Small businesses vital to economic recovery go bankrupt

— -- Entrepreneurship and new small businesses are supposed to lead us out of the recession, just as they have in prior downturns, right?

Sure. Your neighbor's grand idea will persuade a bank to lend her start-up money; she'll open for business in six weeks; and money will immediately flow from customers to her to her employees. Taxes will be paid, and the national economic engine will hum effortlessly in no time.

If only.

Today shows a different reality: Commercial bankruptcies are surging. Fewer people are starting small businesses, and firms already open are struggling under changing consumer habits, a lack of funding options and tougher bankruptcy laws. If a nationwide trend seen since January holds true, more than 300 businesses will file for bankruptcy — today alone.

Cafe Boulevard, for 12 years a popular European-style restaurant in Dayton, Ohio, hasn't been able to endure the downturn.

Rising gas and food prices, increased competition and an ill-timed expansion cut profits. Local unemployment made matters worse, because the regulars no longer showed up. In April, the restaurant's owner, Eva Christian, was one of 8,149 U.S. business owners who filed for bankruptcy-court protection.

She didn't close the cafe. Instead, Christian is trying to retain her employees while she works with creditors.

"When I decided to file for Chapter 11 bankruptcy, I felt crushed," Christian says. "But my attorney said that Donald Trump did it, and GM did it, and Delta did it. It gives people the opportunity to bounce back."

The first five months of this year have shown a 52% increase in the total number of commercial bankruptcy filings (36,106) compared with the same period last year (23,829), according to the Automated Access to Court Electronic Records. On average thus far in 2009, some 350 commercial enterprises file for bankruptcy daily — an increase of 240% from 2006, the first year after the bankruptcy law was changed.

Small companies hardest hit

Major corporate failures, like GM and Chrysler, flash across front pages and websites. But the vast majority of commercial bankruptcies, which are not separated by size of firm by data keepers, are filed by entrepreneurs and small-business owners, says Robert Lawless, professor of law at University of Illinois.