I recently attended a gathering of entrepreneurs hard working, concerned for their people and attempting to keep it all together through this extended recession. They represented a cross section of industries everything from manufacturing to home construction. Some had experienced up to a 90 percent loss of sales during the depth of the recession but still had found ways to keep going. One person had to lay off 75 percent of his work force and said it was the hardest thing he ever had to do, as some of his people had been with him for 18 years. The stories were gut wrenching to say the least, situations that you would not wish upon your worst enemy. During the discussions, I so wished a group of Washington economists was listening in. I doubt they have any understanding of how their policies have torn the fabric of our key job providers.
One very good friend who has a cement business that is extremely dependent on construction had managed to land a lucrative contract that require him to seek an expanded line of credit. His banker declined, then cut the current line 50 percent. To keep his business together, he sold his home and moved into his warehouse.
One person at the gathering said bank lending requirements are so onerous that its impossible to qualify, especially when your last two years financials showed the results of the depth of the recession. It doesnt take a rocket scientist to figure out what is causing our slow economic crawl and continued high unemployment.
My limited survey was supported by a July 6 on-line Forbes report titled, The State of Small Business. The magazine surveyed businesses with fewer than 500 employees. Despite a strong stock market and many strong financial reports from larger corporations, the small business sector that represents 50 percent of our economy is feeling that things are not going well. Many of these business owners feel that their financial conditions are slipping and do not feel optimistic about the future. In the survey, they confirm the continued difficulty of access to credit.
In part, this is the continued impact of new regulation. The cost of federal compliance issues between 2001 and 2008 grew at a 6.1 percent rate for businesses with fewer than 20 employees against an inflation rate of 2.8 percent. These are hidden cost burdens that impact the small business sector far greater than larger businesses.
The July 8 Wall Street Journal also had an article on the current small business outlook. It showed how overall job growth has declined across nine different sectors. The WSJ survey showed that only 13 percent of businesses plan on new hiring, 3 percent less than the month before. Only 20 percent plan any kind of capital improvements. The Index of Small Business Sentiment also shows declines.
Its hard to blame bankers, because regulators are sitting on their doorstep, carefully analyzing every loan and nitpicking every loan decision. Money is available from the Fed window for banks at the lowest rates ever and can be easily reinvested in government instruments for a solid return with little FDIC oversight. With the massive federal deficit needing to be financed, this situation will continue far into the future as the government does not dare allow those interest rates to go up, causing them to have to pay more interest on federal debt instruments and exasperating the budget even further.
Pepperdine Universitys Graduate School of Business did a study and found that all wished to proceed with new strategies for growth. Most had a positive outlook for growth opportunity. Yet 54 percent found that when attempting to line up loans, they were denied. They found that since January banks have denied 60 percent of loan applications. The turn down rate was also high for private equity as the study showed that during the same period, they only funded between 1 percent to 4 percent of the business plans presented.
As I mentioned above, financing decisions are based on historical financial data with little weight being put on future projections. Today with the recessions effect dragging on, this future is held with ever increasing suspicion from the people who should be helping to finance our way out.
The Wall Street Journal recently reported that business loans of less than $1 million were down 8.6 percent from a year earlier. The Federal Reserve Bank of Kansas City showed that larger bank lending to small business dropped by 14 percent from March of 2010 to March of 2011 and that loans by small banks had dropped by 3 percent.
It reminds me of the 1996 movie Jerry Maquire with Tom Cruise when his buddy Cuba Gooding, Jr. yelled at him, Show me the money! For a small business entrepreneur, it is heart wrenching to watch outside forces slowly choke you to death. For this reason, I have urged friends and colleagues who own businesses to avoid the pain of seeking debt capital. It is a process that today is way too time consuming and onerous with limited odds for potential success.
It is hard for Midwest residents to understand the thinking of the Wall Street moguls, politicians and bureaucrats. It is almost funny watching them wring their hands trying to find more places to spend billions of dollars to stimulate and grow the economy with mega projects. It is why I find myself screaming, Show me the money! One thing is for sure: When push comes to shove, they do take care of each other, often at the expense of the very sectors of the economy that deserve support. I have written in previous columns about the importance of growth through use of internal resources improving your productivity and looking for ways to squeeze more cash flow out of your existing sales base along with conservative growth strategies anything that will not require the use of outside financial resources, anything and everything that can buy you time to survive and grow. With time, this too will pass.
Erdman is chief executive of Strategic Growth Resources, a business acquisition firm. Previously, he founded entrepreneurial programs at the University of St. Thomas in St. Paul and the University of Iowa. Contact him by telephone at 218-326-6939 or e-mail to firstname.lastname@example.org