Small Businesses Adapting To New Economy Small businesses traditionally drive the U.S. economy. And while there are some encouraging signs on the horizon, many mom-and-pop businesses around the country can't get the loans they need, and have no plans to hire again.
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Small Businesses Adapting To New Economy

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Small Businesses Adapting To New Economy

Small Businesses Adapting To New Economy

Small Businesses Adapting To New Economy

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Small businesses traditionally drive the U.S. economy. And while there are some encouraging signs on the horizon, many mom-and-pop businesses around the country can't get the loans they need, and have no plans to hire again.


Janet Hildreth, owner, Tree Lovers Floors in San Francisco

Colleen DeBaise, small business editor for the Wall Street Journal

Sam Chandan, global chief economist, Real Capital Analytics


This is TALK OF THE NATION. Im Neal Conan in Washington.

If you follow economic indicators, you've seen some glimmers of hope lately. Factory orders are up. New jobless claims have fallen, if ever so slightly. Some sectors are even adding jobs. Good news today, for example, from airplane manufacturers.

But if you run a small business, you might not see a light at the end of the tunnel, at least not yet. Those that survived, most of them did so after shedding staff, slashing expenses and cutting pay and benefits. And after learning to operate leaner and meaner, some small businesses may never go back to the old staff size or operate the way they did back in the good old days, if and when business does pick up again.

And since small business is the engine of the American economy, these changes will tell us a lot about our future.

So if you're a small business owner, what did you learn from the Great Recession? How did you adapt? Tell us your story. Our phone number is 800-989-8255. Email us, You can also join the conversation on our Web site. Thats at Click on TALK OF THE NATION.

Later in the program, retired Marine Colonel Gary Anderson back from a year as a civilian advisor in the area around Abu Ghraib. But first, what small businesses learned in the recession.

Janet Hildreth is a partner in the business Tree Lovers Floors in San Francisco. We last spoke with her in October, 2008, and she joins us again today from member station KQED. And Janet, nice to have you back on TALK OF THE NATION.

Ms. JANET HILDRETH (Partner, Tree Lovers Floors): Thank you for having me back, Neal.

CONAN: And when we last spoke, you just had the unfortunate experience of laying off a third of your employees. How have things been going since then?

Ms. HILDRETH: Well, Neal, I'll tell you that we have learned a lot from this recession. There I don't there is a glimmer of hope. We have settled in to the leaner aspects doing business, but unfortunately every day is very tenuous still.

CONAN: You're right on the edge.

Ms. HILDRETH: Exactly, and there's also a trickle-down effect, that we rely on our clients for payments, and it all is involved within the process of the cash flow. And I think one of the problems that small businesses are experiencing right now is access to capital just to gap that cash flow.

CONAN: Oh, so between the time you perform your services and the time you actually get paid, and a lot of the times that comes with basically small loans.

Ms. HILDRETH: That's correct, and I think that the businesses are being judged on their credit scores, which we all know have gone down, and not on the viability of the companies, and I would like to see that. I think that that would really help small businesses a lot.

CONAN: I wonder. Some do you go to the same banks you used to go to back in the good old days when boom times?

Ms. HILDRETH: Well, actually, no. I for instance, I have a large amount of payments due on our insurances, and I always went to one line of credit for that period of time and would pay that off within the year, and that line of credit no longer exists. So I have to seek other sources.

CONAN: Have you is business picking up?

Ms. HILDRETH: Well, actually, Neal, there is a little bit of there is a glimmer of hope, as you said. I do we have been having a little more success, but it's not time to say that the recession is over. It's not time to, you know, to do any to make any financial changes. It's just not time yet.

CONAN: Have you made any changes? Look, nobody likes to lay people off, but have you made any changes to your business and said, gee, you know, I wish I'd done that three years ago?

Ms. HILDRETH: Well, I don't think so. Our business is such that we have a very hard-working team, and but I will say that my expenditures have gone down, and I when the good old times return, I think that I will be a lot more profitable.

CONAN: And a little more cautious about adding staff, perhaps?

Ms. HILDRETH: Well, I think that staff is very valuable. I think that the problem with small businesses, and here in California, a small business is 100 employees or less, and I think federally it's 500 or less; we're kind of isolated in that we're with less staff we were trying to create stay in business, forget about profitability, and I belong to an organization called the Small Business Association of California, and their survey that came out just recently has a few very interesting numbers that I'd like to share with you, if I may.

CONAN: Go ahead.

Ms. HILDRETH: To the question: Do you plan to hire in the next six months, 76 respondents said no. So as much as I support President Obama, I think that the hiring credit is not timely right now.

CONAN: The $5,000 credit per employee.

Ms. HILDRETH: That's right. And one other thing that is actually quite scary is that 79 percent of the respondents do not see themselves in business in California in the next three years.

CONAN: Really, they think they're going to go out of business or move?

Ms. HILDRETH: Yes, that's absolutely correct.

CONAN: That's astonishing.

Ms. HILDRETH: It is. Another and this is the last number that I will throw out there is as far as which political party better represents the interest of small business, 21 respondents said Democrats, 27 said Republicans, and 33 percent said neither.

CONAN: Neither.

Ms. HILDRETH: So I think that's telling as to yes, go ahead.

CONAN: One last question. How closely do you follow the health care discussion and how it would affect you?

Ms. HILDRETH: Well, I've been following it quite a bit. I just we do offer health care to our employees. It's pretty much the last benefit that we have available, and it is definitely a big issue with small businesses.

CONAN: Janet, we wish you the best of luck, and we'll check in with you from time to time, if that's okay.

Ms. HILDRETH: Great, thank you so much, Neal.

CONAN: Janet Hildreth, the one of the owners of Tree Lovers Floors in San Francisco, with us from member station KQED. And let's see if we can get some callers in on the conversation. We want to hear from small-business owners, 800-989-8255. Email And Paul is on the line from Boise.

PAUL (Caller): Hey, how are you doing?

CONAN: Very well, Paul. More to the point, how are you doing?

PAUL: You know, I'm surviving. It's like you said: a lean and mean machine. So you know, you've really got to cut back. Most of the jewelry stores here have basically gone out of business, and as a goldsmith, as one who repairs, you know, I've had to go out and hustle and make sales, repair, and I've had to lay off employees.

So yeah, it's time to tighten the belt and just make things work however and whenever I can.

CONAN: Do you see opportunities out there?

PAUL: You know, yeah. I mean, whatever I find my hands to do, I do, you know, basically, and it's that time where you just have to save money and basically just buy the necessities, pay the bills, and really save and cut back as much as possible.

CONAN: And bitter lessons, yes, but have you learned some lessons that you will incorporate in the future?

PAUL: Yes absolutely. The biggest lesson I've learned that I'm going to take into the future is ignorance can be cured, but for some people, stupid's going to last forever.

CONAN: Well, Paul, that's a valuable lesson. Stay with that, and good luck to you.

PAUL: All right, bye.

CONAN: Bye-bye. Joining us now to talk more about how small businesses are faring is Colleen DeBaise. She's the small business editor for the Wall Street Journal, author of "The Wall Street Journal Complete Small Business Guidebook," and joins us from our bureau in New York. Nice to have you on the program.

Ms. COLLEEN DeBAISE (Wall Street Journal): Oh, it's nice to be here.

CONAN: And I wonder, what we've just heard from those two small business owners, does that sound in accord with what you're hearing from your reporters and what they're finding out?

Ms. DeBAISE: It certainly is. It sounds like everything that we're hearing, and you know, actually, I like what you said at the beginning of the program about businesses operating leaner and meaner than they have in the past, because we certainly are seeing that, and I think that was a nice comment that that caller just had about, you know, you just have to be smarter these days to, well, gosh, not just to make a profit but to survive.

CONAN: I was impressed by one of the articles your reporters wrote, saying about how small businesses have adapted and that indeed, some of the lessons they learned were, you know, we were, as that caller suggested, maybe, you know, ignorant in the old days, but we're never going to go back to the way we operated. We're never going to go back to the old staff levels.

Ms. DeBAISE: Yeah, well, you know, well, there's some silver lining in this really tough economic climate that we've been living through. That silver lining is that we're all learning to operate in ways that are smarter and more efficient than in the past, and we're you know, what we see a lot with business owners is that we're seeing a lot more bootstrapping, and that is essentially doing more with less.

And you know, of course the best entrepreneurs have always done that, and yeah, we're seeing businesses, you know, partnering up with other businesses so they can do some cross-promotion and so that they can work together. We're also seeing entrepreneurs take advantage of opportunities.

For instance, if you want to start a restaurant right now, you might look at a failed operation that maybe you could buy that. You might also, if you need equipment and machinery, you know, you could look at businesses that have gone under that are now selling that equipment and machinery at a pretty low cost. So you know, we are seeing some smart things happening.

CONAN: There are also changed conditions. Five years ago, people were talking about, gee, we're being driven out of business because we can't afford those rents that are skyrocketing. I suspect they're not skyrocketing so much anymore.

Ms. DeBAISE: No, and then, you know, that's actually a good thing, right? You know, that's yeah, I've been talking a lot about starting a business. That's what my book is a lot about how to kind of start and grow a business, and you know, one of things that keeps coming up, people say, well, you know, this is just such a terrible time. We're in a downturn right now. This can't possibly be a good time to start a business.

But if you think about it, there are a lot of good opportunities right now, some of the ones I just mentioned, but also, yeah, like you're saying, you know, the space is available for a much lower cost than it was five years ago. So you know, that's one of the, you know, positives in an otherwise kind of not-so-great climate.

CONAN: Though again, you might need a loan for that, and as Janet Hildreth was saying, getting loans these days can be very tricky.

Ms. DeBAISE: Yeah, you know, it is such a struggle for business owners. At the Journal, we've started a new column called The Money Hunt, and it runs every Thursday in the paper, and we're doing this column for business owners, chiefly because we hear so much about the pain, really, you know, the struggles that business owners are facing, especially with that lack of access to credit.

You know, it's just been we're starting to see some improvement, but it's very tough for small business owners to get those loans and those lines of credit that they really rely on to grow their business.

CONAN: We're talking today with small business owners and what they've learned from the Great Recession: 800-989-8255. How did you adapt? Email us, And up next, another looming threat to the economy: A wave of foreclosures may hit the commercial market. We'll find out how that might threaten the turnaround. Stay with us. This is TALK OF THE NATION, NPR News.

(Soundbite of music)

CONAN: This is TALK OF THE NATION. I'm Neal Conan in Washington. We often hear that small businesses are the engine of the U.S. economy. Well, here's some emails from the engine of the U.S. economy.

William in Duran, Michigan: As a small business owner located near Flint, Michigan, I have to say we are in serious trouble. I own a small veterinary clinic. You would not believe the amount of regulations and taxes we have to pay. It's time to get rid of entitlements now. The payroll taxes and Social Security payments we have to make are killing us. I would like to hire but just can't afford to.

From Sidney(ph): I own a nightclub in San Francisco with about 40 employees. Revenue has been flat, which in this economy is okay. However, the city continually increases expenses, including the Healthy San Francisco Plan, adding $1.1 dollar per hour adding $1.1 dollar per hour per employee. Payroll tax, workers comp continue to go up. It's getting more and more difficult with such rising expenses imposed by the city and the state. We're trying to reduce expenses by another 10 percent this month.

This from Mark in Menlo Park, California: Although we are a very small engineering consulting business, we've always kept a diversified portfolio of clients in a range of industries. While some might criticize this as not focusing on a core expertise, our revenues have and continue to be solid in this rough economy. While some clients may give us less work than in previous years, our diversification means that when whole industries tank, we don't go down with them.

Well, let's see if we can get another angle on this. Another challenge for small business owners. Many are losing their storefronts. Commercial mortgage foreclosures are on the rise and are not expected to fall anytime soon.

Joining us now is Sam Chandan. He's the global chief economist for the real estate research firm Real Capital Analytics, and he's with us now by phone from his office in New York, and Sam Chandan, thanks very much for being with us today.

Mr. SAM CHANDAN (Global Chief Economist, Real Capital Analytics): Thank you.

CONAN: How big is the commercial mortgage foreclosure problem?

Mr. CHANDAN: It's a significant challenge for policymakers. It's a significant challenge for small businesses as well, in part because we have rising delinquency and default rates, where we have a deterioration in the performance of the underlying assets.

The buildings themselves have higher vacancy rates. Rents are falling, and all of that's making it challenging for borrowers who have borrowed money to finance commercial property purchases to make payments back to the banks.

CONAN: And is this directly analogous to the foreclosures that we've seen ravaging the, you know, private homes?

Mr. CHANDAN: There's a big of a lag in terms of how this crisis is playing out. It's taking a little bit longer. It's more closely related to job losses than has the housing than have the housing issues, but what we also see is that it's been a little bit slower to earn the attention of some policymakers, in part because we're not talking about borrowers potentially losing their homes. In many cases we're talking about people who are having challenges in making payments for buildings that they own.

What we do know is that the concentrations for these commercial real estate loans are heavily concentrated. They exist in large numbers on the balance sheets of regional and community banks, but those regional and community banks are also the primary sources of credit for small businesses in the United States, and so there's a spillover there.

CONAN: Are these the result of the same kinds of problems we saw with home mortgages where, well, predatory lending and maybe, well, over-optimistic borrowing?

Mr. CHANDAN: I think you did see a lot of over-optimistic borrowing. If you look at the expectations for how the cash flow, the rents would grow in the building when borrowers were taking out new loans, in 2006 and 2007, those expectations were fairly optimistic, even aggressive in many cases, and so that led people to borrow on what we refer to as underwriting terms that were fairly aggressive as well.

It's been increasingly challenging because the people, the tenants aren't there to fill those buildings to generate the cash to make the payments. One critical difference, however, is that while in the single-family housing market, over the course of this period there was a lot of new building activity, and so we have a supply issue. When we look at commercial real estate office buildings, apartments, retail, industrial spaces, hotels we don't have the same kind of building activity over the course of the last couple of years.

CONAN: So less of an over-supply.

Mr. CHANDAN: Yeah, it's not as much of an over-supply issue. There's definitely some feedback and some interesting dynamics between the housing market for condo properties and apartment buildings, but apart from that, this really is about supply being constrained. In part because there were not very many buildings coming online, that allowed for prices to really ramp up in 2006 and 2007. People wanted to buy and own commercial properties, but there were only so many that were available in the market to purchase.

CONAN: Now, as we look at this looming foreclosure, I mean, is this is this a slight hiccup, or is this a serious case of nausea for the economy?

Mr. CHANDAN: I think what we see is that over the course of the last eight or nine quarters, default rates for commercial mortgages on bank balance sheets have been going up in a very consistent way. So in the fourth quarter we have a default rate of 3.8 percent, and that's a 16-year high.

The Congressional Oversight Panel that was established as part of the Emergency Economic Stabilization Act and provides some oversight and accountability structure in Washington produced a report just in February that really does a good job in describing this link: How does the deterioration in mortgage performance on the balance sheets of these small banks in the country impact their ability to make mortgages or to extend credit in other areas, whether it be for small businesses or for families?

And that is a very real link that we need to be concerned about, and it's the primary channel through which we observe spillovers from commercial mortgage markets into the broader economy and the credit needs of small businesses in the United States.

CONAN: Sam Chandan, thanks very much for your time today.

Mr. CHANDAN: Thank you.

CONAN: Sam Chandan, global chief economist for Real Capital Analytics, a real estate research firm. He was with us today from his office in New York.

Still with us is Colleen DeBaise, small business editor at the Wall Street Journal, author of "The Wall Street Journal's Complete Small Business Guidebook." We still want to hear from small business owners. How are you adapting as a result of the Great Recession? 800-989-8255. Email Chris(ph) is on the line from San Francisco.

CHRIS (Caller): Yeah, hi, Neal. Thank you for taking the call.

CONAN: Sure, go ahead.

CHRIS: Yeah, I own an Internet-based earthquake-supply business, and we've had to do at to survive is we had to reduce drastically our inventories and reduce our costs in that regard but also make sure that our products differentiate ourselves in an already crowded field.

And then we added services for our existing customer base, such as helping them to protect their homes and extending that to protecting their businesses, going in and actually helping them prepare their homes and businesses so that they will survive, especially single location, and this is can survive an earthquake. So any services in reducing our carrying costs would really be the key for us.

CONAN: And you're doing okay?

CHRIS: We're doing okay. I mean, it's well, we've seen in Haiti, we always get an increased interest when there are tragedies such as earthquakes in other parts of the world as Haiti and Chile, and that helps the people in our area, which is very necessary, to get prepared.

So we're doing okay. We're hoping that, you know, we can get more people on an ongoing basis get prepared because it's extremely necessary.

CONAN: Well, Chris, good luck to you, and I hope none of your equipment is ever needed.

CHRIS: Yeah, me too, Neal. Thank you very much.

CONAN: Bye-bye. And it's interesting, Colleen DeBaise. He works in a business where reducing inventory is an important way to save money.

Ms. DeBAISE: Yeah, I know, that is interesting, and I like his story about how he's reinvented his business a little bit in adding those new services, and we've seen a lot of businesses do that in the past couple years. A lot too have added services or products that sort of target -that are a lower-priced line of products, for instance, kind of targeting that lower price point, which is something, you know, a lot of customers want these days. So we're seeing a lot of businesses do that as well.

CONAN: But I wonder, as opposed to keeping large amounts of inventory in stock, working much more toward a just-in-time, to borrow an analogy from the auto industry, just-in-time kind of process, where you order it and get it out as soon as you can.

Ms. DeBAISE: Right. Yeah, I think that's smart, and this actually ties into that access to credit that we were talking about before. You know, it's difficult for a lot of businesses to get those lines of credits the lines of credit that they used to have and the loans that they used to have.

A lot of times businesses use lines of credit to stock up on inventory, and you know, that can you know, when you don't have that line of credit, it can be very difficult to buy your inventory. So anything you can do to reduce having to carry it for longer periods of time is smart.

You know, I thought it was interesting too what the caller who was talking about commercial mortgages, what he was saying about how a lot of banks are exposed to that commercial mortgage market, and that can trickle down and hurt small businesses because small businesses are trying to get money from banks, and if the banks are exposed to the commercial mortgages, then that's going to be an even tougher climate, which is kind of hard to imagine, but perhaps an even tougher climate for small businesses.

CONAN: Let's go next to Pamela(ph), Pamela calling from Hillsdale in Michigan. Welcome to TALK OF THE NATION.

PAMELA (Caller): Thank you very much, Neal.

CONAN: Go ahead, please.

PAMELA: For the last 11 years I have been a mobile notary, and I have done mortgage closings. Of course, when the mortgage market fell apart in 2007, I had to totally realign my type of business, and now I am doing inspections on those foreclosed homes. So actually now I am working much harder and much longer to make, actually, less money than I was making before.

CONAN: I wonder, have you done any doubles, gone to foreclosures on homes that you previously did the notary for the purchase of them?


CONAN: Oh, that's sad.

PAMELA: Very, very. It is very sad.

CONAN: And when business picks up and eventually homes start selling again, are you going to go back to doing that or stay with what you're doing or maybe do both?

PAMELA: I am still doing both.

CONAN: And that's going to...

PAMELA: But I went from doing anywhere from 20 to 30 mortgage closings a week down to last month I did actually only 14 closings in a month in that month.

CONAN: Hmm. In a month?


CONAN: Yeah. All right, Pamela, thanks very much for the call. Appreciate it.

PAMELA: Thank you.

CONAN: Bye-bye. She's an individual who works for herself. That's the smallest of businesses.

Here's the email we have from Dave in Conway, New Hampshire. I learned this when I started my first business: Run your business as if the banks do not exist. They claim to be your friend when they have money to lend, but not when you need it. So a little cynicism there, or maybe earned cynicism there, about the availability of funds from banks.

And this from John(ph) in Georgia. Many politicians talk a lot about small businesses, especially about how many jobs they create, then they advocate special help for such businesses. I wonder whether such businessmen really need any help. I get the impression from small businessmen I know that they have all sorts of tax breaks.

At least two told me recently they pay no income tax at all, though each has a prosperous business. So how many tax breaks do such people already get? One works as a builder and carpenter, make $30 an hour plus whatever his contract calls for. One is a veterinarian with a good practice. Maybe they and their CPAs are just cheating. Or could they legitimately pay no income taxes? And I wonder, Colleen?

Ms. DeBAISE: Well, there's certainly a lot of tax breaks for business owners, and you know, a lot of them what you pay in taxes has a lot to do with how you structure your business, you know? You can structure your business as an LLC or a regular corporation. They're much different entities - one the taxes flow through to your personal tax returns, the other with the corporation you have a completely separate entity there. So you know, it the scenarios can be quite different.

But there are a lot of legitimate tax breaks. That's a great thing about being a business owner. But still, you have to be have a legitimate business, and you have to have a profit, you know, to succeed. So how much those tax breaks help only, you know, depends on how well you're doing in business, I think. There are you if your business is not doing well, though you also can be entitled to take a loss that - you know, all of these things are designed not to give business owners any special advantage but to really encourage entrepreneurship in this country. So you know, that's a good thing. So I...

CONAN: Yeah.

Ms. DeBAISE: ...sounds a little bit like that person was complaining about it. I wouldn't complain about any tax breaks for business owners.

CONAN: Colleen DeBaise of the Wall Street Journal. You're listening to TALK OF THE NATION from NPR News. And I just wanted to follow up quickly on that one point. I've read that a lot of small businesses will declare - pay income tax as individuals so that it looks like you've got a pretty healthy income over 200, 300, $400,000 a year, but it's your whole business.

Ms. DeBAISE: Yeah. Yeah, definitely, and that's something that has come up in different legislation that we've seen as a concern for a lot of business owners who report their income on their personal tax returns. You know, that's income for their business as well as their individual income. So it can look like a far greater amount than it actually, you know, is. It's not just one individual salary.

CONAN: Let's go next to Heather, Heather with us from Durham, North Carolina.

HEATHER (Caller): Hi. Thanks for taking my call.

CONAN: Sure.

HEATHER: You know, I felt like a while ago you we talking about businesses and, you know, they need to trim their fat and then we'll be okay. And I just want to say that, you know, as someone who's been working primarily freelance for quite a while, I don't think that these jobs are coming back. I mean, I am someone who's been working for the last two years on my own and businesses have gotten very used to by having my own Internet connection, my having my own software and hardware. And you know, my job actually requires me to travel around Durham, Raleigh, Chapel Hill, so I've got to have a car and all that other stuff.

And you know, nothing is going to change. I'm making about I'm making a little bit less than what I made in 1991, when I graduated from college. I don't have health insurance and, you know, it's hard for me to believe that the businesses that are relying on my work now are going to ever agree to pay me more. And you know, I also wanted to say that, you know, there's just there's so much wrong with the infrastructure of the country that, you know, there's this is not something that we can solve by hiring a few more people to build roads, and so on and so forth. And there are major things that worry me. I owe, you know, $150,000 plus in student loans. You know, I have a PhD, on and on. You know, not to give you a sob story, but this is not about businesses trimming fat and we're going to get back to where we were before. The country has decided that, you know, they can outsource work in such a way that, you know, you get to pay practically nothing for the work that was done previously.

I would also say that, you know, some of the jobs that I bid for, I bid for through Web sites, and these Web sites takes 10 percent of, you know, whatever the cost of my work is and the cost of my work has got to be, you know, based on the lowest possible bid...

CONAN: Yeah. 'Cause you're big competitive bidding, yeah. Yeah.

HEATHER: Yeah. And you know, I'm bidding against people who, you know, know, you know, all you know, I'm really happy for them, but I'm bidding against people who maybe live in a city where the cost of living is less expensive, maybe are supported by a spouse, I have no idea.

CONAN: Yeah, Heather, I don't mean to cut you off, I just wanted to give Colleen a chance to respond.

HEATHER: Yes. Yes. Sorry.

Ms. DeBAISE: Oh, gosh, yeah. No, it's and I gosh, I can't agree with her more about all that she's saying. And I wonder too when things will ever change. We just did a story about small businesses who had to cut jobs during the worst of the downturn. And you know, now they're starting to, you know, see some glimmers of hope. They're starting to recover, but you know, these business owners that we talked to said, you know what, we're not going to hire right now; you know, we're going to try to do as much as we can with the staff we have.

And in some ways, that's good. You can't blame them - you can't blame these business owners for being gun shy. They don't want to, you know, take on people who they can't afford to have on staff. But it's tough because, you know, you wonder what will happen, especially with work like (unintelligible) when people are just working around the clock and not, you know, getting paid, you know, 1991 levels, as the caller the said.

CONAN: Heather, we wish you the best of luck. Thanks very much for the call. And we'd also like to thank Colleen DeBaise of the Wall Street Journal, the small business editor there who joined us from our bureau in New York. She's the author of "The Wall Street Journal Complete Small Business Guidebook." Thanks very much for your time today.

Ms. DeBAISE: Oh, my pleasure.

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