Wall Street may have gotten its clock cleaned in the past six months, but the pain of brokers in tony Park Avenue abodes can sometimes pale in comparison to the devastation wreaked on small businesses across the country, not to mention the people who work in them.

Johnie Sanders is a victim of the tough times. Until a few months ago, he was an employee of a small Virginia mom 'n' pop archaeology business, of all things-a company whose services are required by anybody who does any digging in sensitive places.

The company takes in both private and federal money, but in the last couple of years, the revenue had dropped off. Sanders says he should have been laid off a year ago the way the business was going, but his boss kept him on out of loyalty, tapping money wherever he could, often at great personal cost.

"He couldn't even look me in the eye when he gave me notice, and I could tell he had been crying about having to do it all night."

In an age where bank financing has turned into a dust bowl, many small business owners have had to take desperate measures to save their concerns. This has meant turning to credit cards to keep financing their businesses. Or taking out second mortgages and putting their own houses in jeopardy. Some even raid their children's college funds or spike blood out of their 401(k) plans.

It's probably not surprising that 91% of small business owners in a recent survey by the National Small Business Administration think the economy is worse off now than five years ago. And more than a third of those polled lacked confidence in the future of their own enterprises.

"Supplies have skyrocketed in price, and shipping has increased," says Monica Dillion Brown, who makes cakes and other desserts in Reading, Pa., as owner of her own company (called In Your Home Catering and Confections). "Even though my sales have basically equaled out," she says, "costs are killing me."

She says the holiday season helped, though it's still very difficult to find financing from banks. "And in a way, you can't blame them. But at the same time, it has been my experience that it takes money to make money. So if the banks aren't willing to drop that wall a little, I don't see how things are going to get better."

Stewart H. Welch III, founder of the RIA firm Welch Group LLC in Birmingham, Ala., says that banks have begun tightening the noose even on larger customers-calling loans and shortening credit lines to strengthen their own capital. "Cash is king," says Welch. "This is a crazy thing, but some of the banks are looking at it and saying the place we can raise capital right now is from the 'A' customers ... because those are the ones they are sure they are going to get their money back from. It's a shoot-yourself-in-the-foot strategy, but that's how they're raising capital."

In this dry-as-bone financing environment, it's been important for planners to help small businesspeople refocus their energies, get creative, rethink their budgets, and-in extreme cases-re-examine their business's viability.
Cheryl Meyer, a veteran jewelry designer, launched her own Los Angeles company, Sophie Miller, more than two years ago to design silver, cubic zirconium and faux-fine jewelry, much of which she has sold in the past to large retailers and celebrities. In November, however, she said business came grinding to a halt. She recently found herself stuck with a huge load of inventory, however, when a large retail customer was forced to cut back its order. Neither one had expected the slowdown.

"The whole retail base is shifting," she says, "And I don't know who's going to be a viable player and who's not." She has bounced back a bit by selling a huge chunk of it at a reduced price to TJ Maxx. At the same time, she has managed to keep her overhead low by working in her own ranch home in Los Angeles, with only one full-time assistant and a smattering of other helpers. She has also launched a Web site. But she says many of her friends in the business have been less lucky and are now unemployed.

One thing she has done is expand her base from large retailers to independents and specialty stores, mailing them catalogues with her spring line and bridal categories.

Also, she says, "I'm trying to partner with charities to drive business to my Web site where I will give a significant part of the sale back to charity if they bribe their patrons to buy on my site. Everything I've ever had in terms of creativity I'm trying to put to use to keep moving forward."

Small business owners can make numerous mistakes in these circumstances that make matters worse. Using very expensive credit card debt to meet costs can be deadly-but in tough times all too common. Even worse off are those tapping money from their retirement accounts.

Edward M. Gardner, a planner in Houston, says a client of his in the flooring business has been suffering from the housing downturn, and failed recently to analyze the business and cut back inventory. Two years ago, the client took $50,000 out of a retirement plan. He had to pay tax on that, in the 28% tax bracket, not to mention a 10% penalty for being under 59½. He ended up owing more than $19,000 in taxes. And because he was $14,000 short on taxes, he had to yank yet more money and take another hit.

"It becomes a vicious cycle," Gardner says. "And you've got to understand the market was down last year, so not only did they have a haircut on the value of their portfolio but then they had to take it out at a lower value."
According to Welch, there are a lot of alternatives to the usual knee-jerk emotional reactions of business owners. He says it's not even always necessary for them to lay people off.

"The biggest mistake is to have no plan at all and just react," he says. "They'll do one big thing, which is to fire people, when the best solution is to do four or five smaller things like lower rent. Instead of firing, maybe roll back compensation or look at other sources of financing."

Some of these sources could be loans from family members instead of credit cards, he says. Another solution is to get a loan from an insurance policy. "I've had a bunch of people borrow from their whole life policies-permanent insurance-with no questions asked," says Russell Rolnick, a senior vice president with Lenox Advisors in New York. "It's your money. You just go and borrow it and you don't have to qualify for it, don't have to wait for it. Usually in three days you have a check in hand."

Another financial planner has looked into helping out his own firm by getting a "prime minus" home equity line of credit for $100,000 at 2.75% interest and then loaning it out as a promissory note for 12%. "Which I think is secure," he says. He wouldn't do it for a five-year term loan, he says, but the borrower in this case is a wealthy person with a $10 million financial statement who is backing up the loan with real estate and a personal guarantee, thus the planner thinks in 12 months there's a better chance of getting the money back, not to mention a sweet spread. It's a good alternative source of financing, meanwhile, for the borrower at a time banks have become miserly.

He adds, however, that he hadn't actually gone through with it yet, and wasn't ready to divulge his identity. "My wife would kill me. She's really nervous." (Such is the plight of small business, where there are often more constituencies to consider than the banks.)

But while you may find creative ways to tap the piggy-bank, it's also critical to go through the looking glass to the other side of the balance sheet and rethink expenses. Payroll is one of the biggest, but it might be possible to cut pay across the board instead of letting people go.

Then there are other expenses. It might be possible to cut back substantially by shopping around for new phone/Internet service. Or to renegotiate rent if the building you're in isn't fully leased and the landlord doesn't want to see you leave. There are other creative measures as well.

"I have a medical clinic as a client," says Gardner. "They do a lot of printing, and I had them get refilled toner cartridges. On a monthly basis that helped pay for one receptionist. The refilled toner cartridge was 60% of the cost of each cartridge, and when you have 100 cartridges a month you use, it's a substantial savings."

Rolnick says that it's often the excesses that hurt small businesses owners most-too much spent on hiring, technology and travel and entertainment. "Is it worth going out of town on a trip, or can you do a teleconference?" he asks. One of his clients used to take his customers to sporting events all over New York; now he's cut that back.

More important is that small business owners work on their accounting, which is easier to lose track of in good times. That means knowing what seasonal expenditures are going to look like throughout the year, and adjusting them accordingly. Your clients should be able to imagine worst-case scenarios and have a flight plan to follow when things go wrong, when targets aren't met, when revenue falls short, or when expenses get out of hand-"knowing when the money is coming in and what to spend it on," Rolnick says, "instead of borrowing and using credit to fund your cash flow needs."

Rolnick says benefit costs for employees, especially health-care costs reaching into the double digits, are usually the problems of first order among his own clients, especially those trying to keep employees and match what the mighty corporations are offering. The result is that these smaller players have had to look into different kinds of programs. Some health care plans now come with higher co-pays, or perhaps there is a benefit plan allowing employees to choose either a cheap option or an expensive one.

"They're trying to make it more so employees are a little bit more aware of what the costs are," he says.
Or perhaps the owner is cutting matching funds out of retirement programs, he says, or maybe the matching program is simply tied to the firm's profitability.

Hope Fades
But everybody agrees that there's something more intangible that's necessary: optimism and hope. "One of the biggest challenges," says Meyer, "is that all the people who call me are negative. If you decide you're not going to do any business, you're not going to do any business."

"I think the mental attitude of a small business owner is one of the most basic keys to success," says Gardner, who recommends all his clients read Who Moved My Cheese? as a lesson in positive thinking. (He's also got his own book called How To Start Your Financial Future: You've Got To Have the Why Before the How). "They don't have time to feel sorry for themselves, that's wasting too much time and energy."