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Market volatility dampens small business growth

By Deborah L. Cohen, August 17, 2011
 
(Reuters) - Entrepreneur Jo Heinz is in a holding pattern. Just as her interior design and architecture firm was recovering from the recession, the shaky U.S. stock market has put the brakes on her business.
 
"The uncertainty and fear is making everybody crazy," said the 61-year-old president of Dallas-based Staffelbach Inc. "I believe this will slow decision making by our major clients and it will have a trickle-down effect on our projects and our workload."
 
Heinz, whose staff of nearly 70 works for companies throughout the U.S., thought she had climbed out of the real estate downturn that made 2009 her worst year. Things improved in 2010, and this year was looking even better.
 
But after the downgrade of U.S. government debt and subsequent volatility in the equities markets, she is taking a wait-and-see approach. That means holding the line on big expenditures like hiring and employee bonuses, and crossing her fingers that already fierce industry price competition won't worsen.
 
"I fear this will kind of squelch things," said Heinz, who is redoubling Staffelbach's efforts to cut costs such as travel. "We're just going to be stalling and that doesn't help anybody."
 
THAT SEVENTIES FEELING
 
The waiting game by small companies - considered the engine of economic growth and job creation - is a retrenchment from earlier 2011 gains, according to Brian Hamilton, CEO of Sageworks, a software firm that tracks the financials of small businesses.
 
"This feels a lot like the 70s, when things were just dragging," said Hamilton, noting Sageworks had tracked improvement of nearly 7 percent this year in both small business sales growth and net profit margin, two important metrics. "I'm very concerned about the stock market because I can't explain why that's happening.
 
"The state of privately held companies in the U.S. would be positive to today," he said, "but with uncertainty over the last couple of weeks, who knows what's going to happen."
 
Even if results were showing incremental improvement, sentiment among small business owners was already souring, according to the National Federation of Independent Business, which gauges the outlook of its business members.
 
For the fifth straight month, NFIB's Small Business Optimism Index was down in July, falling 0.9 points, a larger decline than in each of the three prior months. And that was before the market turmoil of the past two and a half weeks.
 
Uncertainty over whether stock market volatility will translate to a slowdown in consumer spending has businesses like Elizabeth Cotton, a maker of high-end pajamas, altering plans for growth.
 
"This year we were planning to open a few pop-up stores in available retail space in the New York City area," said owner Elizabeth Allen, who has seen sales increase ten-fold in the six years since founding the Stanfordville, New York company. "I'm am very skittish about signing leases now."
 
Instead, she plans to promote her sleepwear in less risky ways, using holiday-related promotions such as exclusive events at retail stores. Unlike years past, she won't be spending any money on direct mail.
 
"Our wholesale business gets hit hard when the economy is bad because our line is the most expensive," said Allen, 34. "It gets cut from many stores' assortment in favor of lower priced collections."
 
NO MONEY FOR HIRING
 
Even if they do choose to aggressively expand, small businesses continue to have a tough time getting credit, according to Rohit Arora, CEO of the online credit marketplace Biz2Credit, which connects small businesses to a variety of financing options.
 
"Credit has tightened compared to a month back," he said, adding he is doubtful the Federal Reserve will be able to keep government lending rates near zero, as promised.
 
"As the U.S. economy slows down, small business growth will suffer again," said Arora, noting he has also suspended hiring at his own company, which employs 30.
 
Even businesses positioned in somewhat recession-proof industries like technology are having difficulties. Talents Combine India Inc, a Manhattan-based IT services firm, has been hard pressed to find capital in recent weeks. It needs about $1 million over the next two to three months to hire up to 25 additional programmers for new business.
 
"We're finding it difficult to get working capital; there's a delay," said CEO Joe Kadi, who has been left hanging by banks and turned to Biz2Credit to seek other options. "There is work but there is no money."
 
Uncertainty that began with the U.S. debt crisis has led many small businesses to work out their own ad hoc financing deals by negotiating extended credit and other favorable terms from customers and vendors, said Jeff Stibel, CEO of Dun and Bradstreet Credibility Corp, which evaluates credit ratings of small businesses. Those arrangements include extended payment terms and improved pricing.
 
"Businesses are figuring it out for themselves, they can't rely on banks, they can't rely on government," Stibel said. "There is no question everyone is trying to squeeze everyone else so they don't have to raise prices."
 
For the full article featuring Sageworks’ private company data and insights, please visit Reuters – Market volatility dampens small business growth.