You have a value proposition.  It may be the one you started with or it may have evolved.  But change keeps coming at us faster and faster.  Right now the biggest change coming is the looming economic slowdown.  Is what you’re selling now as valuable to your customers as it was last year?  Last month?  Are your prices holding up?  One change being forced on many small businesses involves pricing.  Much of many physical products being sold today comes either wholly or partly from China and tariffs are increasing the costs of many of these products.  As this trend continues the big players – the Amazons, Walmart, Apple and on and on are better able to absorb the increasing costs with little or no increase in prices – so far.  This may not be so easy for small businesses.

If you do have to raise your prices is what you sell still as valuable to your customers?  Do you assume that if sales are holding up that they will continue to if you have to raise prices?  If you do have to raise prices is there something you can do to keep your value?  Do you offer a different service to go with your product – like free delivery five minutes ago?  Do you look at a different product mix?  Do you maybe add something new to your offerings or eliminate something with lower margins or take that too much time to perform?  How flexible can your pricing be?  Airlines adjust prices almost by the minute.  Do you have slow times when you might be able to offer a little lower price?  Do you look at your social media presence to see if there are more ways that you can connect with your customers?

How long has it been since you really had a Dutch uncle look at your prices and the costs that go into them?  Cost control, even for small businesses, is something that should always be watched closely.  Do you know what your competitors are doing?  Do you know why people are buying from your competitors?  Are there potential customers out there that you have never even thought about?  Pricing can be a winning or a losing strategy.  It might be worth taking a look now.


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October 8th, 2019

Have you ever been anywhere where there is a faucet with a slow leak and every now and then you hear the drip, then a little while later another drip, then another?  At first you hardly notice it.  Then you hear it again and start to wonder where it is.  Then you find it and say “OK, I’ll deal with that later.”  But it keeps on dripping and now you’re starting to get irritated.  The economy is starting a slow drip.

In the last week several more causes for the drip have shown up.  The manufacturing gauge is the lowest it’s been since 2016.  It has now contracted for two straight months.  Weakness in the manufacturing sector spreads to other parts of the economy because companies start lay to lay off workers and stop buying as much from suppliers – an example of a ripple effect.  Small business hiring plans have dropped.  The ISM Non-Manufacturing Index (the services sector) has also fallen to its lowest level since 2016.  The U.S. services-employment index is the lowest in five years, and then hanging out there like a great dark cloud is the trade war.  The trade war is already having negative effects on the economy in many industries, but one of the less visible effects is the creation of continuing uncertainty about what’s going to happen.  Companies that might be thinking about making investments or expanding are holding back until they see how the trade war will resolve.

On the positive side, jobs continue to increase although growth has slowed considerably, and the unemployment ratio is the lowest in 50 years.  Mortgage rates are low and the housing market is strong.  And the American consumer is still spending – a very positive sign for the economy because consumer spending accounts for approximately 70% of the economy.

But that faucet is still dripping.

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The basement?  What about the garage?  The stories of some rather well-known companies speak to the lore of the garage startup – Apple and Amazon come to mind.    But the basement?  I don’t know if Ewing Marion Kauffman had a garage, but he did have a basement.  He served in the Navy in World War II, and after leaving the Navy he became a pharmaceutical salesman.  In 1950 he formed Marion Laboratories with a $5,000 investment.  In his basement.

In 1989, Marion laboratories merged with Merrell Dow Pharmaceuticals to form Marion Merrell Dow.  In the year prior to the merger Marion Laboratories had revenues of $930 million.  The Kauffman Foundation was born.

From the basement to the C-Suite.  The entrepreneurial spirit that drove Ewing Marion Kauffman to the C-Suite created a major American foundation dedicated to entrepreneurship and education.  There is no limit to what the entrepreneurial spirit can do.

Who needs a garage?

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“…The candles flicker…
September 24th, 2019

and dim.”  Back in the 1950’s, one of the most popular crooners, Nat King Cole, sang a song called “The Party’s Over.”  The second verse begins “The candles flicker and dim.”  The economy’s party is definitely nowhere near over.  Unemployment is at near-record lows, homeowners’ wealth has escalated dramatically since the 2008 recession (remember that?), Apple’s market value passed one trillion dollars, Jeff Bezos bought the White House, and interest rates keep going down.  The strong economy probably has a way to run yet before it starts running out of breath.  Christmas spending is projected to be up around 5% this year which is great for the economy.  But back at the party, somebody just cracked the door and a slight zephyr is sneaking in and the candles are flickering just a little.

Another line is “… now you must wake up, all dreams must end….”  They’re not going to end abruptly and they aren’t likely to be nightmares.  But eventually you have to wake up and realize that the party can’t go on forever.  Credit card debt continues to increase.  Good times mean lots of buying, lots of buying often leads to lots of credit card usage.  Total credit card debt is estimated to be higher now (approximately $1.04 trillion) than the 2008 peak.  It will eventually start being paid down to some extent taking money out of the economy that would otherwise be spent (of course it has already been spent and now the bills are being paid but at a time when the economy is slowing).  The attack on the Saudi oil production facilities is probably going to raise gasoline prices if for no other reason than continuing uncertainty over the vulnerability of their oil infrastructure.  Trucking industry shipments have been declining in 2019, an important leading indicator of where the economy is headed.  And then overhanging a large portion of the economy is the trade war with China, affecting multiple industries.

Just a tiny zephyr ….

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In the Virginia District, which excludes the Virginia counties around Washington, SBA approved 749 loans for a total of $363,332,500 in fiscal year 2018.  How many small businesses might not have been able to expand their businesses, pay off debt, buy new real estate for their businesses etc. if the SBA guarantee did not exist?  Nobody knows, but I can guarantee you that it is a big number.  A bank might receive a request for a loan that they would be inclined to turn down, but if it can get a 75% guarantee from the SBA it might make the loan.  That is the SBA’s mission – to give lenders the incentive to make more small business loans.

SBA loans can be used for any normal day-to-day operating expense such as what you would expect to find on a balance sheet or P&L.  They cannot be used to buy investment properties.  A business must be a for-profit business.  Under the SBA 7(a) program – the major loan guarantee program, there are also special programs for certain industries.  For example for contractors there is the CapLines program which can be used for things like short-term working capital loans and to finance construction costs.  There are several different programs to help finance international trade and exports.  There is another program called the 504 program which is used for fixed asset purchases such as real estate and machinery purchases.  It is a two-part program with the opportunity for a business owner to finance up to 90% of a project.

SBA also provides Resource Partners – SCORE, Small Business Development Centers and Women’s Business Centers that provide free mentoring and low-cost education services to small business owners.  For the near-term foreseeable future we are going to be operating in a very low interest rate environment.  On all SBA loans longer than seven years and over $50,000, the maximum interest rate that can be charged is 2 ¾% over prime.  Opportunities abound.

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Insert or Swipe Card
September 10th, 2019

It’s so easy.  See what you want, pick it up and head for the checkout counter, insert or swipe your credit card in the little reader then out the door.  Slam bam thank you ma’am.  Quick, easy, and adding to the already approximately $1.057 trillion dollars in consumer credit card debt outstanding according to the latest figures available.  During the 2008 recession credit card debt peaked out at about $870 billion.  That very large number did not generate as significantly higher default rates than might have been expected although there were more defaults.  But for those who had high credit card balances during the recession many started paying those balances down.  You pay more on your card to lower the balance, you don’t spend that somewhere else.

So here we are in September of 2019 at the tail end of one of the longest economic expansions in history.  The expansion is slowing, but until December 24th those card readers are going to be humming.  But after Christmas and at the beginning of 2020 people may start looking at those balances and start paying them down again as they did after the 2008 recession.  But this time they are going to be paying them down into an economy that is already showing signs of weakness.

Whose business is going to start to see some of that lower spending?  It’s worth taking a look at.

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The yield curve has inverted before every recession since 1955.  So what is it?  It is simply when interest rates on short-term U.S. Government bonds are higher than the interest rates paid on long-term bonds.  When this happens it’s called an inverted yield curve.  Sometimes it has happened months before, sometimes two years or more.  But it has now happened again.

Think about deposits in a bank account, which are essentially loans to the bank.  You are “loaning” your money to the bank in return for interest on that money.  If you can withdraw the money at any time the bank pays you a lower rate because they may not have the opportunity to use it for very long.  But if you lock up your money for a longer period – for example a 12-month CD, the bank pays you a higher interest rate because they have longer to use that money to make loans.

So when interest rates are higher on short-term bonds than long-term bonds it indicates that investors are looking at the safety of long-term bonds because they are worried about the near-term economic prospects, and because of this the government is having to pay more to short-term investors in order to sell bonds and less to long-term investors.  Recession still seems to me to be too strong a word for what is coming.  The labor market is strong, wages are still rising, plenty of jobs are still available for people who want them and consumers are spending like they don’t have a care in the world.  So a slowdown seems much more likely than any serious recession, and more and more signs are pointing toward a slowdown.  It is on the way.  When, nobody knows.

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“I’ll take your BMW and raise you a new bike.  OK, I’ll raise you a steel.  I’ll raise that a soybean.  I’ll call.”  The poker game of international trade between the U.S, and China rolls merrily along with the most recent raise bigger than ever.  Caught up in this poker game are the American consumer and retailer.  Consumer spending makes up approximately 70% of the U.S. economy, and the economy is beginning to slow down – slowly, but still a reality.

JPMorgan Chase estimates that the American family will absorb another $1,000 in annual costs as a result of Chinese tariffs after the coming 10% levies take hold.  If the upcoming tariffs are raised to 25% as the president proposed most recently (may have changed by the time you read this), that number could creep up toward $1,500.  Where is the consumer going to decrease or stop their spending?   Retailers?  Restaurants? Clothes?  Shoes?  More?  There are going to be retailers that suffer which we are seeing already and it could get worse – death by a thousand cuts.  Tariffs are raising retailers’ costs on some items.  The consumer may have less to spend.  Not exactly a pleasant thought.

Christmas is right around the corner.  There are as of today only 119 shopping days ‘til Christmas.  Pretty soon “Jingle Bells” will begin to leak out of stores’ sound systems.  Consumers are spending like mad, and no matter what happens between the U.S. and China between now and then they are going to keep spending right through Christmas Eve.  But what happens after Christmas?  What happens to products totally made in China or ones where parts of them (like bikes) are made in China?

It could be a bumpy ride.  Retailers, fasten your seat belts.

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Distant Thunder
August 20th, 2019

It’s a glorious summer day at the beach.  The economy is roaring along; interest rates are continuing to decline with all the benefits that come with lower interest rates; the president just postponed tariffs until after Christmas on certain items without which the world as we know it would end – such things as laptops and iPhones.  The sun is shining brightly.  But anyone who has been at the beach in the summer probably remembers seeing way off in the distance these beautiful high clouds beginning to appear.  Then you hear something that’s so far away that you can’t tell what it is, and you finally realize that it is thunder.  It’s still a long way off but it’s there, and the clouds are beginning to get larger and creep closer.

We’re beginning to see in those clouds more and more signs of a looming recession sometime in the next year or two.  In my opinion the word recession is like crying fire in a crowded theater.  But it sells ads.  Recession usually indicates big problems.  I think the economy is still healthy enough over a wide spectrum that while a slowdown is coming it doesn’t have to be a disaster.  But disasters sell ads.  One of the things worrying people to most is a US-China trade war.  Many companies are holding off on investment decisions on things like plants and equipment until the situation becomes clearer.  The US services sector declined in July to its lowest level in three years.  Last week the Conference Board said its index of consumer sentiment fell to its lowest level in nearly two years, and it is the consumer that has been driving the economy.  And then there is the inverted yield curve (next week).

So what does this say to small business?  Only that it may be time to look at all the pieces and parts of your business and make sure that everything is tight and you’re on top of your numbers.  When things are rolling like they have been there is sometimes a tendency to get a little complacent.  So a little tightening up may be warranted.  Maybe you have everything completely under control, but you want to keep an eye on the clouds.  You don’t want to get caught without an umbrella.

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With interest rates continuing to fall, if you have existing business debt it may be worth looking to see whether it might be eligible to refinance with an SBA loan in order to lower your monthly payments.  SBA loans were created with longer amortizations than banks were normally comfortable with in order to enhance business cash flows because of the lower monthly payments associated with longer amortizations.  Another key benefit is that interest rates allowable under the SBA loan program are capped.  So the interest rate on any SBA 7(a) loan (by far the largest SBA loan program) over $50,000 cannot exceed 2 ¾% over prime.  Since interest rates have been dropping you may have debt that was obtained earlier when rates were higher.  So even though they may not have been thought to be that high at the time, with rates where they are now and expected to go still lower you may still be able to lower your monthly payments. 

To refinance existing debt there are certain conditions that have to be met.  One of the prime requirements is that a new loan must provide the borrower with a “substantial benefit” demonstrated by the payment amount being at least 10% lower than the existing loan.  Some of the other important requirements are:

·       A demand or balloon maturity feature in the existing note or the current maturity is not appropriate to the original purpose

·       The existing debt being refinanced is on a revolving line or a credit card

·       Interest rate exceeds SBA’s maximum

·       Loan is over-collateralized

·       Line of credit lender is unwilling to renew

There are other considerations but these are some of the most important.  If you think that you might be able to benefit from an SBA refinance go talk to your banker or an SBA lender and find out.  It could be well worth the effort.

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