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For many years, wage earners have been considered the sector that suffered most in this country. It is they who always pay the price of the package deals, the cost-of-living supplements paid to them were always minimal and when taxes were increased, they were the first to feel it in their pay slips.

If you ask small business owners, however, or the self-employed, they will tell you that they are the ones who bear the brunt of the country's economic woes. It is very costly to set up a small business in Israel, and the costs are usually financed via a bit of equity plus bank loans, which can give a lot of small businesses an economic dizzy spell even before they ring up their first sale.

A small business owner has to handle a lot of complicated aspects of a business, including financing, operations, manpower and marketing. In between all this, he also has to cope with innumerable authorities like the municipality, the fire department, various government offices, the rabbinate, the Israel Standards Institute, customs, the National Insurance Institute and the income tax authorities. A self-employed person who does not look out for himself will also enjoy no pension fund, something that is almost automatic for salaried employees.

The end result is a system that puts great pressure and a huge burden on independent business owners, many of whom cannot bear it all. The paradox is that the success rate for many businesses (particularly in the retail sector) is quite low, so there are many who invest their savings, get burned by the system and are tossed out of the circle of business owners, bruised and battered.

In the past few years small business owners have been faced with a new source of grief in the mushrooming growth of the large chain stores. Chain stores have sprung up in almost every type of business in Israel, from fast food to office supplies and toys to electrical appliances, furniture, automotive supplies and do-it-yourself stores.

From the consumers' point of view, the chain stores are a positive development. Consumers now enjoy a wider selection of products, can do all their shopping in one place, and the competition between the chains has led to lower prices and better credit terms. For small businesses that operate in the same fields, however, the advent of the large chain stores is a death blow. The small businesses are at a relative disadvantage to the bigger ones in their negotiating power opposite both suppliers and customers. A large chain can effortlessly dictate credit terms to its suppliers, while a small store has no power to alter the credit terms with either suppliers or customers.

Sources at the various banks say that the level of risk in their dealings with small business is not high because of the great distribution of the credit. A senior banker at one of the large banks explained that the deterioration in the economy has not affected the level of credit irregularities in the bank's dealings with small businesses.

"I constantly look for skeletons in the closet but have so far found none," said the banker. "Even at the beginning of the intifada we were afraid that a crisis would develop and small businesses would be hurt, so we directed our branches to be more wary and to pay attention to what was happening in order to identify problems.

"In the meantime, I don't see a dramatic change in the numbers. Of course there has been a decline in certain areas, such as tourism, in Tiberias, for example, but I have so far not seen a dramatic increase in allocations for bad debts of small businesses."

The banker added that even if there were to be a rise in the number of businesses falling on hard times, the distribution of the loans is so wide - tens of thousands of the bank's customers are small businesses - the damage to the bank would not be great.

One factor that eases the banks' worries is the high profit margin from their dealings with small businesses. Unlike large companies, which pay low interest, small businesses have limited negotiating power and pay higher interest on credit.

Banking activity with small businesses is characterized by a high level of personal acquaintance between the branch or business center with the client. This familiarity is usually a very important parameter in the bank's relationship with the client, more important than the type of business or its geographical location. This personal relationship can be detrimental to the clients to a certain extent, because they are often asked to sign personal guarantees that make things difficult if their business runs into trouble.

Unlike large businesses, which take out non-recourse loans, small businesses do not enjoy this privilege and often have to provide personal guarantees that put their private property at risk. "Small business owners are at greater risk, because they can lose their homes due to the identification of a business with its owner," said another banking source.

At times like these the banks become quasi-economic advisers. "We try to help small businesses," says Michael Friedman, vice president of Bank Leumi and deputy head of the banking division, "if the customer has positive characteristics and if it is clear that the business owner knows what he's doing. In such cases we try to help by rescheduling debt repayment. Even so, if we feel that the owner of the business might have difficulty [repaying his debts], I try to prevent him from making certain transactions."

Friedman said it's hard to single out any particular branch of business that is having a tougher time than the others, because hardships is evident in all the sectors. "There is no smooth sailing for anyone," he said. "In retailing the difficulties are very evident. Some contractors are barely getting by because companies are postponing their payments. People are renovating less, so renovation contractors are having problems. Hotels are closing down and businesses connected to them are going through a tough time because the hotels are the essence of their existence. More businesses are crumbling. I don't remember a period as unpleasant as the one we are going through now."

A senior banking source said that total deposits by small businesses are twice as much as the total credit extended to small business customers. "You have to remember that these businesses earned a lot of money when times were good so even if a business closes down, the customer will have resources for repaying debts. The banks do not erase debts," said the source.

This same source, who seemed a bit more optimistic that his colleagues at other banks, feels that the outlook is not so bleak. "People continue to buy at neighborhood grocery stores, get their hair cut and order their wedding invitations at small printing shops, " he said. "Although there has been a drop in activity, if the situation is temporary, business owners have to be given a chance to reorganize and stabilize their businesses.

"Our job is to keep our eyes open with new customers to make sure they are not bad customers who have been rejected by other banks. Everyone is under pressure and is late with payments and the trick is to make sure the whole process doesn't snowball and knock everyone down," he concluded.