Small businesses struggle to stay afloat as damages from two wars deepen

On October 7, 2023, Dudu Argaman, 79, was walking between trees, picking lemons and working on his family farm land in Moshav Almagor in the north of the country, like most days over the past 53 years.

On that day, as war broke out with Hamas following the terror group’s onslaught on southern communities, orders for lemons and mangoes from Argaman’s 42-dunam grove plunged dramatically. Ever since, the farmland business, which he runs and harvests along with his 77-year-old wife Bat-sheva, has been forced to resort to loans, bringing the decades-long business to the brink of financial collapse.

“Following the outbreak of war, our market completely dropped, and we were stuck with the fruit. We couldn’t market it, and orders from customers fell as restaurants and other places closed down or were running on a limited scale, and many people were called up to serve in the army,” Argaman told The Times of Israel. “At the same time, prices for our produce dropped far below our costs.”

Now, 20 months later, the business was hit again by a slowdown in orders and sales due to last month’s 12-day war against Iran, while the couple has already been struggling to cover running costs and make debt repayments during the ongoing fighting with Hamas.

“We’ve been concerned that we would need to sell or close down as we can’t keep this up for long,” said Bat-sheva Argaman. “Having built our business over many years, we received financing from every possible channel, but with ongoing expenses and low turnover, it was getting more and more challenging to make loan and debt repayments, while the bank was getting more impatient.”

For the Argamans, this week’s approved government plan for compensating businesses, which were financially impacted by Israel’s 12-day war with Iran, would have been too little and too late to save their business from collapse.

The Argaman’s business is one of many that managed to stay open and function during the war period with the help of social lenders such as Koret Israel Economic Development Fund (KIEDF).

Founded in 1994, the non-profit organization facilitates the provision of loans for small and micro businesses that are unable to receive loans from traditional financial institutions, as they are perceived as high-risk or have a low credit score and low revenues.

“We applied to Koret in May, and this week we managed to get credit, which saved us and will help us keep our head above water, but we don’t know for how long,” said Bat-sheva. “We don’t have any savings, we don’t travel or go out to restaurants — this is about our basic existence.”

The Iran conflict, which started on June 13, had an immense economic impact on the country, with damage estimated to be double that caused during the October 7, 2023, Hamas attack and the ensuing war, combined.

According to a survey conducted by business data firm CofaceBDI, the damage caused by the Home Front Command’s bans and restrictions on gatherings, the closure of educational institutions and workplaces except for essential workers, along with the extensive callup of reservists resulted in revenue loss of about NIS 18 billion ($5.4 billion) in the first 10 days of fighting with Iran. Most of the damage was reported in the private sector, first and foremost by small businesses, which often suffer from low equity and no financial backing, CofaceBDI said.

Many small businesses from carpenters, hairdressers, tour guides, shop owners, farmers, photographers and suppliers of all stripes have been struggling to stay afloat over the past 20 months, hurt by slower demand, cancellation of orders, scarce and more expensive financing, and insufficient and slow government assistance during the ongoing war.

Last year, as many as 60,000 businesses in Israel were wiped out, of which about 50,000 were small and medium-sized, compared to about 40,000 in normal years. It is estimated that the number of business closures due to the October 7 onslaught will grow to 80,000, and that is before taking into account the damage inflicted during the Iran war.

Earlier this week, the government greenlit a plan for compensating those affected financially by the war with Iran, including grants for businesses whose income streams have been reduced, and partial reimbursement for workers who have been furloughed.

Businesses with an annual revenue of NIS 12,000 to NIS 400 million that saw a 25 percent decrease or more in revenues month over month will be eligible to apply for compensation. The compensation ceiling for business owners with a turnover of up to NIS 300,000 is NIS 14,025. For business owners with a turnover of up to NIS 400 million, the compensation ceiling is NIS 1.2 million.

Speaking to The Times of Israel, Koret CEO Adi Azaria-Pessahov lamented that the compensation plan proposed to businesses reveals fundamental gaps that fail to provide the necessary oxygen for the survival of small and micro businesses, which she described as the weakest and most vulnerable link in the Israeli economy. Micro businesses are a subset of small businesses with less than 10 employees and an annual turnover of up to NIS 2 million.

“Many of these businesses lost between 80% and 100% of their income, and if they fall within the optimal conditions of the outline, they will be entitled to compensation of less than 5% of the revenue they lost,” CPA Azaria-Pessahov said. “This is not compensation — it is a mockery at the expense of businesses who are barely surviving.”

“The main problem with the outline lies in the definition of ‘micro businesses,’ which in the outline are defined as those with an annual turnover of up to NIS 300,000, leaving those micro businesses with a turnover of [up to] NIS 1 to NIS 2 million [which in other government ministries are still classified as ‘micro businesses’] to fall between the chairs,” said CPA Azaria-Pesakhov.

Azaria-Pesakhov elaborated that in the outline, those slightly larger micro businesses have been thrown into the wider category of small and medium-sized companies and large businesses, which have a turnover of anywhere from NIS 300,000 to NIS 400 million, and don’t have the same needs, resources, knowledge and experience.

“This creates a distorted reality, in which the system mainly cares for medium and large-sized businesses, which are equipped with advisers, resources, knowledge, and experience to navigate the bureaucratic maze of applying for loans and compensation schemes,” she remarked. “That leaves small and micro businesses contending with financial literacy gaps and a lack of resources, struggling to keep afloat, without assistance tailored to their needs.”

Azaria-Pesakhov said that many businesses, which generated revenues in the months before the Iran war, and saw their operations disrupted because their stores were damaged during the Iran conflict, impacting their income prospects for this year, will not be able to get maximum state compensation.

More than one-third of businesses in Israel suffered a revenue drop of more than 50% in June because of the 12-day conflict with Iran, according to a recent survey conducted by Israel’s Central Bureau of Statistics. Sector-by-sector analysis showed that the restaurant and beverage industry was hit hardest, with about 65% of businesses experiencing more severe revenue losses, compared to a more moderate 11% in the high-tech and financial sectors.

The conflict also led to a widespread absence of employees across many businesses. Between June 23 and 25, when the survey was conducted, 35% reported that their workforce was reduced by more than 80%, with some reporting a complete halt or closure of their business.

In the restaurant and beverage industry, about 70% of businesses operated with less than 20% of their everyday workforce, while only 12% of high-tech and financial companies experienced such a drop in workforce levels.

“The most vulnerable businesses are the same businesses that suffered most during the COVID-19 pandemic, and at the start of the Hamas war,” said Azaria-Pesakhov. “Businesses that can’t work from home or operate remotely.”

“The magnitude of the economic and financial damage inflicted on these businesses, found mainly in agriculture, tourism and hospitality, is strongest, and they take the longest time to recover,” she added.

Azaria-Pesakhov emphasized that small and micro businesses in Israel account for 80 to 85% of companies and are the backbone of the economy, while only 6% of business credit within the traditional banking system is deployed to those businesses.

“There is a huge need that must be answered,” she said.

In 2024, Koret assisted more than 2,000 financially hit small and micro businesses with NIS 80 million in credit loans. Azaria-Pesakhov said she expects the loan figure to rise to more NIS 90 million this year. Koret is supported by philanthropy and impact investors, and also works with Bank Leumi, one of the country’s largest lenders.

Prof. Yaacov Frucht, founder and CEO of DFSL (Dr. Frucht Systems Ltd.), is another small business owner who recently received a loan with the assistance of Koret to help his startup stay afloat. Founded more than two decades ago, Acco-based DFSL is the developer and manufacturer of laser radar-based sensors for Homeland Security.

“During the war, our markets in China and Europe closed for us with customers reluctant to buy Israeli products because of politics,” Frucht said. “As a very small company, it was challenging for us to compete with large companies in the US.”

Frucht recounted that the startup, with only six employees, has been contending with many disruptions to its operations.

“There were many days people could not come to work, so on the one hand, orders stopped, and our production slowed, while the orders or sales we had, we could not always supply,” Frucht said. “Without the financial support we managed to get through Koret, I would have probably had to close the business.”

“Most businesses are not asking for charity but need financial support and guidance to bridge and overcome this challenging period to be able to resume their operations,” he said.