There is a disconnect between the market rebound that indicates the economy may recover soon and small businesses that continue to face a challenging environment. First, you must keep the market rally in historical perspective and you must interpret the market rally. The market rally has caused some excitement as it is one of the strongest market rallies in history. However, the 50% increase between March and July 2009 must 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 return at an annualized rate). base). In addition, the July 2009 S&P level is well below the October 2007 all-time high of around 1,580 (more than 37% below according to Yahoo! Finance). The current market rally indicates that for large publicly traded companies, times are beginning to level off. It may not get better, but less bad news is good news in today’s environment. Smaller companies, however, face tougher times ahead.
Lending financial institutions need to flow money from Wall Street to Main Street. Credit markets are thawing and larger businesses may re-qualify for loans. Qualifying for loans will allow larger businesses to calm their cash flow nerves. However, small businesses face increased scrutiny when applying for and renewing loans. Even with a high credit score and a large portion of collateral, small business owners have loans that are not accepted or renewed. If the loan is not renewed, the small business may not be able to raise capital or take advantage of local market conditions. Then the loans are not renewed, small business owners are forced to pay. Many small businesses and small business owners do not have the assets to repay the so-called loans. The cash outflow to repay the loan (if available) can create financial hardship for the small business by crushing liquidity, working capital needs, and accelerating the rate of cash burn. All of which makes it more difficult to qualify for a loan from other lenders. These hurdles put more pressure on small businesses (even in a recovery). In addition, small businesses will be forced to enforce stricter credit standards, which could potentially increase the number of small business bankruptcies as the economy recovers for larger companies. Understanding this situation is important for small business owners because they can (immediately) begin to review their operations and focus attention on their financial position to take steps to strengthen their overall position before applying for a loan or applying for a loan renewal from a financial institution.
Second, financial lending institutions are currently trying to figure out the new lending standards. The new standards are stricter than small business owners want them to be. Small businesses enjoyed the NINJA days (No income, no job or assets, no problems). Now, small businesses feel like they are being hassled at renewal time as they have to provide accurate financial information and understand that renewal is no longer guaranteed. The small business “problem” is the increased time involved and higher financial costs, including hiring a Certified Public Accountant (CPA) to issue financial statements and attend loan negotiation meetings . Lending financial institutions, however, have been faced with an increased number of bad loans and are now finding that the personal guarantees they had signed by small business owners are semi-useless. The small business owner protected himself by transferring all of his assets to his spouse who did not sign the personal guarantee. This leaves the bank with a bad loan and a worthless personal guarantee. Banks can have both spouses sign the personal guarantee in the future for added protection. One worrying sign is that many small businesses and their owners are not well capitalized (ie, they don’t have many assets, but they do have debt and a good lifestyle). As the largest companies have built assets over time and have made drastic cost cuts and layoffs of the workforce, the smaller companies have minimal assets and minimal liquidity and have not reduced costs and the workforce as quickly or dramatically as the larger ones. bigger companies.
Wall Street and the US government are lending and bailing out Wall Street companies, but Wall Street and the US government are not lending to and bailing out Main Street companies. As larger companies begin to receive financing from financial institutions and bail out money from the US government; Small business lenders like CIT have received little to no attention from Uncle Sam. CIT is one of the largest small business lenders (The CIT Threat By Donna Childs). Small business lenders and regional banks seem to be suffering the most of all financial institutions right now. For these institutions to lend money to small businesses in the future, they will have to raise their lending standards. For major businesses to qualify for loans in the future, small businesses must make significant adjustments to their business model, including building assets and generally strengthening the financial position of the business and owner (just as their employers have done). larger counterparts).
Third, the economy is still in a recession and growth will not be the glory days of the past. David Rosenberg, chief economist at Gluskin Sheff, stated that “it is the contour of the recovery that matters” (The Best Five-Month Run Since 1938 By Kopin Tan and Andrew Bary), which means that the economy still has a long way to go. To go. Markets may have “improved” 50% between March and July 2009, however, the business environment has not improved or has not improved significantly. Continued pressure on the economic recovery and growth over the next few years includes unemployment around 10% and rising, the US saving rate has risen in the last 12 months, US companies continue to deleverage and the US government is too involved in private markets. .
Unemployment at 10% and rising, as well as an increase in the US savings rate, put pressure on consumer spending due to uncertainty about future employment and income. Consumer spending at the local level directly affects the performance of small businesses. A reduction in consumer spending puts pressure on 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 expected to be created by 2011, yet the economy it has lost 6.5 million jobs since December 2007. Consumer spending due to job uncertainty over the next few years may put financial pressure on local small businesses. As American companies continue to deleverage, they are paying down debt instead of buying and instead of adding to their workforce. Reduced purchases trickle down to small businesses, and fewer purchases can hurt small business revenue. The US government’s involvement in large corporations should be more concerning than the news reports. Our pride as a market-based economy and being a democracy has become the US being socialist without any major opposition. Yes, we are socialists since the government owns the private company. As the taxpayers complain that the government can’t do anything well or at least efficiently. We are now using more taxpayer resources for Wall Street companies and not Main Street companies will have a significant effect on the future of Main Street. Mr. Gross claims that it costs the US government $92,000 in government spending or $145,000 in tax breaks to create a job. The average job in the US country is less than 1/3 to ½ that this amount. The jobs created will hit the largest companies first, with the hope that they will trickle down to small businesses. At least Main Street will still have its pride (even if it is forced to file for bankruptcy). Small businesses need to be aware of this environment and understand that the recovery has many challenges in the coming years.
In conclusion, small businesses have several challenges in the coming years. Immediate action is required to further evolve your business model and strengthen your financial position. Business owners should expect to sacrifice more and potentially raise capital (diluting their ownership) to survive the rest of the downturn and try to stay alive during the recovery. Small businesses must remain vigilant during the potential economic recovery to continue their operations.