Small businesses struggle to survive downturn

updated 3:36 p.m. ET Jan. 11, 2009

It may be the final days of business for the Scandia Bake Shop. After almost 60 years of serving treats like julekake and Oslo rye bread, the Minneapolis store is worried it may have to shut its doors within the week, felled by shrinking sales, rising flour prices and a downright dismal holiday season.

"They come out in droves and you make most of your money between Thanksgiving and Christmas," said 60-year-old owner Gary Arvidson, who took over the business in 1993. "And then this year I was really counting on that and the economy went into the dumper."

Times are tough for small business owners, those whom politicians tout as the backbone of America. As the recession marches on, it's those businesses — which employ about half of the country's private-sector workers — that are particularly vulnerable to the squeeze.

To cope, small business owners — from neighborhood plumbers to graphic design firms — are paying employee salaries before their own, trying to renegotiate leases and pleading for customers on neighborhood blogs. But despite their best efforts, the customers aren't there.

"It's all feeding on itself," said Raymond Keating, chief economist at the Small Business Survival Committee, an advocacy group based in Oakton, Va. "People are scared. They're not quite sure what to do."

Not every small business is facing impending doom. But the economic quicksand brought on by the longest recession in a quarter century is getting worse as the nation's unemployment rate reaches a 16-year-high and banks become more careful about lending money. That's consuming even local favorites like Heinemann's restaurant chain in Milwaukee, Olsson's Books & Records in Washington, D.C., and The Music Mill, a popular performance space in Indianapolis.

Small businesses — defined by the government as having 500 or fewer workers — are a key portion of the country's commerce food chain. They account for more than 99 percent of all employer firms, according to federal statistics, pay nearly 45 percent of the country's private payroll and produce almost a third of the nation's export value.

That means when they hurt, everyone feels the pain. Closures affect communities, where friends are co-workers and customers, and the cost-cutting creates a hard-to-stop cycle. Charitable donations wilt. Storefronts sit empty. Cities and towns get less tax revenue, and have to cut their budgets. And people wind up spending even less as those who are unemployed — or those who worry they will be — trim their own budgets at the expense of other businesses, large and small.

Eric Parsons / AP I'm heartbroken," says Bonnie Mihalic, left, of her decision to shut her Ventura, Calif., shop.

While falling sales and the credit crunch have made headlines, the small business owners left standing are facing problems as varied as the businesses they run. Manufacturing is slowing. Layoffs are looming. Financing is hard, if not impossible, to come by. Vendors are being skittish about extending credit for inventory. Rents are rising. And profits are falling — or vanishing altogether as sales slip.

Ajay Ekesa, 29, worries that his Kahawa Coffee House in Chicago may not last through the spring. He's spreading flyers around the neighborhood, opening his shop's space for community meetings and writing letters to a popular local Web site, asking them to publicize his plight.

"Right now I'm trying to do everything I can do," he said, adding that he's using his own money to pay the coffee shop's bills and the salaries of his two employees. "With every hour that I'm staying open, I'm not making money. I'm losing money, which doesn't make much sense."

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That's why Bonnie Mihalic closed her eponymous costume and bric-a-brac store on New Year's Eve, after sales fell by 50 percent during the all-important Halloween season. When she shut down the Ventura, Calif. shop, she laid off her seven employees and said goodbye to loyal customers she had come to know during 30 years in business.

"They're like my children. Or my grandchildren," the 76-year-old said. "I'm heartbroken."

Now she's emptying her 10,000-square foot store and moving things to a warehouse. If she doesn't get rid of her stock, including hundreds of wigs, tiki torches, and leftover holiday decorations by the end of the month, she'll owe another $15,000 in rent.

It's not just communities that feel the pain. Small businesses that are pinching their pennies also thwart corporate America.

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