Why the debt ceiling debate won’t stop America’s small businesses
– John Krubski is an entrepreneur and the architect of The Guardian Life Index: What Matters Most to America’s Small Business Owners. He is currently working on his next book, “Cracking the America Code: How to Get US Back on Track”. –
As recently as April of this year, the Amex Open Survey announced that “For the first time since 2006, growth has surpassed survival as the number one priority for entrepreneurs… Perhaps further evidence that economic recovery is reaching Main Street, more than one-third (35 percent) plan to hire, the highest level since the fall 2008 survey.”
Just a few short months later, the headlines were filled with gloom and doom about the impending, “unprecedented” default of U. S. debt, followed quickly by predictions of a “double-dip” recession.
The truth is that, for America’s small business owners, the debt issue is an old tune, perhaps with a few new lyrics. We began as a debtor nation – dependent on a creditor country across the sea – and printed a currency without much prospect of making good on either its value or the debt incurred. In fact, the “continental dollar” printed during the Revolutionary War was worth one penny by the end of the war. Thousands of tradesmen and farmers were literally left holding the empty bag of the American government’s promises. Eventually, our national finances straightened out. However, until that time, the many small businesses that funded the Revolutionary War had to rely on themselves to figure out a viable route to survival.
More than two hundred years later, it’s still the same story for America’s entrepreneurs and owners of small enterprises. After the market crash of 2008, a key “national problem” was the availability of credit. As money for loans became more available, the problem then became “qualifying for loans.” However, as many small business owners know, the only way to get money from banks is to prove in the application process that you don’t need it in the first place.
Now, with the downgrading of America’s credit rating, the concern is not just about the availability or the qualifications, but about the cost of borrowing. Throughout this very public national “crisis,” it is important to realize that credit has never been the typical small business owner’s major concern or strategy for making his or her business work. To the contrary, most small businesses that stand the test of time rely on their own resources, live within their means and effectively adapt to changing circumstances.
The first and second of these – relying on yourself and living within your means – are the key attributes that make it possible for a small business to survive infancy and continue through even the hardest times. If you start your business with the assumption that you aren’t going to get help from anyone else, your model automatically requires a commitment to living within your means. It becomes not only a mindset, but a powerful strategy for success.
Credit crunch forces small businesses to get creative
United National Consumer Suppliers, a Ft. Lauderdale, Florida broker of clothing, toys and other merchandise for discount stores such as Marshalls, has been seeing more suppliers ask to be paid up front amid worries over the uncertain economy.
But that’s not necessarily a bad thing, said CFO Todd Hartstone, who in exchange for complying can often garner deeper pre-payment discounts.
“We’re going to monopolize on that opportunity,” said Hartstone, whose business has been putting up good sales numbers as consumers seek more bargains from discount stores. “Fortunately having a little cash strength puts you in a position where you can drive the purchase.”
During a downturn, successful entrepreneurs work to create their own financing infrastructure by improving trade terms with suppliers and vendors, said Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp, which studies credit ratings of small businesses.
“They’re becoming a proxy for credit and debt,” he said. “What they’re trying to do is build stronger relationships.”
Nick McKay, president of EnviroScent, a maker of room freshening products sold at retailers such as Lowe’s and Michaels, agreed.
He said his Atlanta-based company has many suppliers that offer EnviroScent extended payment terms, the result of longstanding relationships built on trust.
Exclusive: Fewer small businesses shopping for credit: PayNet
When the financial crisis hit, panicked small businesses were scrambling to find credit. Nearly three years later it’s a much different story.
The level of credit shopping – when a borrower seeks a loan or lease from more than one lender – by small businesses has fallen nearly 30 percent since September 2008, according to new data released by PayNet Inc and it may lead lenders to offer better terms said William Phelan, PayNet’s president and founder.
“It indicates that it’s not a very competitive market right now,” said Phelan, whose Skokie, Illinois-based company released the data as part of the launch of its new Credit Shopping Indicator, which measures the number of lenders a borrower shops for business credit. “In 2008 you would have expected it to be high because of the recession and the lack of availability of credit.”
Phelan said back then the indicator registered 118 – a record – and far above pre-recessionary levels in January 2005, when it sat at 100 – the point at which a borrower typically shops for credit at more than one bank. Today it stands at 84.
This dip is actually good news for small businesses, who should take the opportunity to ask for better loan terms from lenders, said Phelan.
Mr. Phelan is obviously not well informed. The main reason for the fall in credit applications is that many small businesses have collapsed by now and thus need no more credit.
Further, I would suggest that Mr. Phelan actually bothers to shop for credit himself to experience what happens if you walk into a bank and “ask for better credit terms”.
I am surprised that Reuters is consulting with Mr. Phelan who is obviously only a paper tiger and has no idea of what is happening outside his office.
Big banks see slow recovery for small business
Marc Bernstein’s response to reports of loan facilitators advising small business clients to avoid big banks: “It’s simply bad information.”
The head of Wells Fargo’s small business lending initiatives then pointed to the $3.7 billion the country’s fourth-largest bank (by total assets) lent to small firms over the first three months of the year – an increase of 27 percent over the first quarter of 2010.
“That’s not small change,” said Bernstein, who added Wells Fargo is the largest national lender of loans under $100,000 and was recently honored as the Small Business Administration’s (SBA) 2011 Large 7(a) Lender of the Year. “We are trying to do everything we can to get people who apply for a loan approved, but the fact of the matter is that there are a lot of small businesses that unfortunately have been hit very badly by the downturn and are struggling and it’s hard to see how they’re going to handle more debt.”
This appears to be the view of most big banks, who insist they are ready to lend, so long as the business owner can show they are capable of repaying the loan.
But what if your primary source of collateral – your house – has plummeted in value due to the housing slump that still has a grip on the country?
“We love collateral, but we are first and foremost cash-flow lenders,” said Bank of America small business executive Robb Hilson, adding a company’s current and future sales are a better indicator of its ability to handle more debt. “We could have bullet-proof collateral, but if the business owner has a hard time demonstrating that they can repay the loan vis-a-vis cash flow then we’re not as excited about doing it.”
Bank of America, the biggest U.S. bank, made more than $92 billion in loans to small and medium-sized business in 2010 and is the top lender of SBA 504 loans, which are used to purchase commercial real estate, upgrade existing facilities or buy new equipment.
The gall of Mark Bernstein’s hyperbole. Mega banks lending to small business is dismal compared to their community banking counterparts.
According to MultiFunding research, in 2010, the top 25 banks controlled about 61 percent of all deposits, but made only 20.3 percent of all SBA 7(a) loans. Smaller banks held about 39 percent of all deposits but made 79.4 percent of all SBA 7(a) loans.
These banks are in your community as “deposit shops” to collect and send your money to Wall Street for god knows what. But it isn’t good for your community, that’s for sure. Move your money out of these banks. It’s just not good for the country.
Small business confidence taking a beating
All those pundits who declared the current recession dead and buried, obviously haven’t been talking to small business owners.
Chapman University economists are the latest to announce the official end of the recession – with the codicil that the recovery will be more tortoise than hare.
In stark contrast to that report is the latest National Federation of Independent Business survey that shows small business confidence is locked in a downward spiral, that is worse than at any time during the last big recession in 1981-82.
The NFIB index showed a drop of 0.8 points in November – to 88.3 – from where it was in October and it represented the sixth time the index was below 90 since the current recession officially began 24 months ago. According to the NFIB, the index never fell below 90 at any point during the 1981-82 downturn and experienced a sharp rise at the beginning of 1983.
NFIB chief economist William Dunkelberg said the index’s current level was directly related to a lack of consumer spending. It seems not even a modest increase in Black Friday sales volume was enough to boost morale among small business owners.
“The biggest problem continues to be a shortage of customers,” Dunkelberg said in a statement. Among the 825 respondents to the NFIB survey, just 16 percent said they planned to make any capital expenditures over the next few months – the lowest total in 35 years. “Consumer spending is very weak, and there is nothing on the table in Washington to make owners more optimistic about the future.”
Dunkelberg said a continued lack of access to credit was further handcuffing small businesses and slowing job growth. In November small businesses reported a decline in average employment per firm of 0.58 workers during the prior three months, according to the NFIB. That represented a vast improvement over May’s record loss of 1.26 workers per firm, but not something that could lead someone to confidently proclaim the recession dead.
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Beer startup needs to create a buzz
As the jobless rate climbed toward 10 percent this summer, Erica Shea and Stephen Valand, quit their advertising jobs, took $10,000 in personal savings and started selling their 1-gallon home brew beer kits from a stand at the Brooklyn Flea Market, testing the theory that beer is recession proof.
“When you go from an actual salary down to $0 an hour, it’s quite an adjustment,” admitted Shea, who got the bug for beer making after she stumbled across her dad’s old home brewing kit. But when Shea and Valand went to brew their first batch they discovered there was no place in New York to buy the ingredients, so they created the Brooklyn Brew Shop. The kits take up only a foot of floor space and come with everything needed to brew your own beer.
Shea said they opened their stand, which they rent for $100 a day, on the July 4th weekend, but sold just five kits. By the end of the month they had moved 40 kits, which go for $40, or $30 without grain. The kits, which make about 12 bottles through a four-week process, include a 1-gallon glass jug, some tubing, a racking cane, a thermometer, sanitizer and the yeast, hops and grain. (read the full story here)
The U.S. craft brewing industry has weathered the recession better than most, with sales up nearly 9 percent in the first half of this year, according to the Brewers Association (BA). The BA, which has more than 1,500 members, also reported that overall U.S. beer sales were down 1.3 percent in the first six months of 2009.
Shea and Valand believe the trend of brewing your own specialty beers will continue to grow and that it will entice a younger, more urban demographic that enjoys the ability to experiment with different flavors.
“I just think that because there are really good craft beers now, there is really a drive for people to explore that and make their own really good beers,” said Shea, who has used ingredients as bizarre as lobster and jalapeno. “Our challenges as we continue to grow the business are time and space. There’s only so many hours in a day that you can be doing things and there are so many ideas that come up that we really want to pursue, but ultimately there are two of us and we get tired.”
America’s economic recovery lies in the middle market
Thomas Bonney is founder and managing director of CMF Associates, a financial consulting, staffing and recruiting firm based in Philadelphia, PA, that serves private equity, middle-market and small-cap public companies nationally. The views expressed are his own.
In his 1988 Republican National Convention acceptance speech, George Bush championed the tradition of the American community, describing it as “a brilliant diversity spread like stars, like a thousand points of light in a broad and peaceful sky.”
More than 20 years later, this tradition still forms the core of our country’s strength – particularly the “thousand points of light” that comprise our medium-sized, family- and private-equity owned business community. I believe it is this community that will ultimately drive the tailwind of economic recovery and growth.
The economic healing power of these businesses is clear. According to the Small Business Administration, more than 6.7 million of the 27.2 million existing businesses in 2007 were small businesses with less than 500 paid employees. Just one hire by each of these firms would more than replenish the 6.46 million jobs lost since the recession began in December 2007 through June 2009.
Smaller companies continue to forge the strongest track record of job protection. The Labor Department’s Quarterly Business Employment data for Q4 2008 shows that, relative to the size of private sector employment, job losses at large companies were approximately one-third larger than losses in the middle market. Mid-sized companies with 999 employees or less accounted for 10.9% of job losses, while larger companies with 1000+ employees were responsible for 20.7% of job losses.
Middle market American leadership teams generally are innovators. The innovation we see on the ground is qualitative and anecdotal, but indicates a growing desire on the part of a subset of the middle market to begin to play some offense. This is not the sort of data that quickly moves through the labyrinth of channels used to generate state and federal government data that drives Wall Street and dominates media outlets; we expect that our qualitative observations will be validated in quantitative data by Q1 2010.
For instance, smaller companies are already taking the initiative to pick up the pieces of fallen “humpty dumpty” corporations. Many individuals displaced by larger organizations’ job-shedding are choosing to leverage their experience and relationships and start their own organizations which, in turn, will hire more employees. One example is a newly founded consulting firm that identifies orphan pharmaceutical compounds within large pharmaceutical companies, and connects them with middle-market companies whose cost structures are in line with the orphan compounds’ expected revenues.
It’s a good point brought up in the article – about laid off individuals starting their own companies, leveraging the experience they acquired while working for a large corporation. It’s definitely a better option to sitting home and feeling depressed that no one hires you with your brilliant skills and impressive experience. The recession benefits these new entrepreneurs in a way that once they lose their jobs, they have so much time to reconsider their life goals and think about other options, than just jumping into another dead end job.
Is your business failing? It’s your fault
Brace yourself, because George Cloutier has some unsettling news: your failing business is your fault.
Cloutier is the no-nonsense CEO of American Management Services and author of Profits Aren’t Everything, They’re the Only Thing, a literary slap in the face to small- and medium-size business owners who wonder why sales are slipping and cash is tight.
Like the gruff boss he urges small business leaders to be, Cloutier doesn’t waste any time trying to get you to like him — he wants your respect, and his book fires off rules without apology: “Love your business more than your family”, “End your denial” and, perhaps most startling, “Give up golf – it’s a waste of time!”
Profits Aren’t Everything is peppered with real-life examples of businesses teetering on the brink of disaster because they invariably failed to put profits first. Of the hundreds of maxims Cloutier imparts, the profit rule trumps all others: “In the game of business, pure profits are the only prize,” he writes. The message is clear: fire your family members, skip your kids’ recitals. Do whatever it takes to bring your business to profitability.
The book offers a few surprises, too. When Cloutier’s not scolding readers for taking weekends off or phoning their spouse from work (both definite no-nos), he insists they stop underpaying themselves and take a big, fat raise. His logic? A salary demonstrates who’s boss and if you can’t pay yourself like one, there’s something wrong with your business. (So fix it!)
The endless barrage of rules would all seem like a bit much if it weren’t for Cloutier’s impressive track record. The so-called “Turnaround Ace” has made a successful career out of digging hapless businesses out of debt and mismanagement by demanding his clients fire dead weight, own up to their laziness and stop making excuses. And it works.
Be sure to pick up Cloutier’s next book: “Get Rich; Die Alone”
Is the government giving small biz a fair shake?
Last year was a record for small businesses, which scooped up more than $93 billion in federal contracts, a $10 billion jump from a year earlier, according to a report by the U.S. Small Business Administration (SBA).
It’s good news to be sure, but critics are already grumbling that the government only allotted 21.5 percent of its promised 23 percent target to small businesses for fiscal 2008.
Key among their complaints:
* High costs: Small businesses often opt out of the running for government contracts for fear that they can’t absorb the proposal costs that can run as high as $25,000 to $500,000, The Washington Post reports.
* Misrepresentation: Critics say large businesses have been known to fudge their size and scope to win contracts intended for their smaller counterparts, and urge government to penalize companies that do so.
* Poor enforcement: Small businesses are calling for a tougher crackdown on government agencies that fail to meet their contracting requirements. (The SBA report shows that only one agency actually met its goal.)
I see the biggest obstacle for SMBs to be the relative absence of a history with government contracting, or with the government agency seeking the work, compared to larger and more established contractors. Agencies are risk-averse, and want to choose a safe option, even if it may cost slightly more. SMBs need to get creative and demonstrate their value to the government, even if prices are lower than the larger competition, because the government agencies are usually required to factor in past performance on similar contracts. One strategy: find larger companies with the performance history or the agency relationship and team with them for a portion of the work. Although you won’t get the whole contract, you will start a good relationship with a prime contractor, may start a good relationship directly with the customer, and certainly will start building a good track record with the agency. And, if you see a solicitation or RFP that is not set aside for small businesses, but contains a piece of work that could be done effectively by a small business, reach out to the SBA and encourage them to contact the agency. They might not be able to change the contract to a “set aside,” but it may get them thinking the right way for the next similar opportunity. Some other helpful hints: http://www.airtranmagazine.com/features/ 2009/09/big-government-small-business.
Experts weigh in on Twitter-based shopping site
Yesterday we presented entrepreneur Prashant Nedungadi (read his entrepreneur journal) and his startup website IMshopping.com, which offers a platform whereby consumers can ask specific retail-related questions, through the website directly or via Twitter, and have them answered by an online community of retail experts. (click here to read Nedungadi’s pitch)
Nedungadi launched his website last April and has already received $4.7 million in venture capital investment from SK Telecom, but now needs to find retailers willing to pay to utilize his virtual sales force instead of going the traditional route and hiring their own sales people.
Our panel of experts have watched Nedungadi’s pitch video and gave us their reaction to IMshopping and Nedungadi’s business model.
TAKING IT TO THE EXPERTS
Tom Ryan, the CEO of the trend-setting clothing company Threadless, knows all about leveraging Twitter for business, having formed a partnership with the social media powerhouse to reproduce notable “tweets” on t-shirts.
“I believe that using social solutions to boost conversion is generally promising,” said Ryan, who feels IMshopping’s approach of creating a network of unbiased experts to answer specific questions of shoppers is interesting.
However Ryan added they will have a tough go competing with review sites, like CNET and decision-engine sites like Hunch. “I think a key success factor will be the company’s ability to successfully recruit a large, loyal, talented and unbiased group of experts and to convince shoppers that these experts truly are talented, unbiased, and a better source of information than other sources.”
It remains true that the banks do not lend unless you can show you don’t need the money. The difference today, however, is that they no longer advance funds against confirmed letter-of-credit. They seem to have forgotten how business is done and do not have a mindset to even try to figure out that they are the ones that are wrong. It’s too bad because their attitude influences politicians who also don’t know. It’s a good thing small business continues to exist.