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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Is nothing sacred anymore?  In a lab at Columbia University in New York graduate engineers are developing ways to laser print pizzas and cook them with laser beams.  The whole idea behind this desecration of the noble pizza is to be able to create a pizza that can improve nutrition.  The 3D printer has an array of cartridges in which ingredients can be loaded.  So for example the printer can lay down the dough, then another cartridge lays down the tomato and another lays down the cheese.  Then it is put into a specially-developed oven and baked with laser beams.  Makes for more even baking they say.

So the thinking goes that you could customize the material in the cartridge, say maybe the cheese, with certain additives or medicines that might be used in a hospital setting for example where people may have certain nutritional deficiencies.  Why not?  Meatless burgers are here to stay with all the societal benefits attendant.  Why not 3D pizzas?  New technologies already here and being regularly developed  and are creating opportunities currently undreamed of for startups to create whole new businesses developing products for the betterment of mankind or just consumers’ lives.  Such as pizzas.  Digitized food to help people stay healthy.  Bon appetit.

Yuk.

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Raising venture capital for a founder is an exercise in seeing how high the founder’s tolerance for rejection is.  But if success is achieved, survival is assured and the horizons are unlimited.  Maybe grow the company and sell it for a big number.  Maybe even go public.  Maybe even build to a large successful company that is a leader in the industry.  But in the meantime, there is a business to manage, and managing a growing company is a lot more complicated than raising a round of venture capital.  Managing goes on “forever” as long as you own the company.

In the earliest stages the founder has to manage him/her and maybe one or two employees.  Not that hard.  But then success and growth start to happen.  More people, with all the attendant problems they bring are being added to the payroll.  There are hiring and firing decisions to be made, maybe some government regulations (like having to pay taxes, hence having correct records, hence paying attention to the company financials).  You may need new space, with all the time required to find the right space to grow into.  And finally the small matter of always having to make sure that there is enough cash on hand, not to mention constantly focusing on increasing sales and revenue.

When you become a manager you may look back on raising venture capital as a walk in the park.  Now you have to learn to manage, whatever that takes and whatever that is.  Success won’t come without it.

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In Hamlet Act 1, scene 3, 75-77 Polonius provides this counseling to his son Laertes.  So we know that Polonius didn’t own a small business in today’s banking environment.  It’s fairly certain that the Fed is going to lower interest rates soon by at least a quarter of a point, on top of the already historically low interest rates that we have today.  One factor affecting the Fed’s decision is that China’s second quarter economic growth decelerated to the slowest growth in 27.  And since China is a major buyer of US goods a weak economy in China can slow growth in some sectors of the US economy.   

In March I wrote a post about no more interest rate hikes.  I never thought that instead rates would be coming back down.  So I will say again that if the Fed does go ahead and make the cut there will be plenty of time to look at your company and its future to see whether a loan of some kind would help your company grow and increase its profitability.  One way lower interest rates would help if nothing else would be that if you have credit card debt that has been used for your business you might be able to pay it off and increase your cash flow because of the substantially lower payments on a bank loan.  Taking on debt is obviously risky and not always wise.  But if it would help you grow and profit it might be worth serious consideration.

I wonder what Polonius would say today.

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Approximately 10,000 Baby Boomers are retiring each day.  A lot of these Boomers own businesses and a lot of them would like to see these businesses, which are their legacies, continue.  Starting a business from scratch may be a dream so that you can look back and say that you built your own successful business.  But as exciting as that idea may sound it is hard – really hard, and a very high percentage (some say up to 50%) fail in the first year.  That’s lousy odds when you consider that you are usually risking everything and therefore you could lose everything if you don’t make it.

Or, you could buy an existing business – one that is long past the high-risk startup stage.  Perhaps most important, it has a salary in place for the owner.  Otherwise, why would you buy it?  It already has customers although this could be a little dicey if you aren’t careful.  Often, and this of course does not apply to all businesses, business drops off for a period of time for a new owner because the customers were comfortable with dealing with the old owner and aren’t sure whether you can live up to the service, quality, whatever provided by the previous owner.  It should be incumbent as a new owner to try to make sure existing customers are aware of the transition and that you will continue to provide the same level (or better) of service that they had become accustomed to.  And one more thing.  Commercial financing to acquire an existing business, and especially SBA financing, is much more likely to be available than to a startup.

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