"it's clear that small business believe that lack of demand is the biggest problem they face right now"
This is blatantly obvious. It is equally true regarding business start ups, and big corporations as well.
It isn't the lack of demand so much as the lack of faith that future demand will support them. We have never had a recession wherein public and business confidence was so undermined. It began with the week of TARP when Summers and Geithner went into meltdown mode saying that the world would end if we didn't fork over a gazzillion dollars within one week. Fedsters don't do that. Maintaining confidence is their prime directive. They mutter bad news in encrypted doublespeak.
Ever since then everybody thinks that more shoes may yet fall and taking a risk is the last thing anybody wants to do.
Hoard, save cash, cut expenses, cut staff, hunker down and wait this one out below deck.