Financing Options

Banks keep tightening their guidelines for lending to businesses, small companies are looking for ways to borrow money to sustain their operations. Many banks have also raised interest rates on credit lines.

While there is a natural tendency to return to rational evaluation of risk, choking the small business market supports a downward virtual cycle since this sector of the market contribute a large percentage of the American workforce.

In the meantime, there are other options in the market that are still unknown to many small to middle-market businesses:

• External advice to streamline processes and surgically downsize non-value add activity could free up cash and decrease burn-rate.
• Outside the traditional institutional capital market, individual investors are starting to move funds. For amounts less than $5M, companies should approach new avenues that can help them reach smaller investors.
• Economic development has been historically underestimated and kept in the dark. Many local communities offer amazing solutions including grants, tax credits and other financial accommodations. Most companies do not know about these offers because local governments do not have the budget to advertise.

Finally, this is the time to stop following the herd and start pursuing creating financing idea without diluting shares.

Hiring or not?

Below are survey results from the American Express OPEN Small Business Monitor. Compare 2006 to 2008. Small businesses that did not plan to hire or even planned to cut back remain at the same percentage level (40% to 50%). The difference is that businesses that might be hiring today prefer to report that they are not sure (mid-twenties today versus mid-teens in 2006).
There could be many explanations but the obvious ones are:

• Small businesses really do not know where the wind might take them. Which is concerning because a small business is usually affected by microeconomics and -- beyond the financing piece -- small businesses with solid models should know exactly what their plan is.
• Small businesses are sandbagging and are not willing to openly brag about hiring.
• A third of small businesses are usually very clear on their hiring plan regardless of the economic environment. It is just the ones that are planning to cut-down that prefer not to respond clearly to the survey.

Inflation or Deflation?

Everybody is talking about inflation or hyperinflation. Something similar to what happens after a country cannot meet its debt obligations. All the signs for inflation are here: Social Security is seen depleted by 2037, consumption is down, state retirement plans shortchanged. But somehow, prices keep going down and some analysts are talking about deflation. So how is the current situation different from post-WWI Germany or Argentina’s chronic hyperinflation? In short, the current situation is a global recession and other than pulling money away and investing in commodities, investors do not have many choices. Here’s a good summary from WSJ:

Economically Green

Want to encourage Americans to go green? How about starting by making Green economically viable?

Some consumers are willing to pay the price for having the stamp of being Green, either financially or by sacrificing their comfort. However, if we were to expect a major cultural shift, Green would have to be economically feasible. In one area, we are always blamed for being a high turnover consumer nation. That means we tend to throw away good stuff just to be able to get a new replacement. In reality, we are usually forced to replace somewhat good stuff because it costs more to fix than to get a new one.

Last week, our 3-year old washer was not spinning well. Clothes were left soaking wet after a cycle. We called GE repair and they required $75 just for the trip. OK, we paid that. The guy showed up and in less than five minutes, he was able to figure out the problem and unclog a small sensor pipe. That was it! And he charged us $250 which is 50% of the original price of the washer! Mind you that had we purchased an insurance, GE would have charged the insurance less than $100. Other things that might end up being replaced instead of fixed include our cracked glass oven top (repair cost = $700, brand new = $600).

Outside the fact that consumers are being ripped off in a similar way to individuals with no healthcare plans, why couldn’t we enforce insurance prices on the non-insured? So how about subsidizing or enforcing rules to help fix appliances instead of replacing them, thus becoming green?

Stress Test

As banks undergo stress tests, shouldn’t your business do the same even without mandate? The Sarbane Oxley (SOX) Act of 2002 was put in place for public companies as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. Privately held companies remain shielded from stress tests and SOX, but shouldn’t they subject themselves to tests ensuring the viability of continuity of their business models?

For a start, companies will need to better understand the key drivers behind their bottom line. Then different scenarios will need to be reviewed to understand the inherent risks. Following is a sample list of key drivers that would need to be subjected to testing:

• Sales: What portion is sustainable, comes from repeat business, or is dependent on one large account? Are your products diversified?
• Cost structure: Fixed versus variable. Does your company have a good understanding of cost per unit? Do you need Activity-Based Costing and allocations to better control your cost per unit?
• Debt structure: What was reasonable a couple of years ago might be obsolete now. Do you just trust your CFO’s opinion or should you get independent advice?
• Liquidity: How long can you survive a downturn?
• Brand and client satisfaction: How much can you downsize before service and delivery suffer, thus hurting you long-term image?
• Pricing: How healthy are your margins? Can you leverage pricing on a short-term basis to gain market share?

These are general drivers however every industry and in some cases every company has different drivers. Historical views are necessary but not enough. Companies need to leverage analytics and perform simulations to better understand risks.

More Good News

• Automatic Data Processing, a payroll-processing firm, said private-sector employment decreased by 491,000 in April, a 31% improvement from the revised 708,000 drop in March.
• Outplacement firm Challenger, Gray & Christmas Inc. reported that job cut announcements by U.S. employers totaled 132,590 in April, an improvement of 12% from March's 150,411.
• A peak in the number of jobless claims signals the worst U.S. recession in half a century may end in June, according to Thomas Lam, an economist at United Overseas Bank Ltd. in Singapore.
• Banking and energy sectors made solid gains in the past month with the DOW increasing by 30% in a two-month period.
• AIG, the insurer saved from collapse by the U.S., may report tomorrow that its first-quarter loss was about $5 billion. The result is an improvement from the record $61.7 billion fourth-quarter loss posted in March.
• The benchmark 30-year, fixed-rate mortgage is remains low at 5.23 percent, according to the Bankrate.com's national survey of large lenders. One year ago, the mortgage index was 6.16 percent.

Sub-Contracting

As more people opt (more like “forced”) to find contract versus full time jobs, they are discovering first-hand the pros and cons of such a move. Prior to the past century, most people worked as freelancers. Industrialization and the Great Depression created a sense of security with full-time jobs.

The trend for contract jobs is going up again and 1 in 4 working Americans is a contractor, compared to 1 in 5 a couple years ago. It seems like a win-win situation where a worker can find a paying gig while businesses ensure capacity flexibility. In reality, contractors take a big risk given that they are the first expense line item to be cut during a downturn. Also health-benefits and self-employment tax creep up very quickly.

As for companies, the downside is more strategic. Most organizations do not know how to differentiate between core competencies and supporting capabilities. While outsourcing or sub-contracting the latter is usually a smart decision, applying this strategy to a core competency could be detrimental to your business. There is still a need for in-house and permanent expertise to maintain and improve on core competencies.