Four years ago, Amy and Lorin Cirincione were the picture of small business success. They opened their natural pet supply store and grooming center, The Feedbag East, in the Long Island suburb of Mattituck in 2005, and quickly expanded to two new locations using Small Business Administration (SBA) microloans.
Today, they are a case study of how the recession is crushing what were once healthy companies. A family illness and slumping sales forced them to close their new locations. As the recession deepened, their suppliers began to tighten credit lines. Accounts that had been opened on 15- and 30-day terms were switched to cash-on-delivery accounts.
The change seriously depleted their inventory and led to a further downturn in sales. At one point, the Cirinciones attempted to sell their house to raise capital, but could not find a buyer, which pushed them into delinquency on their loans.
Unfortunately, their story is far from unique. An untold number of small businesses that were thriving only 18 months ago are now on the brink of collapse because of a recessionary spiral that began with the credit crisis and the collapse of real estate prices. Now, deteriorating business conditions are spreading like a cancer from one business to the next.
The Senate Committee on Small Business and Entrepreneurship in Washington held a hearing this week to gauge the impact of the American Recovery and Reinvestment Act, a measure President Obama signed into law three months ago to aid small businesses, mainly through SBA loan programs. But the snapshot it got of Main Street suggests the administration’s efforts to aid this all important sector of the economy have been too small and too slow.
Susan Sobbott, president of American Express OPEN, the nation’s largest small-business credit card program, has had a front row seat to the changing business conditions. “By all accounts, we are in the midst of the most challenging economic environment in a generation,” she told the committee.
“Spending growth by our small business customers slowed over the course of 2008, ending the year with a 3 percent decline in comparison to the fourth quarter of 2007,” she said. “Our small business spending declined 13 percent in the first quarter of 2009.”
At the epicenter of the economic crisis, the housing sector, the average delinquency rate in March for small business card holders was almost 50 percent greater compared with the overall small business and consumer customer base, she said. Unlike previous recessions, however, “virtually all other segments” of the economy, from auto dealers to event planners and advertising agencies, have be slammed by the downturn.
In January 2009, the number of business owners who said their customers were taking longer to pay jumped to 36 percent compared to 27 percent in February 2008 — a 30 percent increase. “This has made managing cash flow a significant challenge for business owners, and the implications for businesses that rely heavily on a small number of large customers are magnified,” she said.