High interest, inflation hit small business extra hard

A combination of high interest rates and unrelenting double-digit inflation is hitting hard at thousands of small businesses spread throughout the US economy. Many of them, it is said here, are being driven into serious financial trouble.

While large consumer-goods manufacturers and industrial corporations continue to perform well in the marketplace -- thanks to continued levels of bullish consumer spending -- small businesses are increasingly finding themselves in real hardship.

In fact, says James D. McKevitt, who heads the Washington offices of the National Federation of Independent Business Inc., a trade group representing small firms in the United States, indicators are beginning to project a "severe recession" this summer for small companies, no matter how well the overall economy performs.

"Firms that want to expand are having a very difficult time" finding loan money, given record interest rates, says William J. Dennis, the federation's chief economist.

He says that although smaller companies are still able to obtain loans for "cash flow" (to finance inventory purchases or for short- term management needs) , there is a question about how much longer that will continue as larger firms and corporations leave the bond market and turn to commercial lenders.

It is known that the Small Business Administration is already bracing itself for an increase in the numbers of smaller companies forced into bankruptcy because of worsening economic conditions.

The seriousness of tightening credit and high inflation for smaller firms is indicated by a number of new findings:

* Late last week the Independent Business Federation released its economic report for the fourth quarter of 1979, covering the period from mid-October to mid-January, 1980.

The report, prepared in part by William C. Dunkelberg, an economist at Purdue University, showed, for the first time in three years, a net decrease in employment by smaller companies.

Worse, notes Mr. Dennis of the federation, it showed the largest increase in inflation (as measured in price increases by smaller firms) since the survey was first prepared in 1973.

* Meantime, the federation is still working on data indicating how well the smaller companies will do for the first quarter of 1980, the ending in mid-April.

What the preliminary data suggest, Mr. Dennis says, is that there will be another quarter of net decline in employment, while prices will again rise.

* During the past week or so, because of soaring interest rates, a number of major corporations and state and local government agencies either postponed or scuttled initially projected bond sales.

Now, many of those same corporations and government agencies are expected to turn to local banks for short-term financing needs.

For banks -- finding themselves increasingly strapped for readily available loan dollars in large quantities -- that will mean difficult choices about deciding who will have first choice on extensions of credit.

Banking sources privately concede that it is usually "more advantageous" for a bank to extend credit to a large corporation rather than a smaller company, since large corporations can typically afford higher interest costs, and also because it is usually cheaper for a bank to pay "servicing" charges on accounts with larger corporations.

Corporations tend to consolidate a wide variety of corporate business functions with a bank, reducing costs to the bank.

For small businesses in general, federation officials say, the main concern at present is not so much a possible sharp dropoff in sales, but rather, tightening credit, high interest rates, and longer and longer repayment periods by their customers.

Mr. Dennis says most small companies are complaining of high inventory levels. But this means that many of them are having difficulty making payments to their suppliers.