Small Business Faces Sad Week

THE destruction or damage to perhaps 10,000 businesses during the Los Angeles riot - most of them small businesses - couldn't have occurred at a more ironic time.

This week is "small business week" in the United States.

At least 3,000 of those Los Angeles businesses may not reopen, observers there say.

Across the nation, the US small-business community has been hit by the recent recession.

Bankruptcies are still on the rise. Job hiring is down. The pace of new-business formation is off substantially compared to prior recoveries.

Moreover, the main concerns of small businesses - soaring health-care costs for employees, government red tape, the need for bank credit, and tax relief - have yet to be fully addressed by the major presidential candidates, small-business experts say.

"The small-business sector is very weak right now," says an economist with Bear Stearns & Co., an investment house. "Since the first quarter of 1991, new business formations in the US, including smaller firms, are up about 5 percent. But that pace is only about half the rate of increase for business formations in a typical economic recovery."

That is unhappy news, considering that small businesses are the linchpin of the US economic system. "Some 58 percent of the entire private work force in the US is employed by small businesses of 100 people or less," says Terry Hill, a spokesman for the National Federation of Independent Business (NFIB) in Washington. All told, there are some 5 million small businesses that employ workers; another 5 million firms are individual proprietorships, Mr. Hill says.

Some economists estimate there may be as many as 20 million small businesses. Many unincorporated small-business owners file personal, rather than corporate, income tax returns, and are thus difficult to track.

Whatever the number, the economic impact of small businesses is enormous. Total annual sales of companies with 500 or fewer employees are in excess of $4 trillion, according to US Department of Commerce figures. That represents a little over half of the sales of all firms with employees.

Small businesses are still the main generators of jobs. In recent years, large firms such as IBM and General Motors, as well as entire business sectors, including banking, insurance, and financial services, have laid off thousands of workers. But according to Bear Stearns, between 1982 and 1986, the small-business sector created 14.2 million jobs in new businesses; another 4.5 million jobs were added in existing small businesses.

On Long Island alone, 2,800 businesses started up last year.

Starting in the late 1980s, small businesses were hit hard by changing economic circumstances. Many entrepreneurs were unable to get access to capital because of intense competition for credit from corporations involved in mergers and buyouts. Then came the recession. Since early 1990, business failures have outpaced business formations. Dun & Bradstreet estimates that new business incorporations increased about 2.2 percent between October 1990 and October 1991; but business failures shot up by 40 percen t.

Small businesses are not expected to undertake much hiring in the next few months. According to a recent NFIB survey, 20 percent of the firms surveyed say they plan to expand employment during the months ahead; but 7 percent will actually reduce employment. These are the "worst March figures since 1986," when monthly data were first collected, according to William Dunkelberg, chief economist for the NFIB.

Still, the March survey finds that small-business owners are slightly more optimistic about the recovery than in February.

"This is a very tough economy for small business owners," says Rieva Lesonsky, editor in chief of the Entrepreneur Group, which includes Entrepreneur Magazine.