Micro-businesses live a true Darwinian existence and have borne the brunt of the worst recession since the Great Depression. But the very thing that encouraged most owners to start their own businesses, may be working against them, at least during the recession and weak economy.
“Most micro-business owners start a business to pursue a passion, not necessarily to run a business,” says Don Osborne, a small business consultant, who also owns Profit Puzzle, a micro-business employing four. “Someone who opens a bakery, for example, is probably more interested in baking pies than balancing books.”
That leaves micro-businesses especially vulnerable in a recession because they aren’t doing the things they need to do, from a business standpoint, to operate efficiently and maximize sales and marketing strategies, Osborne says.
“In good times micro-business owners get way with a lot of mistakes because the pie is big enough to pick up crumbs. In bad times, mistakes can be deadly,” he says.
While most micro-business owners are the most likely to benefit from business programs sponsored by the government, chambers of commerce, or other groups, they are also least likely to take advantage of them.
That’s because the very attributes that lead someone to start a business — independence, an entrepreneurial spirit — often leads to a go-it-alone, do-it-yourself attitude. Many micro-business owners also have a philosophical aversion to government programs.
“The biggest problem is human nature says, ‘let me do it my way,'” Osborne says. “They struggle along or tough it out. When you ask people to utilize an educational-based resource, they seem to be highly resistant to it.”
The dilemma is particularly acute in the current economy, because micro-businesses — typically defined as a business with 20 or fewer employees — make up 90 percent of all small businesses, according to data from the U.S. Census Bureau.
The Obama administration has made reaching out to small businesses a cornerstone of its efforts to jump-start the economy. But micro-business owners say many of the administration’s efforts, mainly through the Small Business Administration, don’t cover the times when then need them the most: that critical window when they are just starting out.
That may help explain the high failure rate of micro-businesses. Ninety-five percent of firms that fail are micro-businesses. In fact, most of those firms start small, stay small, and close a few years after opening, according a recent study published by the SBA’s Office of Advocacy.
Yet, micro-firms still create the lion’s share of new jobs, according to the study. More than 90 percent of all new firms are launched with 20 or fewer employees. Between 1977 and 2000, those new firms created 70.5 million jobs in their first year of existence and 57 million jobs remained by the time those surviving firms reached their fifth birthday, according to the latest available Census Bureau data.
“This is a very strong basis for the claim that opening a business has greater consequences for job creation than expanding a business does. The criticism that new businesses close quickly is also weak; about half of new firms survive five years or more,” the study concluded.
But the economic downtown has crippled this engine of job growth. The recession’s effects have been magnified for micro-businesses because they are most likely to lack the resources and the capital reserves to weather a prolonged downturn, like the one gripping the nation now.
In a survey released in February by the National Association of the Self-Employed, more than 60 percent of their businesses had experienced a significant decrease in sales or revenue, and almost 50 percent say they have had to tap their personal savings or retirement savings to close gaps in cash flow.
More than three-quarters of the micro-business owners surveyed are not planning on hiring workers this year. The majority said they could not afford to pay the salary or benefits of an additional worker. Of the 23 percent of respondents that are planning to hire workers this year, only 31 percent are planning to hire full-time workers.
“Self-employed business owners are being faced with difficult choices just to stay afloat in this current economic climate,” says NASE Executive Director Kristie Arslan.
The University of Maryland’s Robert H. Smith School of Business surveyed 500 small business owners in January, June, and December of last year to gauge the effects of the recession on their firms. Since micro-businesses make up most small businesses, it’s safe to say the study is reflective of micro-firms.
More than 52 percent of the firms surveyed said they had discounted their products and services in response to the recession in December, compared to 40 percent who indicated they did so six months earlier.
As a result of the recession, many small businesses owners also lowered their standard of living (42 percent), made pay cuts (35 percent), reduced employee benefits (29 percent), shortened the work week (25 percent) and laid off valuable staff (23 percent).
The credit crunch has been a recurring issue for small firms as the recession has deepened, and many have been forced to take extraordinary steps to fund their operations.
Almost half of small business owners surveyed in the University of Maryland study met their capital needs by cutting their own pay; 42 percent took a loan from their savings, 39 percent relied on credit cards; 33 percent tapped a business line of credit; 21 percent took out a bank loan and 14 percent took out a home equity loan.
In results that dovetail with Osborne’s observations, few have relied on outside investors (5 percent) or SBA loans (4 percent). Bank loans have become increasingly scarce. A fifth (18 percent) of all businesses indicated that bank loans had gotten scarcer in the past year. Among those who took out bank loans, 43 percent believe the source is getting scarcer.
With those broad trends as a backdrop, micro-business owners feel frustrated and abandoned. Indeed, if small businesses have long been a stepchild in Washington, micro-businesses have been an orphan.
The problem with most administrations and SBA programs to date is that they are targeted at companies already in business with the idea that they can be encouraged to create jobs. But more effort needs to be focused on tapping the nation’s vast pool of unemployed and providing seed capital and expertise to help entrepreneurs start new businesses – the real engine of job growth.
But if the government creates programs, will micro-business owners take advantage of them?
“Most micro-business owners are stuck between a rock and hard place. They have the pure grit and strength to start a business from zero. But all too often you will find people with a product who push it out there. The rest of the stuff they don’t have time for,” Osborne says.