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Thursday, Mar 28, 2024

TROUBLE—Big Problems Seen for Small Biz in Aftermath

Experts are bracing for a rash of small business bankruptcy filings as the effects of the Sept. 11 disaster reverberate through the economy. In the San Fernando Valley, companies supplying airlines and those connected with tourism have already begun to feel the economic aftereffects of terrorism. But many say the problems are likely to extend beyond those industries as the economy continues its tailspin. Many of these businesses were struggling prior to Sept. 11. The horrific disaster and subsequent anthrax incidents may be enough to push many over the edge. Though the numbers do not yet show a significant rise in filings, bankruptcy attorneys say they’ve begun to notice longer lines at the U.S. Bankruptcy Court in Woodland Hills and they are getting more calls from clients asking, “what if?” “I think we’re just seeing the tip of the iceberg,” said Stephen L. Burton, whose Sherman Oaks law office specializes in bankruptcies. “Watch out a year from now.” Concerned that small businesses are especially vulnerable in a disaster, the Small Business Administration in recent weeks instituted a September 11 Economic Injury Disaster Loan Program, making loans of up to $1.5 million available to companies nationwide who were affected by the attacks. Just days after the program was announced, the agency’s western region offices in Sacramento had already received hundreds of inquiries from businesses seeking assistance. Closer to home, the Valley Economic Development Corp. has placed calls to many of its borrowers and begun trying to restructure loans to reduce the payments required. The agency has also requested that the federal government allow it to use money allocated to a Northridge Earthquake relief program for the current crisis. “Right now it is a little scary,” said Roberto Barragan, president of the VEDC. “Any business involved in retail, transportation or tourism is particularly scared.” Many small business owners finance their operations through credit cards. Even when business slows, they continue to borrow against their credit lines, and such borrowing had escalated well before Sept. 11, bankruptcy attorneys say. “The problem is things were not good before 9/11,” said Richard A. Brownstein, a partner at Tarzana-based law firm Wasserman, Comden & Casselman. “I have a sense that we haven’t seen the worst of it.” Through September of this year, Chapter 7 filings in the San Fernando Valley totaled 7,583, a .075 percent increase from the same period in 2000, according to figures compiled by the U.S. Bankruptcy Court. Chapter 11 filings are down to 53 from 71 last year. And Chapter 13 filings also declined to 1,624 from 1,729 last year. The pattern is pretty much the same throughout the Central District. Bankruptcy attorneys explain that the current numbers don’t tell the whole story. Many small businesses continue to borrow until their creditors cut them off, and they don’t seek assistance until these creditors begin legal proceedings. “If they’ve run out of credit, the (credit card company) calls start to come in for about four months,” said Burton. “By six months, it’s charged off and it goes to collection. Things go out to legal at about the one-year mark.” Some companies, especially those doing business with airlines, have already begun to seek assistance. A local company that services airlines found its payments cut off completely in the immediate aftermath of the attacks, according to the VEDC, which holds the company’s loan. The agency restructured the loan to reduce payments and the airlines have since resumed paying their bills, thanks to the federal bailout money they received, but Barragan points out that other businesses may not be so lucky. “This borrower has sales of about $20 million a year and handles a component that’s important to the industry,” said Barragan, who declined to name the company. “But any business with sales of under $100,000 could still be waiting for their check right now.” The pecking order of who gets paid first a larger company with a critical product or service is in a far better position than a smaller business with a product that’s not essential is not exclusive to the airline industry. That leaves small businesses least likely to be paid by customers caught in a downturn. Added to that, these companies often don’t carry insurance to carry them through hard times, they are typically undercapitalized to begin with and, unlike their larger counterparts who may have many options for trimming costs, they may have no wiggle room to make significant reductions in overhead. “Many small businesses are operating month to month,” said Rick Jenkins, a spokesman for the SBA’s disaster office in Sacramento. “They’re able to pay all their obligations, but it becomes tougher and tougher to put away for catastrophic events, and what took years to put together can be wiped out in a couple of seconds.” As a rule, a business surviving from hand to mouth can’t withstand more than 90 days if money stops coming in. And many of the companies that are now most vulnerable were already hurting before Sept. 11. “I had a few businesses that I was helping reorganize prior to 9/11 and they were in bad financial shape,” said Laurence Merritt, a Woodland Hills attorney who has handled bankruptcies for more than 25 years. “But if creditors had cooperated and given them some accommodation, we probably would have been able to turn them around. After 9/11 a bad situation became even worse, so a number of those clients have now filed Chapter 11.” Healthy businesses are not immune either. Hoping to capitalize on what seemed like a strong economy only a short while ago, one VEDC client pumped profits back into an expansion, only to find business dry up in the past month. “I spent all my money this summer to open a cappuccino bar,” said Shahram Kerameddian, the owner of Sean’s Caf & #233; in Venice Beach. “I bought a cappuccino machine, a grinder, I upgraded the electrical system and the business was good.” But sales from the new addition at Sean’s Caf & #233; dropped from about $100 to $150 a day to about $20 a day after the terrorist attack. Kerameddian, who had been able to pay his rent from cappuccino bar revenues alone this summer, has now fired three of his four employees, and he has stopped ordering his supplies wholesale. “I don’t order any big food anymore,” he said. “I get vegetables from the market and I go to Costco to buy burgers. If I order through companies, they bring boxes. If you have customers, it’s no problem. If you don’t, you have to throw it away.” Kerameddian is also working with the VEDC to get an SBA disaster loan to tide him over until Christmas, when he hopes the tourists will return to Venice Beach. Bankruptcy attorneys and others familiar with small business operations say that the strong economic climate of recent years convinced many companies to expand, and, now that the downturn is becoming worse, they are carrying more debt than ever. “Companies that are heavily leveraged are the ones that are most vulnerable,” said Merritt. “I’m sure there’s business being hurt (because of the sector they’re in) but the larger question to me is who is highly leveraged. You can have in the same industry one company with low overhead and the same business across the street with high rent and a lot of debt and the (low overhead) business should be able to get through.”

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