting all his software first.
"We only sell domestically," Mr. Reynolds says, "so I don't have
the opportunity like a public company does to exploit foreign
markets that are growing faster."