Future Is Brighter in 2011, but Problems Linger
Companies, helped by a loosening in the credit markets as well as improvements in consumer spending, are showing some interest in raising prices and hiring new employees.
But most improvements are expected to be marginal, likely benefiting only the healthiest small businesses while the rest continue to struggle, relying on survival tactics adopted during the recession, such as deep discounts to lure customers and operating with fewer hands.
"We'll see improvement but not much," says Tim Kane, an economist for the Kauffman Foundation, an entrepreneurship advocacy group in Kansas City, Missouri.
Here's a look at what's in store for small businesses this year:
A little relief in lending
New government programs, such as the recently created Small Business Lending Fund, a $30 billion initiative directed toward community banks, are expected to boost the number of loans that banks dole out this year.
But amid strict regulations, banks will continue to shy away from anything but the strongest companies, experts say, and are still a way off before lending returns to a consistent level. "I see it as a five-year cycle, and we're in year four," says Paul Merski, chief economist for the Independent Community Bankers of America, a lobbying group in Washington.
Merski says he sees small-business borrowing increasing both this year and next as the economy starts to regain its footing and the regulatory environment slowly eases.
Bill Dunkelberg, chief economist of the National Federation of Independent Business, a Washington trade group, says loan volume fell in recent years because healthy companies resisted taking on more debt and struggling companies weren't creditworthy enough to satisfy bank underwriters. The uptick this year, he says, will come from revenue increases, which will spur small businesses to expand inventory or make capital improvements.
Business owner Tom Scanlan, president of Estate Products Inc., in Louisville, Kentucky, says he expects better access to credit in 2011, but only because he spent the last year cultivating a relationship with a small community bank — the only lender that would work with him — and his stonework company is poised for growth. "If we need to increase our line of credit as a result of growth," he says, "our bank is on standby."
Aside from lending, conditions are expected to improve for fast-growing, early-stage companies that rely on venture-capital support. While investors in recent years had their funds tied up in later-stage companies, many of these concerns have since gone public, freeing venture capitalists to invest again in younger companies.
The National Venture Capital Association announced this week that there were 32 venture-backed initial public offerings in the fourth quarter of 2010 — the highest since 2000.
"The older companies are leaving the nest," says Mark Heesen, president of the association. "From a startup perspective, I'd say those companies are in a better position in 2011 than they have been in several years."
Prices rise, but slowly
Small-business owners are looking to raise prices in 2011 after the blowout sales they offered to woo buyers last year took a big bite out of their bottom line. But making that switch won't be easy.
"During the recession, customers learned to expect discounts," says Catherine Tucker, who teaches pricing strategies at the Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Massachusetts. She expects many owners to take an incremental approach to raising prices in the year ahead.
Following record lows, 18 percent of 807 small-business owners surveyed in November said they planned to raise prices over the next three months, up from 12 percent a year ago, according to NFIB.
"You need to start thinking hard about which of your customers is going to be willing to pay a little more and target the products they buy," Tucker says, citing higher-end goods and services that would normally command a premium.
Some owners might modify their products, she adds, offering both higher-priced goods and cheaper options, until consumer spending picks up.
Whatever their approach, pressure will be on small businesses to start making money this year, says Martin Lehman, a New York-based counselor for SCORE, a national small-business coaching network.
He expects owners to jumpstart sales in the new year by boosting customer service or offering exclusive products, rather than raising prices. And instead of discounting prices even more, he's advising owners to offer add-ons or service deals to return customers, such as free deliveries, tech support or service repairs.
A few more job offers
On the employment front, small-business owners are expected to increase their headcounts in 2011, but with caution.
Fifty-four percent of chief executives plan to add employees this year, according to a December survey by executive-mentoring organization Vistage International Inc. of 1,729 small businesses with between $5 million and $50 million in annual revenue. It was the first time in three years that the majority of respondents to the quarterly survey said they intended to add jobs, reports the San Diego concern.
But that hiring might not happen in the next few months: Only 15 percent of firms in the Vistage survey say they expect to hire in the first quarter of 2011.
Last month, small businesses expanded their payrolls at a strong pace, according to data released Wednesday from payroll company Automatic Data Processing Inc. Privately held establishments with between 50 and 499 employees added 144,000 employees in December — more than triple the number of workers they added in November. Also last month, private concerns with fewer than 49 employees added 117,000, compared with an increase of 49,000 in November.
In December 2009, those businesses shed 56,000 and 51,000 jobs, respectively, according to ADP.
Economists attribute part of the recent growth to seasonal hiring. They also say that employers will still need to expand their payrolls far more to make up for the heavy job losses that occurred during the recession.
But small-business owners aren't likely to embark on such a hiring spree "until they see definitive signs of economic improvement," says Bill Driscoll, a district president for Robert Half International Inc., a staffing firm based in Menlo Park, California. "There's still concern that hiring could really hurt them."
Business owners in most cases will probably just add back some of the jobs they shed in recent years to relieve overworked staffers, speculates David Lewis, president of OperationsInc, a human-resources outsourcing firm in Stamford, Connecticut.
Steve Russo, president of F.A.B. Starpoint, a New York manufacturer with 115 employees, says he'll only add new positions this year if business continues to trend upward. Last year, the company's sales increased about 8 percent, following a 16 percent decline in 2009.
"As of right now, our plan going forward is to keep staffing as-is," Russo says. "We are moving forward very cautiously."