Business survivors will be 'lean, mean' after the crunch
The Small Business Administration (SBA) last week cut ceremonial ribbons and served chocolate chip cheesecake as it opened an ''answer desk'' where managers can phone in for help with business problems.Skip to next paragraph
Subscribe Today to the Monitor
But agency officials admit the new program can not offer managers much help with the tough question of how to avoid being swallowed up in the rising tide of business bankruptcies in the United States.
''If a business is going down for the third time, it is likely that at that point neither the SBA nor anyone else can bail them out,'' says SBA chief counsel for advocacy Frank Swain.
And firms are going belly up at a record rate as a result of high interest rates and sluggish sales. So far this year some 19,170 companies have failed. That is more than have gone bankrupt in any year since 1933. By year's end, 24, 000 businesses will go bankrupt, estimates Dun & Bradstreet vice-president Rowena Wyant.
The recent decline in interest rates offers beleaguered businesses some help. Roughly one third of all business loan costs are tied to the prime rate, which last week was cut from 13 percent to 12 percent.
''Those firms (with floating rate loans) will see the benefit right away. The rest (will) when they renegotiate their obligations,'' says William Dunkelberg, chief economist for the National Federation of Independent Businesses.
But at the typical firm, interest costs account for a relatively small slice of the budget and equal about 4 percent of sales. Thus, a big interest rate decline is needed to produce a major impact. ''The thing that will start saving firms is an improvement in sales,'' Mr. Dunkelberg says.
A major reduction in bankruptcies is not likely given the projected economic outlook for 1983. For example, the Business Council, a group of executives from the 100 largest US companies, predicts the US gross national product will grow by only 3 percent next year.
If the recovery is that modest, ''business failures will continue at high rates well into the next calendar year,'' says Tom Gray, chief economist for the SBA.
And the troubled state of manufacturing is seen in the Federal Reserve Board's announcement Oct. 15 that factory production dropped 0.6 percent in September. Factories are working at their lowest level of activity since April 1977.
There is little cheer in the retail sector either. ''If sales don't show an upswing by Christmas, there will probably be an upturn in retailer bankruptcies during the first three months of 1983,'' says Dun & Bradstreet's Ms. Wyant. She notes that so far this year, business failures have occurred more among manufacturing and service concerns than among retailers. However in the week ending Oct. 7, the most recent period for which data is available, there was a sharp hike in the number of retailers who failed.
Even after a recovery is firmly in place, bankruptcies stay up for a while as companies damaged by the downturn go out of business. And bankruptcy statistics fail to report the number of companies that chose to fold but are able to pay all their creditors. Some economists say that for every firm that declares bankruptcy, four or five close voluntarily.
Bad economic times place a special strain on small firms. ''The cushion of resources between them and insolvency is thin. And usually they are much more in debt than large companies,'' notes Ann Eskesen, director of the Small Business Resource Development Center At Bentley College in Waltham, Mass.
Perhaps because many such small firms have already folded, ''the sharpest increase in bankruptcies has been among companies with liabilities (debts) of $ 100,000 or more,'' Ms. Wyant says. In the week ending Oct. 7, 330 such firms failed, while 268 smaller companies went under.
While big firms like the Chrysler Corporation can pressure their creditors and the government for concessions when times get bad, smaller companies have fewer options. Who helps them? ''Nobody does. When a small company gets in trouble it tends to hunker down, tighten up on internal activities and turn in on itself,'' Ms. Eskesen says.
Organizations which make it through the experience are better for it. ''Three years of hard times means that businesses which have survived are like a marine who has just finished training. He is lean and mean and ready to go,'' notes SBA economist Gray. ''When the economy turns up, they will have good profits.''