Small Businesses Make a Great Big Comeback
Business + Economy

Small Businesses Make a Great Big Comeback


In January 2010, two years into the housing collapse, Mike Solomich took a risk by launching an online retail business of hardwood flooring called Direct Hardwoods. Several long-time online hardwood floor retailers had just gone out of business, which would have scared off most startups, but Solomich figured that with big competitors gone, buyers would be looking for suppliers. After a good start in 2010, sales turned flat in 2011. “There were some periods when I had questions about it,” he says. But he stuck to his business plan, focusing on fast shipping times and good customer service. This January, the company’s numbers jumped. If this month’s sales figures hold, the company will be up 15 to 30 percent in 2012. Since January is normally a slow time for home renovation and construction, Solomich feels good about the year ahead.

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If the moods of small business owners can be trusted, 2012 could be the year the economy takes off. In January, the National Federation of Independent Business (NFIB) reported that optimism among small business owners has increased for the last four months. In another survey in December  led by polling firm Zoomerang, 40 percent of respondents said they feel “optimistic” or “very optimistic” about their business prospects for the new year. And in a TD Bank survey of 300 East Coast small-business owners in December, 74 percent said they expect to meet or exceed revenue projections for first-quarter 2012, up from 61 percent the previous quarter.

“The outlook for small businesses is the best it’s been in about 3 or 3½ years,” says Jeff Thredgold, an economic forecaster and consultant for Zions Bancorporation.

The state of mind of small firms matters since these companies—which the U.S. Small Business Administration (SBA) defines as having fewer than 500 employees—account for so much hiring. For example, they employ about half of U.S. workers and generated 65 percent of the new jobs over the past 17 years, according to the agency. Numbers like those aren’t lost on Washington. “The big companies generally get most of the attention in our economy. But it’s small businesses like yours that help drive America’s economic growth,” President Obama told a group of entrepreneurs and small business owners last February. On Tuesday, the president told his cabinet he plans to give small business more tax breaks and eliminate capital gains for small firm investments in his 2013 budget.

Call them small but mighty. Take Butler’s Grooming, a luxury men’s grooming salon in Birmingham, Alabama that opened in June 2009 in the teeth of the recession. The company has doubled its sales in each of its first two years. Co-founder Christopher Butler says this year they’ll open a second location and launch an online store to sell high-end male-oriented personal care products like shampoos, razors, and colognes. Ultimately, he says, they’d like go national.

Another company is undermining the idea that all textile manufacturing now happens off-shore. School House, a made-in-America producer of college apparel that started in 2008, projects that they’ll turn their first profit this year. That’s two years ahead of schedule, says marketing director Melissa Dohmen, who adds that they expect 2012 to be a “big banner year” for the company. 

And Ziad Ghamraoui, who opened a new pharmacy last June outside Ann Arbor, Michigan, says profits have grown 8 to 12 percent per month since he launched.

Three of the four—Butler, School House and Direct Hardwoods—said their companies will hire more staff this year. Butler, for example, will add 13 employees, up from the current 7. And though Ghamraoui isn’t planning to increase headcount this year, he hired an additional pharmacist last year to manage the workload. That mirrors the national trend. Pepperdine University researchers reported last September that 40 percent of small businesses they surveyed planned to add staff in the following 6 months. The NFIB results even showed that 15 percent of survey respondents have job openings that are hard to fill, the second-highest reading in 39 months.

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Small business is rebounding in no small part because banks are loaning money like they haven’t since the recession hit. A key lending index reported this month that the number of loans to small businesses hit a four-year high in November and jumped 62 percent between June 2009 and November 2011. The SBA has helped boost those numbers—in fiscal 2011, the agency approved a record $30.5 billion in loan guarantees, a 35-percent increase over 2010. And Chase and Citi both recently announced major increases in small business loans in 2011.

Still, the atmosphere is not back to 2006 when lenders were showering borrowers with money. “In general, things were hog wild before the economy went south,” says Hoffman. He worked at a national lender before the crash managing the approval of “micro-loans” up to $150,000. “If you had a good credit score, you could leave the bank after opening a checking account with $50,000 in credit,” he says.

Now loan officers have little leeway to make exceptions to their lending rules, as they often did before the crash, says Hoffman. On small business loans, that means they have to see flat or increasing profits, reined-in expenses, cash flow that’s running 20 to 40 percent above the monthly mortgage payment, 6 months to a year of cash reserves, and credit scores above 650. And anyone buying an already-established business will need to put down between 15 and 30 percent in cash.

Certain small-business sectors are doing especially well. The number of franchises is projected to increase by almost 2 percent in 2012, according to the International Franchise Association; franchises employ 12 percent of the U.S. private sector workforce. Farmers also are turning profits—their incomes grew by an average of 28 percent in 2011 because of high crop prices. And as larger companies continue to outsource, advertising and public relations agencies are thriving. Sales in that sector, including small firms, were up 11 percent in 2011, according to Sageworks, which analyzes private company profits.

For now, most trends confirm the good mood that small proprietors are feeling. Consumer confidence, though dipping slightly in January, went from 40.9 in October last year to 64.8 in December, and GDP rose almost 3 percent in fourth quarter 2011, its best showing in a year and a half. Small firms’ improved outlook is already affecting the rest of the economy.  Between November 2010 and November 2011, fully 51 percent of all new jobs in the country were created by the smallest companies—those with less than 50 workers—according to private payroll firm ADP. When it comes to small business owners and economic growth, a smile really may be contagious.