Starting a small business is never easy even in the best of economic times.

Failure rates are endlessly debated. But even the most optimistic figures reveal that about half of all small businesses fail in the first five years. 

Small business is On Topic at FOXBusiness.com in August. Check back every day to read stories about how to start, build and enhance your small business.

Now throw in an economic downturn brought on by the crippling combination of a severe housing slump and locked credit markets, and the environment shifts from merely difficult to all but impossible.

And, not surprisingly, the hardest hit sectors are directly related to housing.

“The most dangerous businesses to start right now are in construction and the mortgage industry,” said Ruth King, an entrepreneur and author of the book  The Ugly Truth About Small Business.

King said home construction is always a minefield for small business entrepreneurs, especially plumbers, roofers, heating and air conditioning specialists, and electrical subcontractors, because profit margins are so slim.

But with commodity prices soaring upward for much of the past year, the so-called barriers to entry for aspiring contractors have risen that much higher.

Stan Fleming, owner of S&R Fleming, an electrical contractor in Hunterdon County, N.J., said he learned a valuable lesson last year after the price of copper rose 20% in the three months between when he submitted a bid and when the work was completed.

When the general contractor on the project refused to adjust Fleming’s pay to compensate him for the unforeseen jump in the price of copper, Fleming had to eat the difference.

“I didn’t go into the hole,” he said, “but I didn’t make much either.”

Now he makes clear in all of his bids that volatile commodity prices can affect the final price tag of a project.

In addition to rising commodity prices, contractors face a far more competitive bidding process, which has made it that much more difficult for start up contractors to win contracts.

 “You can’t start a business now because the competition is so fierce,” said Fleming.

Because housing work has grown scarcer, larger more established contractors are bidding for jobs that in previous years would have been too small to squeeze a profit.

Now, even the big players will take what they can get, according to Fleming, making it all but impossible for upstart contractors to break into the business.

Just as damaging to start up contractors as the housing downturn has been tightening credit markets.

Entrepreneur hopefuls shouldn’t expect to walk into the nearest bank for a small business loan, said James Kosci, district director for the Small Business Administration in Newark, N.J.

The SBA’s New Jersey loans are down 29% through the first 10 months of the agency’s 2008 fiscal year, according to Kosci.

Through July, the SBA in Newark had approved 2,035 loans totaling $403.6 million, down from 2,869 loans totaling  $478.6 million during the same period a year earlier.

And some of the biggest U.S. banks have dramatically scaled back their SBA loans: Citizens Banks is down 83%; Citibank down 82%; Bank of America down 62%; Washington Mutual down 60%; Capital One down 58%; and  PNC down 55%.

Kosci said the SBA, which makes just under one-third of its loans to start ups, has been forced to turn to smaller, community banks.

“Our loans are unfortunately off because of the poor economic factors that businesses are facing,” he said. “Some lenders have raised the bar for loans with or without SBA backing. The bar for qualifying has been raised.”

Kosci said the housing slump and tighter lending requirements have apparently led many entrepreneurs to hold off on plans for start ups.

“People are looking at the possibility of going into business. But they’re holding off and hoping that the economy shows some signs of a turnaround,” he said.