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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It’s sooooooooooo easy.  The small business owner needs cash – fast, maybe for a new opportunity; maybe a new piece of equipment; maybe a fast infusion of inventory to meet an unexpected demand.  Even if the business owner has a relationship with a bank, fast isn’t going to happen.  First of all the loan may be too small, but if not, it still has to be underwritten to some degree and then approved by someone.  By the time it goes through that process the need may have gone.  But with an online cash flow lender, a usually simple application online and an approval within a few hours or maybe a day and the money is sent to your account.  Slam bam thank you ma’am.

Some cash flow lenders, based on the average amount that a business keeps in its checking account will make a loan – sometimes large, as soon as they get from you your bank statements for a certain period.  One or two other things may be checked but that can be done in minutes by the lender while waiting for the bank statements.  Once that is completed, the loan is made.  Fast.  To repay the loan the lender might take a small amount out of the checking account every day or several times a week.  No big deal; so small you’ll hardly miss it. Doesn’t hurt a bit.  But by the time the loan is paid off you could have had an APR in the range of 45%-plus with some lenders.  It is an unregulated industry.

These lenders lend hundreds of millions of dollars a year because there is a demand for it.  They are filling a need that banks won’t.  So if the small business owner needs cash fast they have to understand that it may cost them – big time.  But the cost of not getting the cash could be worse.  So the moral of the story is go in with your eyes open and read the fine print.

More on alternative lenders coming.

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Economics 101
June 18th, 2019

A few of you may have had to take Economics 101 in college.  A few of you might have even been able to stay awake for the whole class.  When the good times are rolling it doesn’t seem to be a real big deal to catch a couple of winks.  Don’t’ worry, the good times are still going to be rolling when you wake up.  Supply and demand – Economics 101 at its most basic.  There is lots of demand because we have money in our pockets, and lots of supply to fill that demand.  Business is good.  The fat lady hasn’t even gotten to the theater to sing yet.

The stock market just keeps going up, setting new records.  Jobs are plentiful, so much in some cases that there aren’t enough people to fill them putting a damper on opportunities to continue to grow.  In terms of unfulfilled demand, just look at the long-haul trucking industry.  I have seen figures as high as 50,000 jobs going begging in that industry alone.  Wages are continuing to be forced up to attract new drivers.  But the shortages still exist.  House prices, the major source of most people’s personal wealth are high.  Consumer sentiment is high.  The Small Business Optimism Index continues to set new records.

And just to keep the party going a little longer, interest rates are probably not going to keep going up as it appeared just a few months ago but instead may be dropping slightly, offering a longer window for small businesses to borrow at very favorable rates if funds are needed to grow their businesses or purchase big ticket items such as real estate.

“We have six exits from our aircraft….  In case of a sudden decrease in cabin pressure oxygen masks will drop down from the overhead bin.  Place the mask….”  It may be time to at least pull out the seat card in front of you to familiarize yourself with how to get out of this plane that just keeps flying higher and higher.

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PayPal; Amazon (Why not?  They’re already selling you wheat germ.); On Deck; Kabbage;  Square Capital.  In 2018 these five online lenders originated over $11 billion in loans, almost all to small businesses.  In another segment of the small business lending space lives peer-to-peer lending.  Online lenders such as Lending Club and Prosper have been operating in this space for several years.  Another one of the major players – Funding Circle, reports that they have originated $9.5 billion in loans.  Again, a high percentage to small businesses.

Most banks, especially smaller banks, can’t compete in this market because traditional banks still have to use conventional underwriting methods to underwrite almost any loan request including very small loans such as the sizes that any small business owners often need.  It becomes cost prohibitive for a bank to go through the same process for loans that are often higher risk and don’t make the bank much money.  Adding one zero to a loan request (say $500,000 versus $50,000) for example takes almost the same process as a small loan request.  So why make small loans?  Small business owners needing working capital or inventory financing for example don’t have time to wait for a loan committee to make a decision.

The mega banks are getting there.  But unless smaller banks can figure it out they are going to continue to lose small business customers.

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Maybe even a lot more depending on which bike.  Tariffs again.  One specific example illustrating last week’s post, “Higher Prices at the Store” is the bicycle industry.  For example, a Richmond, Virginia company founded in 2014 makes lightweight bikes for children.  It has generally been selling 400 to 500 small two-wheelers a year.  It designs the bikes and they are made in China.  The company paid a 10% tariff on its last shipment, and if new tariffs are imposed on certain consumer goods the cost to the company could even go higher forcing it to pass along most or all of it to their customers.  What that would do for their sales is hard to predict, but a good guess would be that their selling prices would have to go up with potentially negative effect on sales and earnings..

China dominates the American bike business.  90% of bikes with small wheels come from China.  Many other bike accessories such as coaster brakes (80%) and signaling equipment (approximately 70%) come from China as well.  Almost 100% of imported rubber tire tubes come from Taiwan Vietnam or China.

So there is your next bicycle, and that is just one specific industry.  Other things such as furniture and clothing could be dramatically affected.  How many small businesses that have Chinese-made components have started thinking about a strategy to deal with higher tariffs?  Looking even longer term, how might lower sales and earnings affect the ability to borrow money for expansion, inventory financing, working capital and other needs?  We may be looking at a ticking time bomb. 

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Tariffs are on, tariffs are off.  But it looks like they may be coming more on soon.  So far tariffs have been imposed only on things such as washing machines which now cost almost twice as much as pre-tariff.  But now tariffs are being imposed on some consumer goods – clothes and shoes for example.  A lot of shoes are made in China.  Some large department stores like Nordstrom and J.C. Penney (already in trouble) are reporting lower sales.  Dress Barn is closing all 650 of its stores and Payless will close all 2,600 of its stores in July.  And they are just two examples of what is happening in retail.

So just for a moment think about what this means for the economy.  By the end of July 3,250 stores in just two chains will be gone.  What it means is jobs, jobs, jobs that are going to be gone in a flash.  How many employees work at those two chains?  Service jobs, like much of retail, provide jobs for entry-level and low-wage workers – a great many of whom are women.

The economy is booming.  New job creation is strong.  But if a low-wage service industry employee is out of a job for a month or two while looking for a new job, before they find one there will probably be some things that they normally buy that they now cannot. Do you sell any of those “some things”?  You’d better look and if you do it could negatively impact your sales and earnings.  You might want to start to think about how you are going to deal with it if it happens.  There is a lot happening in the economy and probably sooner rather than later the strong economic growth that we have been experiencing is going to start slowing down.  It is becoming more and more important to be vigilant.

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The US economy is rolling along but with it consumer debt is rising, credit card delinquencies are rising, and student loan debt according to Forbes has reached $1.5 trillion on which the delinquency rate is now 11.4%.  That’s $165,000,000 that is not going to be spent into the economy.  An unpaid student loan debt totally precludes a small business owner from any conventional financing including SBA loans because it shows on your credit report.  Rising consumer and student loan debt is beginning to cause banks to raise interest on some loans as well as credit cards.  Credit card delinquency rates in the first quarter hit the highest level since 2012.  This and rising student loan debt is especially prevalent among the Millennials.  Being saddled with high student loan debt is causing some younger people to have to postpone buying decisions – such as a house, with all the related spending that goes with it. 

Does all this mean anything for your business?  It may mean nothing depending on your product or service.  But if you have to buy from a supplier or manufacturer, does anything in that product come from China?  For just one example, depending on whatever happens in the tariff/trade war with China, your supplier’s costs may go up which they will pass along to you which you will probably have to pass on to your customers.  Will that make some of your customers decide not to buy at the higher price?  On the flip side, you may have a good product that was cheaper than the product that consumers were willing to buy before, but if the price on that product goes too high, the consumers may opt for a less costly version of the same product – yours perhaps.

Whatever happens it’s becoming more and more of a good time to look backward at your supply chain and forward to the types of customers purchasing your product to see how interest rate-sensitive they might be, what their ages are and anything else.  It’s prevailing wisdom to know your customer.  It may be a good time to take a closer look both ways.

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