The Other Side of the Coin
February 26th, 2010

9 to 10% unemployment; consumer confidence down (way down); consumers deleveraging and saving, not spending; this is one side of the coin.  On the other side, Home Depot and Lowe’s earnings up, sales beginning to show signs of turnaround; Target, higher sales and earnings; Kohl’s higher sales and earnings.  There is life on the other side of the coin – lots of it.  We are pretty much at the bottom of the worst recession anyone has ever experienced.  On that other side 8 or 9 people are employed and there are faint signs that they are beginning to spend.  And since consumer spending accounts for roughly 70% of US economic activity, that is definitely a hopeful sign.  Even so, one of the most important things that small business owners should keep in mind is that a lot of people are going to be more discriminating in a lot of their spending.  They are going to be looking for value or to save money.

We are not going back to the pre-recession type of spending for some time, probably a long time, because the recovery is going to be slow and high unemployment is going to remain with us for several years.  Why does a consumer want to buy from you?  What do you offer that your competitors don’t?  What is the value of what you are selling?  What is your unique value proposition?  Is it price?  Quality?  Service?  Experience?  Location?  If your business is still reasonably successful, should you assume that since no customers are complaining that they are happy?  Maybe there are customers who have left because they did not get what they wanted or expected and their wants were ignored.  Back to the question of why a customer buys from you.  If you haven’t, stop and think what it might be if you were forced to describe what you sell in 25 words or less, and don’t say service.  Everyone expects good service.  So what is the real reason people buy from you?  A perfect illustration of that 25-words-or less description of why customers buy might be Federal Express – “When it absolutely, positively has to be there overnight.”  9 words.

To stay on the other side of that coin it might not hurt to give this some thought in regards to your business.  Maybe your competitors haven’t.  Some of your competitors may be gone or about to be.  Maybe if you really hone in on what you do best you can not only come out of the recession, but come out growing.  It could be a unique opportunity.




Last Thursday the 18th, the Fed raised the discount rate a quarter of a point.  No one was surprised or particularly worried about it.  Typical of the general reaction was a statement by William Dudley, the president of the Federal Reserve Bank of New York in response to audience questions at a conference.  He said “it is not at all a signal of any imminent tightening” and the Fed’s commitment to keep rates very low for an extended period “is still very much in place.”  Then on Friday the release of the consumer price index for January showed an increase of 0.2 percent when general expectations had been for 0.3 percent.  Excluding energy and food the core index actually declined 0.1 percent.  This shows that inflation is still well under control, and with almost universal agreement that a recovery is going to be slow along with a slow decrease in the unemployment rate, it will continue to be restrained.

A statement Friday by Bank of America chief economist Mickey Levy also summed up the current general feeling about the economy.  He said that the decision to raise the discount rate is a signal that “the financial crisis is largely over.”  But over is a relative term.  Just because the crisis is over does not mean that things are going to get well any time soon.  In a speech prepared for delivery yesterday Janet Yellen, the President of the Federal Reserve Bank of San Francisco gave the cheery assessment, “… I expect unemployment to remain painfully high for years.”  Who knows – maybe the Fed might take the rate hike back, but that would not be a good sign.  All eyes are on jobs and it is jobs that are the most critical issue we face.  And what is one of the scariest parts of this is that solutions have to have some help from Congress.  Grim thought.  So at this point, the shot across the bow was a BB gun and the cannon may not be brought out any time soon.  Besides, the Republicans and Democrats can’t even decide which ammunition to use.




Look out the window.  There is an 800-pound gorilla out there and we are so accustomed to seeing it that it’s almost invisible.  He is state governments, and he is with us every day so we don’t pay much attention to him.  This month, the Pew Center on the States, a division of the Pew Charitable Trusts, published a report titled “How the Recession Might Change States.”  It is very sobering reading, because states are a major component of the national economy where their financial prospects are steadily getting worse and, according to Pew are going to continue to get worse for two years.  Here are a few of the highlights.

Richard Sheppach, an economist who has headed the National Governors Association for 26 years said “… states are heading into a permanent retrenchment.”

Double-digit unemployment in the national economy and continued scaling back of consumer spending will siphon precious revenue from the states in the form of lower sales tax revenue.

The number of public employees is shrinking in many states.  In addition, many states are furloughing workers for short periods of time to save money – lost jobs, less income to spend.

The same digital revolution that is changing how so many businesses operate (such as producing more with the same number of employees) is being used increasingly by state governments.  More and more services are being performed online meaning that fewer workers are needed to perform them.

Most states are beginning to impose higher taxes or fees on all kinds of transactions or products in order to increase revenues.

There is a lot more in the report to digest, but all of it means less money into peoples’ pockets because of loss of jobs or less working hours or more money out of pockets to pay for state government services.  But as so often happens, someone’s loss is someone else’s gain.  Everyone has read about public-private partnerships on large projects.  Those private companies that are supplying those services will grow and hire more people.  Many other services now performed by state governments will be eliminated and picked up by entrepreneurs who see a business opportunity, with the same result in new jobs.  But it’s a scary time.  The gorilla is starting to shrink.




The economy is lousy and it’s going to stay lousy for small business at least until well into 2012, which also means that financing will continue to be very difficult.  Since improvements coming out of a deep recession like this one take longer to get all the way down to the small business level, sales and profits are going to stay under pressure.  The government is trying to do many different things to help small business and to create jobs in the overall economy so more people can afford to spend beyond bare necessities.  There is some headway being made, but progress is painfully slow.

There is one thing that the government has done which has been very successful.  As part of the American Recovery and Reinvestment Act, SBA loans have been made much more attractive for borrowers and lenders.  By raising the SBA loan limit to $5 million from $2 million, and the guaranty percentage from 75 to 90%, many lenders have begun to be much more aggressive in making SBA loans, and the numbers across the country bear this out.  Also in the SBA 504 program for fixed asset financing, the limits there have been raised to $5.5 million.  One more thing that has been added to the 504 program which has never been permitted is that certain real estate refinancing is now eligible.  All of these changes are scheduled to expire soon, but the administration is pushing to make them permanent.  I think the major reason that SBA loans are increasing so rapidly and should be made permanent is that the SBA is already in place and operating.  SBA is the only government program available to stimulate small business lending where a change can be put into action almost immediately, and it shows.

So in many cases, SBA loans have largely become the only game in town for small business loans that are not gold-plated.  But as important as increased credit is to small business owners, the substantial increases around the country would not be happening if banks were not willing to make the loans in the first place.  The $5 million limit is nice, but the key element is the 90% guarantee.  Whereas before, a bank had a 25% loss exposure on an SBA loan with the 75% guarantee, now they have only a 10% exposure with the guarantee at 90%.  Big difference.  So let’s hope that the Democrats and Republicans can get together long enough on at least one issue to at least make the changes permanent, or at least through the end of 2010.  Ideally, it should be permanent.  The changes put into place in the ARRA have already proven to have an immediate and positive impact.  Nothing else the government has done or can do will have this type of impact on small business.  Stay tuned.




SBA Loans — A Bright Spot
February 16th, 2010

The economy is lousy and it’s going to stay lousy for small business at least until well into 2012, which also means that financing will continue to be very difficult.  Since improvements coming out of a deep recession like this one take longer to get all the way down to the small business level, sales and profits are going to stay under pressure.  The government is trying to do many different things to help small business and to create jobs in the overall economy so more people can afford to spend beyond bare necessities.  There is some headway being made, but progress is painfully slow.

There is one thing that the government has done which has been very successful.  As part of the American Recovery and Reinvestment Act, SBA loans have been made much more attractive for borrowers and lenders.  By raising the SBA loan limit to $5 million from $2 million, and the guaranty percentage from 75 to 90%, many lenders have begun to be much more aggressive in making SBA loans, and the numbers across the country bear this out.  Also in the SBA 504 program for fixed asset financing, the limits there have been raised to $5.5 million.  One more thing that has been added to the 504 program which has never been permitted is that certain real estate refinancing is now eligible.  All of these changes are scheduled to expire soon, but the administration is pushing to make them permanent.  I think the major reason that SBA loans are increasing so rapidly and should be made permanent is that the SBA is already in place and operating.  SBA is the only government program available to stimulate small business lending where a change can be put into action almost immediately, and it shows.

So in many cases, SBA loans have largely become the only game in town for small business loans that are not gold-plated.  But as important as increased credit is to small business owners, the substantial increases around the country would not be happening if banks were not willing to make the loans in the first place.  The $5 million limit is nice, but the key element is the 90% guarantee.  Whereas before, a bank had a 25% loss exposure on an SBA loan with the 75% guarantee, now they have only a 10% exposure with the guarantee at 90%.  Big difference.  So let’s hope that the Democrats and Republicans can get together long enough on at least one issue to at least make the changes permanent, or at least through the end of 2010.  Ideally, it should be permanent.  The changes put into place in the ARRA have already proven to have an immediate and positive impact.  Nothing else the government has done or can do will have this type of impact on small business.  Stay tuned.




And the Beat Goes On
February 11th, 2010

Isaac Newton’s Third Law translates roughly from the Latin as “To every action there is always an equal or opposite reaction.”  Although this description was largely the basis for the study of classical mechanics, it almost seems as if it could have been written as a description of today’s business climate.  It feels like every time we get a piece of positive news on the economy, you turn around and there is some negative news.  Consider the following:

On Tuesday February 9, the National Federation of Independent Business Small Business Optimism Index showed barely any improvement in January.  In the report, NFIB chief economist William Dunkelberg said “Small business entered 2010 the same way they left 2009 – depressed.”  He also said the biggest problem was lack of customers – poor salesThere were several other telling comments in the report.  There is very little capital spending going on.  It said “A revival of capital spending will require a significantly improved business outlook ….”  Small business owners continued to liquidate inventories and weak sales trends gave little reason to order more stock.  Price cutting in many areas is lowering sales.  And finally, 12 percent reported higher profits, 55% reported profits falling. 

So here again we have that picture of Washington and Main Street.  Washington is doing everything feasible (debatable) to help increase jobs.  Yet on the “other side of the street” small businesses continue to battle poor sales and profits.  And as profits decline, banks are less and less likely to make loans to them because of the increasing risk of not getting paid back, and small business owners are not looking to borrow as much as historically because business is bad.

And just so as not to focus entirely on the NFIB report, let’s take a quick look at the construction industry.  While the overall January unemployment rate in the US fell to 9.7%, the latest construction industry figures available – October, show unemployment at 24.7%.  Approximately 10 million workers are employed in the construction industry, both residential and non-residential, so it means that almost 2 million workers in that one industry are now unemployed.  Construction spending is not going to see a significant increase any time soon.  There are too many vacant houses and too much vacant commercial space to be sold and leased before hiring starts to pick up and construction of new houses and commercial space begins to pick up.  So in this industry alone we can see an example why the recovery is going to be long and slow.




All of a sudden a race is on – here and across the globe.  Both consumers and nations have amassed mountains of debt.  On the world stage right now is Greece, followed closely by Spain.  Both countries ran up huge debt in the flush times not worrying about how it would have to be paid.  Worry about that tomorrow.  Tomorrow is here, and it could have some serious repercussions on at least the economies of Western Europe – a major US trading partner.  So what?  Greece could be a synonym for what is happening in America.

So all the way back down to the local level, the “American consumer” amassed their own mountains of debt.  But suddenly, seemingly almost overnight, they are starting to pay it down – to deleverage.  Also along with it, savings rates are taking a dramatic jump – so far to over 4% from nearly zero a few years ago.  Big winner – the economy in the long run.  Savings and low debt create opportunities to grow and start new businesses and create jobs.  Big loser – the economy in the short run.

 Let’s say that you have an uncomfortably high level of debt and are concerned about the future because of everything that has happened in the economy and is still happening.  You have $3 to spend.  You pay your debt down by $1.  You put $1 into your savings to build it back up.  You have $1 left to spend.  So suddenly instead of having $3 to spend you have $1.  Your purchases have just decreased by 67%.  Who doesn’t get that $2?  Maybe the local body shop – that dent can wait.    Maybe some local restaurants.  You go out to eat less.  So now, you are spending that $1 far more judiciously.  You are looking for value.

Deleveraging is going to affect a lot of small businesses.  Does your business offer a value that the consumer is willing to part with that dollar for?  Do they really need it when you come right down to it?  What does this mean for the future of a lot of small (and large) businesses?  There will be winners and losers.




Everyone knows that banks have cut back dramatically on their small business lending.  Whether that is good or bad, there are logical reasons.  Small business lending for banks is high-risk even in good times.  Small businesses tend to have a higher failure rate than larger ones, often simply because they have not had enough time to build up a cushion against bad times.  Declines in sales and profits in the current recession are across the board – large as well as small companies.  So banks would not be inclined to lend to these businesses anyway because the risk of being paid back is higher.  Add to this the fact that bank examiners are beating on banks to set aside more money to cover future loan losses, which is money that then can’t be used to make loans.  So banks are caught in a “damned-if-you-do, damned-if-you-don’t” situation, especially the smaller banks where much of small business lending takes place.  So when banks are feeling insecure because of the possibility of running afoul of the examiners, they tend to retreat – exactly the opposite of what we need now. 

So if you are planning to make a loan application, think about this.  You know it’s a risk, and of course, the bank knows it’s a risk.  So rather than try to put only a positive spin on the benefits of your application, consider adding a section on risk factors and how you plan to deal with them.  Because of the law of full disclosure, all offerings of any kind of securities have a section on risk factors, and the bigger the offering, the more the risk factors listed – sometimes going on for pages. 

If you have something like that in your application, it says to the lender “I know that there are risks in this loan, like any loan.  But here are the ones I see and how I plan to deal with them in order to get your loan paid back.”   I can almost guarantee that most small business lenders have never seen anything like this, and it might just make a difference.  You have nothing to lose.




Start with one overarching fact concerning small business today, and that is that the economic climate is bad and improvement is going to be very slow.  But for someone thinking of buying a business it may be an unusually favorable time.

For the small business owner successful enough to want to expand, or for someone who always wanted to own a business, the recession has created an unusual opportunity.   Many small businesses have seen their profits decline – sometimes substantially.  The market value of a business is based on profits, so you can see the opportunity.  Across the country prices of many small businesses for sale are falling because of the declining profits.  So for a business owner looking to expand, there may be an opportunity to buy a company in the same business or industry at a price considerably lower than what it might take to gradually build up their existing business.  It would be the fastest and probably cheapest way to expand quickly.  For the first-time buyer, the same applies.  A business that the buyer might be interested in may be able to be acquired at a price considerably lower than just two years ago.  The benefit to the buyer is that it offers the chance to step into an existing already operating business with customers and some salary to the owner (if it is not paying a salary to the owner, forget it).  I don’t need to go into all the caveats of what needs to done before signing a contract.  That’s a given.

In addition to being able to buy a business at a favorable price, there is a pretty good chance that the owner will finance the purchase because if they don’t, the likelihood of a buyer being able to get a loan is very slim.  Conventional business acquisition financing has never been easy, but it is now even more difficult except in cases where it is a strong business being acquired by a buyer with experience in the same type of business and a substantial down payment.  Here is where an SBA guarantee might increase the odds for getting a loan.  With the current SBA guarantee at 90%, which hopefully will be extended if Congress will get off its …, some banks that are already accustomed to business acquisition financing – Wells Fargo being a prime example as the country’s biggest SBA lender – may be more willing to consider the right kind of deal than it would without the guarantee.

There is one final thought, and it is purely and 100% a personal bias.  If you were able to get bank financing, you would obviously have to put cash into the deal because a bank would never finance 100%.  So if the owner is going to have to finance it for you, even if 100%, consider giving at least a small down payment.  Walking away from a business where you have given it everything you had but it didn’t work out is bad enough.  At least walking away with some cash is a small consolation.   Remember, the owner has customers and friends.  If the owner leaves mad, it might cost you.