Core of state's economy faces greatest risk

Speeding up: Economists fear the failure rate of small businesses will accelerate in the first half of the year.

Small business

January 20, 2002|By Andrea K. Walker | Andrea K. Walker,SUN STAFF

Small businesses thrived with the robust economy of the 1990s, but economists predict many will falter as the nation's recession is expected to continue through the first half of this year.

Analysts say small firms will have a harder time making a profit and meeting sales goals. With little financial cushion to deal with changes in the economy, some small companies will probably go bankrupt or shut down completely.

Bankruptcies of U.S. businesses were already up 17 percent in the third quarter of 2001, according to Economy.com, an economic consulting and forecasting firm in West Chester, Pa.

"It's going to be difficult for small businesses for the next six months or so," said Gus Faucher, a senior economist for Economy.com. "Small businesses are always opening up and shutting down. I think that process is only going to accelerate."

The 141,930 small businesses in Maryland, defined as those that employ fewer than 100 people, make up the core of the state's economy, according to the Department of Business and Economic Development.

They account for 98 percent of all private businesses in the state, employ more than 1 million people and generate $9 billion in payroll.

Capital will dry up for some of these businesses just when they need it to stay afloat, said James McClean, executive director of the Governor's Office of Small Business Advocacy and Small Business Assistance.

He also predicted there would be fewer startups as lending institutions cut back on loans and other financing, and people are less likely to take financial risks.

"When the climate is good you see more people who want jump in," McClean said.

Some small restaurants, hotels, travel agencies and other tourism-related businesses have already seen some of the effects of the slowdown as fewer people are traveling, prompting sales to drop.

But there is some light for small firms, state officials said.

Small companies haven't had the big layoffs of their larger brethren, analysts said. And while small firms struggled to find good workers a year ago, the labor pool has opened up as bigger companies let go of employees.

Analysts and state officials also say some of Maryland's small businesses will continue to prosper, despite the economic climate as they take advantage of government contracts. Small defense companies also will benefit from increased spending by the federal government because of the war on terrorism.

And there will be some financing alternatives for small companies. The Small Business Administration and the state's Department of Business and Economic Development, for instance, said that they don't expect cuts in financing packages aimed at small and minority businesses.

"We'll probably have a better year than normal with our loan guarantee program," said Allan A. Stephenson, Baltimore district director of the SBA. "Whenever things get this slow, banks usually fall back on our guarantee."

Many experts expect the economy to begin a recovery this summer. Until then, some small business owners say the worst thing to do is to be too cautious or cut back too much.

Joan Carol Design & Exhibit Group, a trade show specialist in Clinton, recently expanded its product line to offer 3-D printing and is investing heavier in marketing.

"Those who advertise during a recession usually gain market share on the backside," said the firm's owner, Joan Carol.

Carol, who is also vice chair of a Maryland Chamber of Commerce committee dealing with small business issues, said many of the owners are hoping that revenue evens out later this year.

"My advice is to pedal like mad and keep your face out there," Carol said. "Just be smart with the way you spend your dollars."

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