Special Report Your Job

Why small companies keep shedding jobs

With slow sales and tight credit, many small businesses are caught in a death spiral that contributes to the hemorrhaging job market.

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By Emily Maltby, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Employment at small businesses with 500 or fewer employees decreased by 614,000 positions in March, marking one of the sharpest drops yet in 14 consecutive months of declines, according to an employment report released Wednesday by payroll processor ADP (ADP, Fortune 500).

The magnitude of the losses indicates that the recession is ravaging the small companies that employ an estimated half of America's workers.

Compared to large firms with more than 500 employees, which shed 128,000 jobs, those with fewer than 50 employees lost 284,000 jobs.

"The resiliency displayed by these businesses earlier in the recession, as compared to medium- and large-size ones, is no longer apparent," says Joel Prakken, chairman of ADP's research partner, Macroeconomic Advisers.

Although shaving staff is often a last resort, many owners are finding themselves with no other choice if they want to keep their business alive. Credit is tight, consumer spending is down, entire industries are cutting back, and customers are paying their bills more slowly than they used to.

"It's the domino effect," says Pat Veesart, director of the Kansas Small Business Development Center at Garden City Community College. "In a city like Wichita, for example, there are layoffs in the aircraft industry and there's an ancillary effect with the suppliers, but also an ancillary effect with the bars and restaurants who cater to the employees of those firms when they are on lunch breaks."

Take Dorothy Gonzales, owner of A-Plus Counters in Clearwater, Fla. After five years of growth, she and her husband saw a dip in the demand for their countertops in 2007, as new home construction took a dive. Homeowners also held back on making renovations that would have spurred business.

"As the economy changed, we got hit hard. We started by pulling our salespeople because we couldn't afford them," she recalls.

In September she approached a lender to seek a Small Business Administration-backed loan but was told that because she had a loan for a company truck that was still active, she was ineligible for another loan.

"My credit isn't bad, I always made the payments on that loan, and I never had a great deal of debt," she says. "When the [loan officer] told me she couldn't help, my reaction was, 'Well, what's the point of the SBA if I can't go to them when I need help?'"

Gonzales has pulled $235,000 from her own savings to keep the business going. But paying employees continues to be a problem, and Gonzales had to lay off more of her staff. In 2007 she had 60 workers. Today she has 12, and is unable to offer them health insurance.

"You work your whole life, and in a blink of an eye - it's just not fair," she says. "The fear is that we'll lose everything, but we seem to be keeping busy enough to stay open because we're still a vendor for Lowe's and we get some word-of-mouth jobs."

Veesart says that as the job market remains grim, more people are walking through her the doors of her business development center asking for help starting up their own business. She's also talking with many established small business owners who are seeking expansion help, but they're doing it cautiously.

"Entrepreneurs are risk-takers, and many feel that this is the time to establish your name when others are leaving," she says. "But if they expand, they are being careful about it - they don't want to hire too many people and then have to lay someone off. They'd rather have solid jobs for three than shaky jobs for six."

Government efforts to revive the small business sector haven't yet had a significant impact. The Small Business Administration will soon release its loan statistics for the just-ended first quarter of 2009, a figure expected to be grim. President Barack Obama said last month that the agency was trending toward a loan volume of less than $10 billion for the year, almost half what it did last year.

"The Fed is working to heal the markets and the Treasury has details on proposals to buy toxic assets. But we have to see that they are actually working. We need to see credit flowing out of banks," says Macroeconomic Advisers' Prakken. "It'll [take] months for the stimulus to start having a larger influence. We're only on the leading edge of that now."

As for Gonzales' countertop business, she is not optimistic that it will rebound.

"We'll never be as big as we were. If we grow again, we'll have to hire again because our countertops require a certain craftsmanship and we need people with those skills," Gonzales says. "But right now we can't afford to grow the way we did before." To top of page

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