Are we entering a bear market? That was the question being asked this morning on CNN. Are we entering a bear market? The fears of the investing public, according to the story, revolve around speculation that we may be entering a second phase of recession in the United States and around the world. I am still wondering when the first phase ended. Yes, I know that the government reports showed a three month increase in GDP. And, yes there was some good news from auto sales, appliance sales and retail spending, but wasn’t this the result of federal and state incentives? And now, without those incentives, small business is once again fighting for its very life.
In the 1990s and during the first seven years of 2000, money was easy to come by. The most likely source of capital for small businesses became the home. Second mortgages and refinancing were all the rage. As housing values escalated, it was as if the vault at the bank was left open. All a businessman needed to do was refinance and his business financial woes were over. If that proved to be insufficient, he turned to the second source of easy money, factoring. However at an effective interest rate of 24% to 36%, many businesses needed bankruptcy protection after receiving the factor’s help.
With the main source of small business capital gone, the weaker of businesses failed to survive the past three years. The debt burden became suffocating, coupled with a radical decrease in sales, and the weaknesses of the owner’s management became all too evident. Do not be a man who strikes hands in pledge or puts up security for debts; If you lack the means to pay, your very bed will be snatched from under you. Pr 22: 26-27 (NIV).
Survival brought prosperity to the remaining small businesses whose slice of the pie, even though it may be a bit smaller of a pie, just got super-sized. In fact they are probably the ones being interviewed on TV saying it looks like the recession may be over. Yes, for them it is. I am truly impressed by the profitability that some small businesses are enjoying today, due to the increase in market share, while maintaining the workforce and machinery they had over the past two or three years.
Has the recovery begun, and are we coming out of recession? I don’t believe so. In the United States, we are usually brought out of recession by the hiring of labor through small businesses. That is not happening today. According to an article in the Chicago Tribune, Don Lee of the Los Angeles Times says:
It's a historical change of major proportions. In each of the previous three economic recoveries, small employers accounted for the vast majority of new jobs — the bulk of them coming from firms with fewer than 20 workers, according to Census Bureau data.
Between 1990 and 1993, employers with 1,000 or more workers added 258,000 jobs. Those with 500 to 999 workers shed 102,000 jobs during that period. But the smallest mom-and-pop operations added 860,000 jobs, census figures show.
It also takes consumers willing to spend money on durable, as well as non-durable goods, but, according to a recent survey, two and a half years of recession has put one third of the workforce into the ranks of the unemployed at some time during those years. And still, we remain around 10% unemployment.
When will this end? I’m afraid not anytime soon. I joke with my colleagues that I will change my opinion on a recovery when I see the first bank lend the first dollar to the first small business. I thought I was rather clever with that saying until I read an article by Sharon Bernstein, dated June 30, 2010. Now, I no longer feel simply clever, I now feel profound. In the article she writes about how, due to new SBA regulations credit is loosening up, however in her last few paragraphs she writes:
But despite the higher guarantee, Bank of America spokesman Jefferson George said, B of A lost more money than anticipated on loans made through the SBA's main program.
Bank of America was a major player in SBA loans until the economic crunch when the bank mostly dropped out of the program. The bank's withdrawal reduced the availability of credit to small businesses, according to SBA officials. The bank remains active in a smaller SBA program aimed at commercial real estate.
The bank's other small business loans are made without federal support, as are the bulk of small business loans throughout the nation. But George said that those loans were also down earlier this year.
The bank made $3.4 billion in loans to small businesses during the first quarter of 2010, George said, down from $3.9 billion during the same period a year earlier. "We're starting to see some improvement with the medium-sized business," George said. "But it's still tougher on the smaller end."
So, let me get this straight…we’re coming out of recession and into recovery, but Bank of America reduced first quarter lending by a half a billion dollars from its dismal first quarter 2009 level. Does this smell like recovery?
Look, we have to be smart in what we do, and avoid going further down the road of debt. There are a few things you can do to open up capital, but only with the approval and blessing of the people it will affect:
1. Arrange a one or two week delay on payroll, establishing a new pay cycle. Do not just spring this on your employees, but plan it with them.
2. Cut your own pay in half, if necessary, and fund the business.
3. Arrange a cyclical payment schedule with your vendors, which accelerate payments during your heaviest business months, and slows payments during your low season.
4. Find a secondary market that will accommodate deposits paid with orders.
5. Incentivize customers for purchasing materials and supplies.
6. Drive sales, they are out there.
Be great stewards of the blessing God has given you through self employment. Do not squander this gift.
As each has received a gift, use it to serve one another, as good stewards of God's varied grace: 1Pe 4:10 (ESV)