Image: Paterson, N.J.
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According to a survey by the National Small Business Association in August, 67 percent of businesses said they had been “impacted by the credit crunch,” more than double the 33 percent of a year earlier.
By Mike Stuckey Senior news editor
updated 10/9/2008 2:24:25 PM ET 2008-10-09T18:24:25

If pessimism among small business owners is any indicator, the U.S. economy has not merely derailed. It has hurtled over a cliff and lies in smoking ruins at the bottom of a deep ravine.

"Every day is a struggle and if we were not strong people, I see how people can just give up," said Sheri Wolfe, who had to close her struggling business in smalltown Missouri over the summer.

Wolfe's words underscore sentiments expressed by business owners in a host of recent surveys as well as e-mail and interviews with But solid evidence that small businesses are hurting on a wide scale, especially as a result of the credit crunch, is harder to come by.

“Confidence about the economy for small business is low,” said Bill Rys, tax counsel with the National Federation of Independent Business. In fact, as measured by a monthly survey of federation members that goes back 22 years, “If it’s not at an all-time low, it’s near an all-time low.”

The NFIB survey from September is echoed by other recent polls. Concerns about the economy have reached “an all-time high,” according to the American Express OPEN Small Business Monitor, a semi-annual survey of business owners in its seventh year. Pessimism also “is at an all-time high” in fifth annual PNC Economic Outlook survey. And respondents to the National Small Business Association’s Midyear Economic Report are “extremely anxious” about the U.S. economy, with nearly 80 percent expecting it to flat-line or enter a recession over the next 12 months.

Small is big
Small business is important to the economy because small business is Americanbusiness. The Small Business Administration’s Office of Advocacy notes that “small firms,” defined as employing fewer than 500 employees (and most employ less than a tenth that many), make up 99.9 percent of the 27.2 million businesses across the nation. They provide about half of all private-sector jobs, generate up to 80 percent of new jobs each year and create more than half of non-farm gross domestic product.

The SBA and the business associations lack the ability to give a real-time picture in empirical terms about how small businesses are faring nationwide. “We can tell you generalized survival rates of business, but it won’t be relevant” to what is happening right now, said SBA spokesman John McDowell. That information does not appear until months or years after it was collected.

While studies show that, over time and across different industries, 66 percent of new businesses survive at least two years, 44 percent last at least four years and 31 percent are still around seven years later, “we have no way of knowing about the current situation,” McDowell said.

So trade associations, companies like American Express and journalists are left to surveys and anecdotes to fill in the blanks. In responding to such inquiries, the concerns of business owners often focus on weaker sales, higher costs and taxes.

Big variations
These days, given the meltdown in financial markets and the wrangling on Capitol Hill over how to fix it, the credit crunch is getting more attention. But there are wild differences in the various polls and anecdotal accounts from business owners.

For instance, 67 percent of businesses surveyed by the National Small Business Association in August said they had been “impacted by the credit crunch,” more than double the 33 percent of a year earlier. But in the PNC survey, taken about the same time, just 25 percent said they were finding it harder to obtain credit, up from 18 percent in the spring.

Major Market Indices

And NFIB’s September survey found that “no evidence of serious credit problems has appeared on Main Street. Regular borrowing activity was reported by 34 percent of the owners, unchanged and typical of readings for the past 15 years.” Also, “Only 2 percent of the owners cited the cost and availability of credit as their No. 1 business problem (down 1 point), far from the record 37 percent reached in 1982.”

The American Express study, conducted by a credit provider that is currently tightening its lending practices, does not address the crunch.

Scores of business owners who e-mailed offered widely differing accounts of the impact of the financial crisis on their operations.

Wolfe shut the doors of her soy-candle gift shop in tiny Hillsboro, Mo., because “we could no longer get credit to survive this economy.” In business for three years with four part-time employees and sales of about $100,000 a year, Wolfe, 42, was braced for the “drought” that has always hit her shop in the summer. This year, however, with gas prices soaring above $4 a gallon and flooding from the nearby Mississippi River wreaking economic havoc across the region, it was too much.

“We always have enough money to get us through” the summer, she said in an interview, “but we really had to start hitting the savings earlier because of the flooding and stuff. … We had a line of credit with our local bank, but we started using it more and more, and we couldn’t get more credit. Then we started living off the credit cards, and then nothing was working.”

Wolfe, now selling real estate, and her husband, a graphic artist, are working to pay off $40,000 in debt from the failed venture.

His road is paved with credit
At the other end of the spectrum is Jim Roemer, who runs a chauffeured car service in Kaukauna, Wis. He said he has had no trouble obtaining financing to add three vehicles to his fleet this year, including the purchases of a new $46,000 Cadillac DTS and a new Cadillac Escalade on which he received 100 percent financing from GMAC. The deal on the Escalade, valued at $75,000, was finalized Sept. 30.

“It seems hard to believe that the credit markets are so tight based on my own circumstances,” Roemer said. “I do not have the greatest credit” after declaring bankruptcy in 2005. “Since then I have gotten four credit cards plus three loans for my business.”

Somewhere in between Roemer and Wolfe is Utah baker Brian Smith, who said the credit crunch is “really hurting” his family’s business but not threatening its survival. With his parents, Smith operates Pierre Country Bakery, which sells natural breads and pastries to retail customers and 55 wholesale accounts in the Salt Lake City area. The business garners $1 million in annual sales and employs 25 workers.

With prices from suppliers up and sales dropping, Smith, 30, went looking for financing that could help fund expansion and tide the business through its fall slowdown. “We have perfect credit, a score of 770 and you cannot get anything,” he said. “They’re just kind of like, ‘Well, we’ll get back to you.’”

He said the tightening credit markets have also made it impossible to consummate a deal to sell the bakery because the prospective buyers, who already own about half the business, cannot obtain financing for the rest. He finds that a real puzzle since the well-known bakery has been in business for 20 years and churns out 500 loaves of bread and 350 pastries a day.

J. Michael Feeks, who spent 30 years in the banking industry and is now a principal in the Bank Experts Group consulting firm, said he doesn’t put too much credence in “anecdotal stuff going around” about the impact of the Wall Street meltdown on small business credit lines.

“I’d be very careful of that,” he said. “Bankers are very reluctant to do anything that is going to make a situation worse. I just can’t imagine too many banks pulling back on the credit lines that are financing receivables, inventories, things like that. That would really hurt the business of the customer and you’d end up with a bad loan.”

Location, location, location
Geography also plays a key role in the fate of small business. Credit and revenue concerns are not the same in an Idaho boomtown as they are in a Detroit suburb.

Feeks, who also is the chief financial officer of the tech firm Concurrent Technologies Corp., with 50 employees and $10 million in annual revenue, said his own company has an ample credit line that has not been affected by the economic turmoil.

That’s no consolation to former candle maker Wolfe, who said that until she can get up to speed with her real estate career, the credit crunch has moved from the business realm to the home front.

“We are $1,500 in the hole every month,” she said. "We are trying desperately to work with our mortgage company to get some relief until this crisis is over.”

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