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The Market is Excited, But Challenges Still Loom For Small Businesses
There is a disconnect between the market rally that suggests the economy may soon recover and small businesses that continue to face a challenging environment. First, you need to keep the market rally in historical perspective and you need to interpret the market rally. The market rally has caused some excitement as it has been one of the strongest market rallies in history. But the 50% increase between March and July 2009 should be compared to other historical benchmarks. According to Barron’s Market Week (August 3, 2009), in July 1997 the S&P ended at 954 and the S&P ended in July 2009 at 987. The return over a 12-year period was only 3% (total return, almost no annual return. base). In addition, the S&P July 2009 level was higher than October 2007 all time at 1,580 (more than 37% lower according to Yahoo! Finance). The current market rally shows that for large companies and publicly traded times are beginning to stabilize. Probably not good, but bad news is good news in today’s environment. However, small businesses face more challenging times.
Financial lending institutions must sell money from Wall Street to Main Street. The credit market is liquid and larger companies can get more debt. Qualifying for a loan will allow larger companies to calm their cash flow nerves. However, small businesses experience scrutiny when applying for and renewing loans. Even with high credit scores and collateral, a large portion of small business owners have loans that are not accepted or renewed. If loans are not renewed, small businesses may not be able to raise equity and take advantage of local market conditions. Then the loan is not renewed, the small business owner is forced to pay it back. Many small businesses and small business owners do not have the assets to pay off their so-called debt. Cash flow to repay debt (if available) can cause financial difficulties for small businesses by crushing liquidity, working capital needs and accelerating cash burn rates. All of them make it more difficult to get a loan from other lenders. These obstacles put more pressure on small businesses (even as they recover). Additional small businesses will be forced into tougher credit standards that could increase the number of small business failures at the same time the economy recovers for larger companies. Understanding this situation is important for small business owners because they can (immediately) restart operations and focus on their financial position to take steps to strengthen their overall position before requesting a loan or applying for a loan renewal from the company. financial institutions.
Second, financial lending institutions are now trying to understand the new credit standards. The new standards are tougher than many small business owners expect. Small businesses enjoy the NINJA era (No Income No Jobs or Assets – no problem). Today small businesses feel harassed when renewing because they have to provide accurate financial information and know that renewal is no longer guaranteed. The “complexity” of small businesses is the added time and higher cost of financing, including hiring a Certified Public Accountant (CPA) to issue financial statements and attend loan training meetings. However, financial lending institutions are facing higher loan defaults and are now finding personal guarantees signed by small business owners to be worthless. Small business owners protect themselves by transferring all assets to a spouse who does not provide a personal guarantee. This left the bank with bad loans and worthless personal guarantees. Banks may have spouses sign personal guarantees in the future for additional protection. A troubling sign is that many small businesses and owners are not well capitalized (ie they don’t have a lot of assets, but they have good debt and lifestyle). Because large companies have built assets over time and made drastic cost cuts and layoffs from the workforce, small companies have minimal assets and minimal liquidity and do not cut costs and workforce as quickly or dramatically as larger businesses.
Wall Street and the US Government lend and bail out Wall Street Companies, but Wall Street and the US Government do not lend or bail out Main Street Companies. As larger companies began to receive funding from financial institutions and save money from the US Government; Small business lenders, such as CIT, have received little or no attention from Uncle Sam. CIT is one of the more important lending institutions for small businesses (The CIT Threat By Donna Childs). Small business lenders and regional banks seem to be hurting the most out of all financial institutions today. In order for these institutions to lend money to small businesses in the future, they need to improve their credit standards. For Main Street companies to qualify for future loans, small businesses must make major adjustments to their business models including building assets and overall strengthening the financial position of the business and its owners (as their larger counterparts do).
Third, the economy is still in recession and growth will never be the glory days of the past. David Rosenberg, chief economist at Gluskin Sheff, said “What is important is the contour of the recovery” (The Best Five-Month Run Since 1938 By Kopin Tan and Andrew Bary) which means that the economy still has a lot to improve. The market may have “raised” 50% between March and July 2009, but the business environment has not improved or is not very good. Continued pressure for economic recovery and growth over the next few years includes unemployment at around 10% and increasing, the US savings rate has increased over the past 12 months, corporate America continues to reduce leverage and the US Government is heavily involved in the private market. .
Unemployment at 10% and rising as well as rising US savings rates put pressure on consumer spending due to uncertainty about future employment and income. Consumer spending at the local level directly affects small business performance. A reduction in consumer spending is affecting the survival of small businesses. According to “The Recession is Over Now What We Need Is A New Kind Of Recovery” by Daniel Gross (Newsweek August 3, 2009) 5 million jobs are anticipated to be created in 2011, but the economy has lost 6.5 million jobs since December 2007. Consumer spending because uncertain employment over the next few years could strain the finances of local small businesses. As American companies continue to de-leverage themselves, they pay off debt instead of making purchases and instead of increasing their workforce. Reduced purchases affect small businesses and less procurement can affect small business profits. The involvement of the US Government in large corporations should be more disturbing than news reports. Our pride as a market-based economy and being a Democracy has turned the US into a Socialist with no major opposition. Yes, we are Socialists because the government owns private companies. As taxpayers complain that the government can’t do anything right or efficient. We are now devoting more taxpayer resources to Wall Street companies and not Main Street companies that will have a significant impact on the future of Main Street. Mr. Gross stated that it costs the US government $92,000 in government spending or $145,000 in government tax breaks to create one job. The average job in the US pays less than 1/3 to half of this amount. The work they create will impact larger businesses, with the hope that it will impact small businesses. At least Main Street will still have some pride (even if forced into bankruptcy). Small businesses need to understand this environment and understand that recovery has many challenges over the next few years.
In conclusion, small businesses have several challenges in the coming year. Immediate action is necessary to continue to evolve the business model and strengthen the financial position. Business owners should expect to sacrifice more and potentially raise equity (dilute ownership) in order to survive the rest of the recession and try to stay alive through the recovery. Small businesses must remain vigilant during a potential economic recovery in order to continue operating.
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