The big media is talking about big dollars, big companies, and big bailout packages. Sub-prime mortgage backed securities, money market mutual fund savings, and now commercial paper have all been at the center of the conversation of the current credit crisis in the US and, in recent days, worldwide.
To some, the credit crisis is a very real and immediate danger directly affecting their day to day work life and personal life. But, to others it seems like a distant war being fought by some other society. And, like any war on an abstract concept it is difficult to determine what affect any action has on "the market".
But what about small business? At its most basic "cause and effect" form, the credit crisis has had several immediate effects on small business:
- A Reduction of Working Capital- Most businesses face one of three scenarios that necessitate the need for additional working capital financing. The first is seasonal sales. Working capital lines of credit help ease the effects of the natural ebb and flow of sales throughout the year.
The second is cyclical sales. Industries can be hot for several years, then go cold suddenly. Generally, if the business is not in a permanent decline cycle due to obsolescence, the expectation is that a company needs to weather the storm until the cycle turns positive.
In the current credit environment small businesses are seeing their "standing" or revolving lines of credit being pulled or reduced without notice. At the same time renewable lines of credit are being "called in" due and payable at the end of their 12 month cycle, without the option to renew in the new year.
- Tougher Long-Term Debt Requirements- Generally there are two types of business loans beyond short-term working capital notes; a) fixed asset loans for expansion and b) permanent working capital loans.
Permanent working capital loans are still being offered but with shorter terms and more collateral coverage requirements. Banks have reduced the amount they will lend against inventory and against current accounts receivable for permanent working capital loans and tightened the terms in which they are willing to lend. Many are now asking for fixed asset collateral or cash value securities to pledge against permanent working capital loans.
Businesses borrowing money for property, plant and equipment expansion are certainly in better shape than those borrowing working capital but they have not been spared the effects of the current credit crunch. Collateral requirements have been heightened with some banks requiring additional personal assets be pledged against the loan for added security. Again, as with working capital loans, loan amounts are being reduced with banks requiring higher project "equity percentages" or down payments on buildings and equipment.
- Weak Consumer Environment- Plain and simple…sales are down. People are worried about their jobs, the value of their IRA, the value of their homes and their mounting credit card debt. This is not a good environment for businesses dependant on consumers spending disposable income. Interestingly, one of the only positive stocks on the the day of the big 700+ point crash last week was…Campbell’s Soup. Apparently all the anxiety over the above issues is translating into stellar comfort food sales. Overall though, sales are suffering and small businesses are suffering along with it.
What does this mean for entrepreneurs in the process of starting a business. It might mean that it is time to take a step back and see what the coming months bring. It might mean reaching deeper into their pockets and pledging more assets against that start-up loan. It might mean nothing at all.
So that you don’t think I am just being a Negative Nancy I am going to share with you part of an email I received just this week from a representative at US Bank that had the subject line "U.S. Bank is Still Doing Loans!". Here is the opening paragraph:
U.S. Bank is still doing small business loans! In today’s market, we realize more and more lenders are putting greater restrictions on their lending policies, tightening the already difficult lending market. U.S. Bank has avoided the sub-prime debacle and is in a good position to continue offering SBA loans to our current and new clients.
This is not an attempt to promoting U.S. Bank here. In fact most banks, especially the local / regional banks in most areas, are probably doing just fine as most banks sell off the majority of their mortgages to the investors who are now going under. What I am saying is there is still money flowing to small business. Given the right opportunity and the right circumstances your dream for small business ownership can be realized.
Besides, the average entrepreneur faces far tougher conditions in the day to day fight for solvency than some worldwide credit crisis can throw at them!
Donovan Wadholm - Start-Up Software LLC