Small businesses and the recession

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Oct. 27, 2009

KPCC business analyst Mark Lacter talks about how small businesses are fairing through the recession.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. As we come out of the recession, Mark, how are small businesses faring?

Mark Lacter: Steve, I went over a recent American Express survey of small business owners – and the good news is that more than half believe the economy is getting better, and some even say they’re doing well because they have less competition to worry about.

But then you have 17 percent of the sample saying they are at risk of going out of business (up from 11 percent six months ago), and about a third saying they have used their own money to keep their businesses going (that could mean personal savings or even credit cards). So it’s a mixed picture at best.

Julian: We don’t often hear much about small businesses.

Lacter: No, you normally don’t because, well, they’re small and what happens to them will not make front-page news. But keep in mind that L.A. County has 400,000 business establishments and of those 385,000 employ fewer than 50 workers. So their problems are everybody’s problems.

And many of them are in a bind because there’s just not enough business coming in the door and too much going out the door. That’s why there’s been so much concern about health care – small business owners are looking at an average increase in premiums of 15 percent next year.

Julian: And those are the business owners that offer health care.

Lacter: Exactly. Which is also why small many small business owners are worried about any sort of government mandate that would come out of the health care legislation. But what they’re really worried about, Steve, is finding credit. I mean, you can’t live off your charge cards forever.

Now President Obama has just announced programs for small business owners that are supposed to loosen up the logjam in getting financing, and L.A. Mayor Villaraigosa just announced a $15 million loan program for small businesses in the city.

Julian: Is that enough?

Lacter: Well, no – not by a long shot. Small businesses will only get relief when, first of all, the economy improves to the point where people start buying stuff again, and secondly, when the banks feel comfortable enough about their own financial situation that they’ll start lending again. And we’re not there yet.

Julian: Smaller banks are nervous – why?

Lacter: They’re going through the same aftershocks as the major banks, especially with commercial loans – the same kinds of loans these small businesses take out. The banks need to have enough of a financial cushion in the event that the loans they made over the last few years fall through, which undoubtedly they will.

Good example is City National, which just reported a big drop in its third-quarter earnings because of nonresidential construction loans. East West Bancorp, which is the second-largest bank headquartered in the L.A. area, reported a loss of almost $80 million, largely because it had to set aside so much money to cover future loan losses.

Julian: Are you surprised?

Lacter: Not at all – commercial property values have fallen off a cliff in the last couple of years because you have empty storefronts and empty offices, and the people who own all that property don't have enough money coming in to pay off their loans.

Understand, these banks were not necessarily reckless in making their lending decisions – a few years back they saw an economy that was going great guns, and besides, if they didn’t approve a loan, maybe the guy next door would.

So now comes the cleanup time – and Steve, it’s important to keep an eye on these smaller, regional banks. Their willingness to lend over the next few months will tell us whether companies can expand – and that, of course, determines how quickly the local economy can get back on its feet.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes a business blog at LAObserved.com.

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