No More Credit For Small Business?
A few weeks ago, I wrote a post saying there was not a credit crunch for small businesses (businesses under 500 employees), and that in fact, the commercial and industrial loans from banks were up through mid-October. Furthermore, they had been consistently rising since September 2007. This information came from two economists who are consultants to regional Federal Reserve Banks. I think the information was sound.
However, I just read an article in the current issue of Entrepreneur magazine stating that 65% of senior bank loan officers reported that they recently tightened standards for small businesses seeking loans. This did not match what I had previously understood, so I called a banker I know who deals primarily with small businesses, and was told the federal bank regulators were insisting that the bank change the way it does business.
This came from a sound bank that has been dealing primarily with small businesses for decades. In fact, most local and regional banks were not a part of the financial debacle on Wall Street at all. Unfortunately, this banker was telling me that the federal government is now calling the shots on bank lending policy everywhere. No wonder the number of senior loan officers tightening small business loans is at a record level—it’s not the banks, it’s the federal government.
The biggest problem with this is that, it is small business that will lead the U.S. out of recession. Big business has proven many times over that they cannot improve a flagging economy…they are followers, not leaders. During the last downturn when almost 3 million workers were layed off in 2002, small businesses created over a million new jobs in 2003, and had almost all the 3 million unemployed back to work by the end of 2004—while big business was still downsizing. It would be another three years before big business even replaced the jobs lost in 2002 and 2003. We can expect similar (or worse) performance from big business this time around.
Here are my suggestions for stopping rampant unemployment and starting a recovery of our business sector:
- Have the government stop thwarting the growth of small business. It is not the small businesses that created our recession…it was the greed and incompetence of big business. Let the local and regional banks do their jobs just as they always have, so small business can begin to grow again.
- Remove unnecessary government regulations from small businesses. Small businesses spend 67% more per employee on tax compliance than big businesses do. Sarbanes-Oxley was established to avoid another Enron—it also crippled the growth of many small businesses.
- Offer incentives to start and grow small businesses. Small businesses hire 40 percent of high tech workers (scientists, engineers, computer workers), so why not encourage more small businesses.
Letting the federal government control all banking will only lengthen the recession…if not drive our economy into depression. Local and regional banks are what sustain the growth of small businesses…the same small businesses that will lead the U.S. out of its financial crisis. Let us not allow the government to see problems where none existed—they always come in and, “…hunt mice with a cannon.”
Credit Crunch–What Credit Crunch?
The latest government numbers—through mid-October—show commercial and industrial loans from banks are UP, commercial real estate loans from banks are RISING, and interbank loans are CLIMBING. The real interesting thing is, from September 2007 to mid-October 2008, the numbers in all three categories have been consistently rising. So, what, or who, were the big bailouts for?
V.V. Chari, a University of Minnesota economist and consultant to the Federal Reserve Bank of Minnesota said recently that it sounds like the reasoning for the buildup to the Iraq war all over again…”We know things you don’t know. Trust us.” The government’s own data, however, contradicts what the politicians and bureaucrats are saying.
Lawrence Christiano, a Northwestern University economist recently said, “Nobody has explained how the money system has frozen when the data says it has not.” Because our economy is based primarily on emotion, it seems that we are in a situation similar to someone yelling “fire” in a crowded theater. The resultant panic is simply based on fear.
The Good News.
Anyway, this is a small business blog, not a political blog, but I did want to point out that for most businesses, there is no credit crunch, and money is still available for operating our businesses…and always has been. However, there is no question that there will no longer be any subprime loans available for the near future. To get a loan, a business now must be truly credit-worthy. But, isn’t that the way it is supposed to work?
The sad thing is that the politicians and bureaucrats who yelled “fire” in our crowded economy did so just to satisfy the debts created by greed and avarice of a very few rich and powerful people. Now, it will be up to individuals and small business to shoulder a perhaps unnecessary national debt—again.
But, don’t despair—keep on doing what you do so well, and, as usual, small businesses everywhere will stabilize economies and put the world back on track. At least until someone yells “fire” again.
Small Business Can Learn From Big Business
I just read a comparison between the market values of the two largest U.S. automakers and Japan’s two largest automakers. The market value of GM and Ford combined is $8.1 billion. The market value of Toyota and Honda combined is $146.3 billion—over 18 times greater than the U.S. big two.
Why is the American auto industry on life support, while Japan’s is alive, healthy, and prosperous? Most of Japan’s cars, that are sold in the U.S., are built in the United States. Japan’s auto makers belong to the same U.S. unions, pay the same wages, charge comparable prices for their products…and yet, they are many times more successful. Why do you suppose that is?
To find the answer I think we only have to look as far as the customer satisfaction surveys conducted by J. D. Powers, Consumer Reports, and the like. American automobiles just do not satisfy the consumers as well as the Japanese automobiles do, and they haven’t for a long time. According to the surveys, Japanese autos are better designed, higher quality, and just built better. In other words, Japanese automakers provide more value for the money.
How does this apply to small business?
Value for their money is also what our own customers and clients search for. It doesn’t matter if you are a one-person web site design studio, or General Motors…if you do not provide the best value for your customers or clients money—you will fail. It is as simple as that. Maybe it is time for all of us to take stock of what we are delivering to our customers and clients.
Toyota does it; Honda does it; Costco does it; Avon does it—why can’t we?
Armageddon vs. Business-as-Usual
With all the whining, hand-wringing, and economic trash talking by pundits everywhere, I thought it might be interesting to look at something a little more substantial—like some historical facts maybe? I’ll bet most people don’t even know the last time our country lost almost 3 million jobs. How quickly we forget.
About all we see and hear in the media is the tragedy of Wall Street and the exorbitant paydays for the CEOs, plus the excesses of the oil industry—and rightly so, because these people certainly did not EARN their big paychecks.
On the other hand, many of these same pundits are saying our country must protect these large corporations, because they are the people who pass down the corporate wealth so workers can have jobs.
So, considering that, in general, American large corporations have traded off our country’s manufacturing base to foreign manufacturers, for fat paychecks, let us see how well the big corporations do at providing jobs during and immediately after a recession.
(The following data are from the U.S. Census Bureau.)
Our last economic downturn was 2001 to 2002 when we lost about 2.7 million jobs in the U.S., and all of these people were put back to work by 2004. Total employment in 2004 was almost identical to total employment in 2001, so I picked these two data years to see who put these 2.7 million people back to work.
Here is what I found:
- From 2001 to 2002, large corporations (over 500 employees) lost 1,643,373 jobs, and small businesses (less than 500 employees) lost 1,017,157 jobs for 2,660,530 total jobs lost.
- In 2003, large corporations lost an additional 83,889 jobs, while small businesses created 1,081,278 new jobs.
- In 2004, all the jobs lost in 2002 were replaced, with large corporations adding back 443,110 net new jobs, and small businesses added 2,232,160 new jobs.
- It would be 2006 before large corporations replaced all the jobs they lost in 2002.
- Do not assume that the small business jobs were just service or fast food jobs, because small businesses hire 40 percent of all high tech workers (scientists, engineers, and computer workers), and produce 13 times as many patents per employee than large patenting corporations. (Office of Advocacy, Small Business Administration.)
Therefore, during the last major economic turndown, it was the small businesses of America that turned it around and put people back to work. My conclusion is that, it will be the small businesses of America—the real entrepreneurs—who will turn us around again…and create the jobs to put people back to work again. The big corporations just cannot do it.
Will it happen quickly? Of course not—emotions control our economy, and it takes time for emotions to stabilize. But, it will happen, and it will happen regardless of what Washington does…it may even happen faster if the government minimizes their involvement.
I only wish our politicians would realize this.
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