When Curtis L. Smith, owner of Carlton's Mechanical Contractors Inc. at 1307 W St. NW, started his plumbing, airconditioning and heating business in 1972, he named it after his son, hopping toleave the boy a legacy. Today Smith owes city taxes, federal taxes and other outstanding debts and is out of business. He says 80 percent of his former workers are unemployed as well.
Although he says he has not filed for bankruptcy, Smith's plight is shared by nearly 2,000 District entrepreneurs whose businesses failed last year. And city officials, bankruptcy lawyers and business analysts worry that if the economy continues to worsen, the number may grow even higher.
According to U.S District Court records, the number of businesses that filed for bankruptcy was up 79 percent in fiscal 1981 over fiscal 1980.
Experts say that a combination of reduced consumer spending, high interest rates and poor management is strangling Washington's small businesses.
"Small businesses are hit first with the cash flow problems," says Richard Wills, an attorney who runs the bankruptcy clinic at George Washington University's law school. Unlike large, successful businesses, the small companies do not have enough extra money to tide them over during hard times, Wills said.
The city's Department of Finance and Revenue reports that in 1981, 1,658 businesses notified the city that they had closed, compared to 1,420 the previous year. City officials speculate that probably even more businesses failed but those that don't notify the city aren't counted.
Hardest hit by the recession are restaurants, construction and real estate companies, consulting firms and small specialty stores. While young, minority-owned companies are particularly vulnerable, even larger, more established firms are no longer safe from the precarious economic climate.
Many new and inexperienced minority entrepreneuers aren't properly monitored by the agencies that lend them money, such as the Small Business Administation, says Richard Knight, a business analyst for the local accounting firm of Leevy, Redcross and Co. He said that often these owners have inadequate management skills and don't ask for help until it's too late.
Knight's company won a federal grant to assist struggling minority businesses in the area. The company attempts to design plans to help businesses pay their creditors "without going to court."
U.S. District Judge Roger Whelan, who hears all bankruptcy cases filed in the District, said that in addition to the recession, recent changes in the legal codes permitting attorneys to advertise and the 1979 changes in the bankruptcy laws for individuals have made filing easier.
Though almost 90 percent of the cases filed in bankruptcy court here are for individuals, the number of both business and nonbusiness cases has risen dramatically. In 1979, a total of 329 cases were filed compared with 719 last year, according to bankruptcy court clerk Nancy Piwonski.
Economists are quick to point out that not all of the owners of companies struggling to survive want to or can afford to file for bankruptcy. "For every company that does file , there's probably 10 others that don't," speculated J. Walter Lund, associate director of the city's finance office.
Under federal bankruptcy law, a company may ask the court to allow it to completely liquidate the business (under Chapter 7 of the law), sell inventory to pay some creditors and be released from paying the remainder of its outstanding bills. Most companies, however, file what is called a Chapter 11 bankruptcy under which the organization seeks court permission to reorganize. By reorganizing under court protection from creditors, a business may rearrange its debts to spread payments to creditors over a period of time while trying to raise new funds to keep the business going.
Warren K. Van Hook, director of Howard University's Small Business Development Center, which offers technical assistance to businesses, says his agency is seeing a growing number of troubled owners.
Unfortunately, he says, "most banks are not prepared to make loans to small businesses that aren't clearly able to repay the loan." But with interest rates between 17 and 25 percent, Van Hook doesn't encourage his clients to borrow as a way of staving off bankruptcy, anyway.
Borrowing was not a solution for Curtis Smith. He couldn't get a bank loan for his small company, which employed between 18 and 40 workers.
He approached the D.C. Development Corp. and the Small Business Administration, too, but had no luck. "They were hurting as bad as we were," Smith recalls. So last September, Carlton's Mechanical closed its doors. Now, Smith says, he is doing consulting work and "trying to see if the economy will break."
Nearly every type of business has been affected because consumers have been forced to draw their purse strings taut.
Washington's restaurant business, which is always changing and subject to fads, is having an even harder time. Gone are Sans Souci, Adam's Rib, The Golden Booeymonger, Appletree and Michael's. Some of them were sold to pay off debts.
A small but growing number of businesses, especially restaurants, were closed by the city for nonpayment of taxes, said Lund, the assistant director of the city's department of finance. He said he uses the amount of unpaid taxes as an economic barometer; when times are tough, businesses use the tax money they should be withholding to continue their daily operations, he said.
High interest rates and the inflated cost of housing also have hurt the housing industry. Some real estate companies failed while many others have been forced to merge.
Times are particularly tough for small, minority subcontractors who earn their living from residential and rehabilitation projects, says Milton Carey, president of the Association for Minority Contractors.
Carey said that last year he randomly called 50 of the 100 minority contractors certified by the District's Minority Opportunity Commission. Carey says he was able to reach only 52 percent of those firms. The rest seemed to have dropped out of sight. "It's a nightmare," he said.
"We grew too large too fast without adequate financial backing," said Howard Johnson, the 45-year-old president of Citcorp, a data processing company. Johnson said his firm will lay off the last 35 of its 72 employes on the 15th of this month.
Like managers of other minority firms, Johnson waited months for the SBA to approve his contract for a major federal government project. While he was waiting to get paid for other work, Johnson had to take out loans for overhead costs and to make payroll every two weeks. Citcorp's credit eventually ran dry and Johnson says, "I'm going to be in debt for the next five to 10 years paying off $40,000 to $50,000 in taxes."
Now, says Johnson, who seems to be an optimist, he, too, is looking for a job.