The Wall Street Journal
By: Dana Mattioli & Sarah E. Needleman
July 6, 2011
Many big public companies are likely to report strong second-quarter profits, but that isn't the story on Main Street, where small businesses are grappling with jittery customers, rising costs and tight credit.
The owners of many small businesses say economic uncertainty and inflationary pressures have led them to delay hiring and capital expenditures. Seventy percent have no plans to expand their staffs over the next 12 months, according to a recent U.S. Bancorp survey of 1,004 U.S. companies with annual revenue of $10 million or less.
While about half projected higher revenue a year from now, 78% said the U.S. economy is still in a recession, and many expected it to remain there next year. In May, for the third month in a row, the optimism index of the National Federation of Independent Business declined.
At big public companies, cost-cutting and a rebound in sales, particularly overseas, have provided a boost. But because small businesses account for more than half of private-sector employment and gross domestic product, their owners' caution bodes ill for the broader economic recovery.
Last year, Tribute Inc., a developer of inventory-management programs, thought it was seeing a rebound when the time required to close deals improved. But by the end of the year, sales had leveled off and the recovery had faded. Now, getting new contracts across the finish line is taking as long as six months.
"Given what our customers perceive as a flattening in the economy, they're being very cautious on capital expenditures," says Tim Reynolds, president of Tribute, which is based in Hudson, Ohio, and sells its software to small industrial distributors. Tribute is continuing to require its 35 employees to take a day of unpaid vacation every month, a policy it implemented during the recession, as it waits for sales to pick up. Mr. Reynolds is also delaying investment, putting off buying software that would help him manage his sales prospects and customers but could cost as much as $50,000.
"Small businesses aren't hemorrhaging, but they're still waiting for that significant uptick," says Todd McCracken, chief executive of the National Small Business Association.
One issue is credit. Small businesses are still having a hard time getting bank loans. Lending to them fell 2.4% in the first quarter, the Small Business Administration's Office of Advocacy reported last month.
BleachSafe Towel Co. negotiated a larger line of credit in August, but it was only enough to keep the business afloat, not to help fund more hiring, beef up inventory or make other long-term investments.
"Small business is really affected by the bank teller," says Morris E. Sitt, founder of the New York company. "I've never seen banks like this. It's so hard to get the proper financing."
The company is also juggling rising commodity costs. BleachSafe expects its revenue to rise 20% this year, but its cotton costs are up 30%. The company, which has its towels made at a factory in China, is also grappling with the strong Chinese yuan, which is pinching margins.
With these pressures on profit, Mr. Sitt says he's waiting for further improvement in the economy before investing in more workers. BleachSafe, which has 21 employees, recently hired one part-time employee rather than the two full-time salespeople it wanted, and Mr. Sitt cut back on an order for a new spa product he's testing.
"These days, I'd rather take it slow than go out like gangbusters and have a problem six months from now," he says.
Phoenix Products Inc., an Avon Lake, Ohio, faucet maker, is also proceeding with caution, putting hiring, system upgrades and product updates on hold to conserve cash in case of another downturn.
"Things are OK right now, but I'm acting as if we're in the midst of the recession because of all of the economic uncertainty," Phoenix President Raymond Arth says.
His caution stems from recent unemployment and housing-market data, as well as the growing federal deficit. Phoenix's main customers make recreational vehicles and factory-built housing, and if RV buyers get spooked by bad economic news, he worries that orders for his faucets will eventually suffer.
So far, sales are up 7% from a year earlier. But Phoenix's copper costs have increased 35% during the period, and prices for the plastic it uses are also rising. In May, the company pushed through its first price increase in three years, but it's reluctant to raise prices further even though its input costs continue to rise.
"If we increase prices again, we're afraid it will affect sales," Mr. Arth says.
Small companies also aren't as adept at tapping the fast-growing emerging markets that larger companies are relying on to increase sales. Tribute's Mr. Reynolds says he couldn't expand overseas without rewriting all his software first.
"We only sell domestically," Mr. Reynolds says, "so I don't have the opportunity like a public company does to exploit foreign markets that are growing faster."
Write to Dana Mattioli at email@example.com and Sarah E. Needleman at firstname.lastname@example.org