Small business group, ISME, said figures from its latest survey were the worst on record, with four out of five firms worried about business prospects.
Nearly half of all small firms have already announced redundancies while two out of three said their turnover is down in the last 12 months.
Close to half of firms also reported a reduction in export values.
ISME said the survey results which cover the last three months of the year are disastrous and shows investment plummeting and job losses exceeding its worst forecasts.
Business confidence is also at an all-time low. The most negative sector is distribution with 92% less optimistic about business prospects followed by manufacturing at 82%, construction (80%), retail (78%) and services (62%).
The construction sector recorded the largest job losses with a massive 73% of businesses employing fewer than last year.
The survey, based on responses from more than 600 companies said the first quarter of next year will see an even greater upsurge in job losses.
More than half of firms expect to let people go next year with just 14% seeing an increase in employment.
ISME said there is a strong indication that an unprecedented number of job losses will be announced in the New Year as companies review their options following the Christmas break.
Head of research with ISME Jim Curran said: “Based on the survey results we are extremely concerned for the future of many SME businesses, with a large swathe of companies in all sectors just about hanging on. The indicators are that the next months in particular will be horrific, with many businesses confirming that they will be reviewing their options in the new year, especially with regard to employment.
“In many cases the viability of the entire business is under scrutiny. This would lead us to believe that there is going to be an even bigger increase in redundancies and closures, in first quarter of 2009.”