Small-business confidence plunged in March to near its lowest levels in the past seven years, as business owners grappled with the effects of the novel coronavirus on their companies and the broader economy.

Owners of businesses from restaurants and yoga studios to marketing and manufacturing firms are already making tough choices, as the fallout spreads from industries dependent on Chinese manufacturers to the broader U.S. economy.

“We’re going into a period no one has been through before,”

Said Jay Foreman, chief executive of Basic Fun Inc., a small Boca Raton, Fla., toy maker. “It feels like 9/11, Katrina and the financial crisis all in one.”

The company last week laid off about 10% of its 175 employees to conserve cash, after its bank advised Mr. Foreman to reduce overhead to avoid violating the terms of its loan agreements. “They have been working with us; they are telling us the realities,” Mr. Foreman said. “If you think your income will be reduced, you need to reduce your expenses.”

The pain began in February, when the Chinese government ordered factories to remain closed after the traditional Lunar New Year holiday and restricted the movement of workers, disrupting the toy company’s supply chain. Chinese production is now coming back online, but Mr. Foreman fears the pandemic will mean fewer sales of its Tonka trucks, Lite Brite, Lincoln Logs and other offerings.

Companies with fewer than 500 workers employ roughly 60 million people, or about 47% of the private sector workforce, according to the Small Business Administration. The challenges these businesses face and the steps they take in response, such as furloughing or laying off workers or pulling back on investment, will quickly ripple through the broader economy.

The coronavirus outbreak is likely to be particularly challenging for small companies because they tend to operate on thinner margins and with smaller cash reserves. A 2019 report by the JPMorgan Chase Institute looked at 1.4 million small businesses with a business banking deposit account at the bank and found 29% of businesses in a typical community were unprofitable, and 47% had less than two weeks of cash liquidity.

Many of them simply can’t afford to follow much larger companies like Apple Inc., which said it would close all its retail stores outside Greater China for the next two weeks and continue to pay its hourly workers.

The March drop in small-business confidence reversed four months of gains. More than twice as many business owners said they expected the economy would weaken rather than improve in the coming year, according to a monthly survey of more than 900 businesses with $1 million to $20 million in revenue for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer-advisory firm.

The outlook dimmed over the course of the weeklong poll, with 38% of business owners who responded on March 9 reporting that overall economic conditions in the U.S. had worsened compared with a year earlier, up from 25% on March 2 when the survey began. The portion of companies that expect sales to increase in the next 12 months dropped to 57% from 70% over the week.

Small-business confidence will likely decline further as the impact of the virus intensifies, said Richard Curtin, a University of Michigan economist who analyzed the data. “The policy options to contain the virus will make the economy worse,” he said. “I think small businesses are really caught in the middle.”

MBX Systems, a 180-person manufacturer of custom-computing hardware, recently reviewed each area of its business to determine minimum staffing levels, figure out who is cross-trained and determine who can be taught additional skills in case they need to cover for someone else.

MBX has told the 50% of workers who can work remotely to do so, increased paid time off to 15 days from 10, and largely walled off its Libertyville, Ill., facility. “For the most part, we are not having [visitors] come in unless there is something like an audit or something required for us to sustain our business,” said Justin Formella, chief strategy officer.

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