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Self-employed struggle in bad economy

WEST VALLEY CITY — Clip, Clip. Jessica Bronson stepped back from her client to judge her work. She grabbed her client's hair and let it fall, strand by strand. Then, it was clip, clip again.

The scene plays out in thousands of hair salons across the country every day. This salon, however, is in Bronson's home in West Valley City. And if you didn't know it was there — with its professional shampoo sink, chair, counters and waiting chairs (complete with old copies of People magazine), you wouldn't know the 33-year-old stay-at-home mom ran a licensed salon in the neighborhood.

A difficult economy has forced many people out of work. National unemployment hovers at 9.1 percent, with 7.6 percent in Utah. That's causing some of the unemployed to create their own businesses in their homes or even starting up micro-businesses with 10 or fewer employees.

Businesses on this small scale face special challenges — but they are vital to our economy. Census Bureau data from 2008 shows that 99.6 percent of all businesses in the United States have fewer than 100 employees. Nationwide there were 21.1 million self-employed businesses in 2009, the Census Bureau said in July. Those businesses generated $838 billion in sales that year. In Utah in 2009 there were 176,338 self-employers with $6.3 billion in sales, down from highs in 2007.

"The numbers speak for themselves," said Gene Fairbrother, lead small-business consultant at the National Association for the Self-Employed which is based in Washington, D.C. "However, particularly during a difficult economy, there are a lot of people attempting to be self-employed that never show up in the numbers. It could be multi-level marketing or an Internet business that may never develop enough revenue to cause them to file a business tax return. Numbers are indicators, but they don't tell the entire story."

Bronson didn't choose to open her salon because she lost her job. She said she simply wanted to work at home, "Kind of like a hobby that I get paid for."

And doing salon work at her home increases the money she can make versus renting a $400-a-month booth at a traditional strip-mall salon. "Because I work from my home, I save on rent, I save on gas because I am not driving to work, I save on day care because I can take care of my kids. And I save on eating out because food is in the house."

But the economy has made her job more important for her family. Her husband Jason works in landscape construction — and with the downturn there has been less money coming in. "Mine is the supplemental income," she said.

In West Valley City, applications for new home-based businesses this year have increased 80 percent over the same period last year to 169 licenses, said Russ Condie, assistant city treasurer. Those figures don't include how many licenses have lapsed. New applications cost $160.

"This tells me people are trying to find income wherever they can," Condie said. Non-home-based businesses have fallen during the same period

It is challenging enough to start a business in good times, said Gene Fairbrother, lead small-business consultant at the National Association for the Self-Employed. "A downturn in the economy makes it even more difficult. You have more people chasing the same dollar."

Many newly unemployed and recent graduates are starting up their own businesses, Fairbrother said. These professionals include engineers, plumbers, remodelers and accountants.

"But that doesn't mean they have that entrepreneurial sense," he said. "It doesn't mean they have the business knowledge to create strong marketing programs that will gain the attention of the public to grow their business."

Bronson's hair business relies on word-of-mouth, and on her personal Facebook page where she posts available times. She averages about six to eight clients on the three days a week that she works. The numbers are low enough that she hasn't had any complaints from neighbors. "When I started the business I talked to the neighbors and most were excited to have a hair dresser next door," she said.

But starting a business costs money. Bronson spent close to $10,000 turning a basement room into a professional-looking salon. There were building permits and materials and contractors and inspections and insurance and licenses. The salon chair and shampoo sink alone cost around $1,500. Bronson had some money saved up — and put the rest on a low-interest credit card.

It is the tight financial nature of self-employed businesses that can make the difficult economy so, well, difficult.

"The smaller the company, the more direct expenses they have," said Lori Chillingworth, executive vice president, director of small business banking for Zions Bank. "They don't have the luxury to cut back." It is hard to cut costs by letting an employee go if you are the only employee.

The nature of entrepreneurs is they will do all they can to survive, Chillingworth said. This means a small business will burn through their cash reserves — probably within a year — keeping the business afloat. But after the reserves are gone, the real test comes. "If they made it through the last two years they did everything right," she said. "(Surviving in a bad economy) means going back to what made them successful in the first place. It is almost like starting over again."

But starting up in this economy can be difficult. Chillingworth said her bank hasn't really changed its underwriting standards, but the economy makes it more difficult to get a loan for unemployed people starting up their own businesses. "If people were unemployed they might be past due in some payments, for example, which would hurt their credit scores,"

Chillingworth agrees with Fairbrother's assessment about the biggest question to ask when contemplating becoming a business owner. "Everybody isn't cut out to be an entrepreneur," she said.

Fairbrother at the NASE encourages people starting a business to go beyond just asking friends and family what they think about their business plans. He said asking friends for advice about starting a business is a lot like showing people your newborn baby. "There is no such thing as an ugly baby," Fairbrother said. "And, in the same way, friends and family will tell you, 'You're going to make a million bucks.' But as soon as you are gone they will say, 'He has got to be nuts. He is going to be broke in two days.' "

Instead, Fairbrother said people should do market research and ask tough questions of potential customers like, "How much are you willing to pay for this?"

For Bronson, the question is coming up with a name for the business that satisfies her. "I never came up with anything clever," Bronson said. "Jessica's hair? Hair by Jessica?"

But, that is a small problem.