Craig G. Francis

Small Business Survival Methods

"Creativity" and "Niche" seem to be the watchwords in the small business world these days.  With the economy still down, banks cherry-picking loan applicants, and little in the way of real help coming from Washington, mom and pop shops have had to come up with new ways to survive.  A recent article at NYDailyNews.com tells the stories of several Brooklyn businesses that have had to rethink the ways they have done things in the past in order to get ahead during this recession.

From creative marketing methods to identifying and tapping special niches, these profiled businesses have shown that "luck" is what you make for yourself with hard work and a good attitude.  For example, one nail salon owner began reaching out to special women's groups to promote her salon as a destination for parties and events.  A trio of java lovers opened a coffee shop when they couldn't find a quality cup in their neighborhood; to up the ante they added healthy food choices to the menu.  Finally, a local bagel maker, in business for 50 years, is now selling frozen bialies (similar to an unboiled bagel without a hole) in supermarkets and flavored "bagel holes" they call "poppers."

 

Small businesses have also begun to tout cost benefits to consumers: frequently they can provide equal or greater services as bigger-name and higher-price competitors.  The salon in the article is able to do the same services for much less than comparable salons in more upscale neighborhoods because of the lower cost of doing business where they are located.  Customers are finding that a moderate drive for a more economical product or service is well worth the time and gasoline involved. 

 

So what does this tell us?  First, the age-old lesson that anything worth doing is worth doing yourself.  Don't expect government to reach out and help, and if it does, watch out for the other hand (which is probably in your wallet).  Second, taking a risk once you are already in business can often lead to surprisingly positive results - if you plan carefully and understand what is involved.  Finally, being creative and finding a niche for your product or service are as important to survival as they are to starting a business to begin with.  However, the special niches prominently mentioned in the article are going to work only for those few people who know how to respond in rough time, formulating these special plans while avoiding panic.  Those who panic will fail.  I see this frequently. Fear is good, but panic kills businesses.

 

With all this said, no amount of creativity and niche-awareness will change the fact that a business needs capital to start up and to grow.  Community banks are still lending, although with more attention to the underwriting process than perhaps has been paid over the years leading up to our current recession, and the SBA is still backing loans.  In many cases, having someone to help you through the process can be the difference between an accepted or rejected application.  With nearly three decades of experience in banking and lending, I can walk you through every step of the way and provide the advice you need.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722.

Too Much, Too Little, Too Late?

Small business owners once again are feeling the pain of a poorly thought out government program.  This time it is the America's Recovery Capital loan program, part of the huge Recovery Act (i.e. Stimulus I) of last February.  The program was supposed to provide emergency loans of up to $35,000 to established small businesses that were struggling from the Recession.  However, from the beginning it seemed destined for disaster, as Congress gave the Small Business Administration only 15 days to create guidelines for the program.  It was four months before everything was up and running.

Now, according to a CNN/Money Small Business report, after some 5300 small businesses have slogged their way through the mountains of paperwork, Congress is considering ending the very program it pushed into premature existence.  Even original supporter Senator Olympia Snow (R - Maine) has thrown in the towel, conceding that the program has "fallen short of its goals."

 

So what was wrong with the program?  It provided up to $35,000 in interest-free loans to businesses that qualified, and repayment was not due until after the first year - all of which sounds good on the surface.  The problems, as usual, were in the details.  First, a business had to have been in business at least two years, be cash-flow positive at least one of the last two years, and "demonstrate financial hardship, such as a revenue drop of 20% or more."  Not an easy qualification.  Also, for a business that is struggling, $35,000 may only cover two or three months of expenses, and if a company needs that kind of infusion it needs it right away - not after months of paperwork and delays.  And the paperwork was described as "overwhelming" for both applicants and lenders - when applicants could find lenders willing to work with them.  While Wells Fargo, the SBA's largest lender, signed on to the ARC program, many others, large and small, decided to pass.  In fact, two months into the program only 400 of some 8200 eligible banks had chosen to participate.

 

Why so few financial participants?  Look at this from a business stand point: the loans are interest-free, so there is no profit there for the banks; the paperwork and time involved in approving and managing these loans far outweigh any benefits; even with SBA backing it was estimated that over half the loans would default; and, finally, the additional paperwork involved in applying for reimbursement - and the possibility of it being denied on technicalities - made this very much a no-win situation for lenders.

 

So why would Congress push the SBA to create a program that seemed designed for failure?  Perhaps as a way of showing that they were doing something about the problems that small businesses were suffering, without putting in the effort to do something that worked.  Now, will Stimulus II bring us more of the same?  You can answer that question yourself.

Bob Coleman Talks about Franchises on Fox Business News

It seems the topic of franchise funding is popular right now.  Last Saturday Bob Coleman of Coleman Publishing spoke with Fox Business News on the subject of financing a franchise .  Some of what he had to say matches what we have been talking about here, but of course there is only so much you can say in a 60-90 second spot.  Here is the clip:

Bob Coleman is a Small Business Lending expert and Founder of Coleman Publishing.

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722.

Essay – Entrepreneurs and Franchises

Yesterday we looked at how the Recession has affected the franchise industry.  Today, my thoughts on franchises, entrepreneurship, and funding.  It's very reasonable to assume that entrepreneurs, franchisers, and lenders will line up to fund these startups.  This time it is different and that is the understatement of the decade.

 

In the last 20 years there has never been such a systemic and unprecedented collapse of lenders, most particularly those major lenders who lined up loans to nearly any franchise and buyer/investor.  Of the 10 largest SBA franchise lenders of the last 10 years, 9 are out of business or hobbled by capital issues plus the fear factor of lending in a down economy.  Only one lender of any consequence is left.  Wells Fargo remains as the last national lender making franchise loans. They are making loans, but cherry picking the applicants while requiring 50% down from the investor.  But the good news is there are hundreds of community banks still in the business of making SBA loans.

 

With that said, anyone who is seriously interested in getting into a franchise-based business model must be extremely cautious when investing scarce capital into a franchise business.  The investor must be very self confident as these are contrarian times.  When the economy is still contracting, starting a business in these headwinds takes serious intention and research.  Not all franchises are alike and the differences, while not easily recognized, are very distinct.  There is a saying that the words “lightning” and “lightning bug” sound the same.

 

Yes they do, but the similarities stop there.  There is also a saying that all burger, sandwich and food service franchises are alike.  Yes, on the surface they are, but the differences stop there.  There are ENORMOUS differences in franchise eateries.  Knowing how each business differs from the others can spell the difference between a great success and oodles of cash flow or a bankruptcy in short order.

 

I suggest that the person who is constitutionally able to take on the physical, financial, mental, and emotional challenges of owning a business in tough economic times, hoping that success is just around the corner once things get better, must do their homework.  If you can look at starting a business the same way you would view taking on a 4-year college education plus getting married and raising a family at the same time, you maybe ready for the joys of entrepreneurship.

 

Getting involved in a franchise requires a thorough grounding in business fundamentals, attending the franchise schooling, and then moving into this business arena, fully committed to the process.  Anything less assures you that you will fail.  That is absolute and certain.  The divorce rate and business failure rate are very similar.  In any 10 year period about half of the marriages and businesses fail.  It is not from a lack of initial commitment that the failures take place. It is a commitment to the long-term engagement of the process, coupled with a lot of thorough preliminary research, which allows a business or marriage to stand the test of time.  The real difference between these failures is that about 40% of marriages fall apart due to financial issues, whereas 100% of business failures result from financial issues. Cash flow pays the bills, and without it, the enterprise will fail every time.

 

When you decide that the business life is for you, it is vital that you take a top down approach.  The "Top Down Approach" is not the usual approach   The typical approach of  most risk taking entrepreneurs generally involves the method called "Ready, Fire, Aim."   Interestingly enough, this frequently worked despite the risks, since the fact is that when times are good the chances of success are tilted towards the entrepreneur.

 

The top down approach means that this time you do intimate research of the business most ideally suited to your personality.  If you love food and like to cook and enjoy the show, the restaurant style may be the best for you. If you love to work with people and want to make a difference in their lives, a service or sales business may be the best bet. If you are a numbers person and have an engineering and systems bent, then a business model based on those talents and skills could be the most promising.

 

Every personality type has a business ideally suited to their talents.  Focus only on those businesses most suited to the person you really are.  It's advisable that you take some sort of psychological evaluation of your strongest and weakest internal and external qualities.  MMPI and TAIS can provide that key skill and psychological evaluation analysis for you.

 

Once you have established those qualities that best represent you in the real world of business, start the search of suitable franchises.  There are hundreds of them.  Some represent the best of breed; others are charlatans with little to offer and no discernible track record of success.  Start reviewing and researching each by consulting with local lenders, the SBA, SCORE, and the many websites devoted to franchiser research and evaluation.

 

Following this process of personal research and self discovery, (and I can't stress enough the importance of finding out who you really are), you are ready to get down to the business of interviewing the franchisers who have the best qualities.  Don't be swayed by promises and glowing reviews from the sales people. They have a job to do, and that is bringing in new qualified applicants.  “Trust but verify” is the watch word here.   Once you commit to a franchiser and pay a fee, you may be legally bound by the decision.

 

Before you sign on the dotted line, do a final interview of other franchisees and see how they are doing. Are they making money?  If so, is it enough to live on? And are they getting a decent return on their investment?  How long did it take to reach a break-even cash flow?  Find out how they financed the business.  Was it all cash?  Did the franchiser provide a loan?  Was a bank loan or SBA financing involved?  If so, find out how they accomplished this financing process.  Before you pay a franchise fee, meet with the district director or senior loan officer with a local SBA office. This can be found on the SBA home page at www.sba.gov. You can find the entire do-it-yourself DIY application and all the other parts of an SBA loan with SBALoanStore.com as well.

 

This is a VERY important meeting.  You lay the ground work to learn about the loan program most suitable for your capital needs and which local or regional banks are likely to fund this deal (assuming you have the required down payment, skill set, credit score, and collateral to back the loan). You may even get an SBA preapproval for your project, if you present all the right qualities. The loan officer can assist you with the package, saving you the $500-$2500 in loan processing fees the marketplace normally charges for this service.

 

Once you have a solid and complete loan package in hand, get the input of the SBA officer and/or SCORE adviser to direct you to the lenders who are likely to be comfortable with your project.  Scan your application into your computer.  This makes the app instantly available for submittal to lenders.  Then go to the lenders who are recommended by the SBA.  Meet with the loan officer in charge of the SBA loans. Make sure the lenders who are on the list are still in business making loans and, more importantly, will be in business long enough to process, approve, and fund your loan completely. This may sounds like I am being overly cautious, but 140 SBA lenders were taken over by the FDIC in the last 2 years. It is expected that another 400-500 banks will be taken over this year.  Thousands of applications were in the middle of the process when these banks were seized.  All those applicants had to start over.  This unexpected delay can cripple the applicant.

 

Once you have winnowed out the list to those banks that are still viable and can expect to continue lending into the near future, make applications to all the banks on the list by sending the application in your computer through email to the bank representative.  Be sure to include a copy of your credit report and pay particular attention to your FICO score. By embedding your credit report into the application you can be sure that the banks won't each run a copy of your report and reduce your score with excessive inquiries.  If you are fortunate to get one approval from the entire retinue of applicant banks, RUN – don't walk – and get signed up ASAP.

 

This is the final process.  This letter of intent makes you financeable for the franchise you selected. It shows your new landlord that you are serious and committed.  Be sure you do not sign up for a long-term lease before you are certain of the franchiser and the financing.  Notice that you get the bank loan last.  It is difficult to get a bank to approve your deal, but these steps – taken in slow, methodical order – give a much great chance that you will get funding and be on your road to success.

 

This essay is designed to give you a basic understanding of the financing process. It is not designed to provide investment advice or recommendations of any lender, franchiser, or loan process.  The writer does not guaranty the success of an individual applicant nor can he assure that a business owner, franchise, or business model will not suffer catastrophic failure in spite of the best efforts of the entrepreneur.  Business ownership involves a considerable degree of risk.  Being approved for a franchise, the SBA, or a bank does not assure success.  The borrower must evaluate the chances of success relative to the costs of failure.  The franchisee is completely responsible for his or her success or failure.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722.

Franchises Deal with Recession

The year 2009 was a rough year throughout the economy, and no less so for franchises than for individual businesses.  Entrepreneur Magazine recently reported on how these businesses fared and how they are trying to make 2010 a better year.  About 1.2% of the over 800,000 franchise units closed in 2009, and the drop in SBA lending resulted in an estimated 10% fewer openings than the previous year.  But the biggest change, according to author Jason Daley, will be in how the successful franchises do business going forward.

 

The good new for franchises is that there are some sectors that are expected to do relatively well: fast food, services (such as senior care or tax advice), and home repair.  The levels will not return to pre-recession for some time, but at least some of these franchises will creep back into the black.  An increase in funding will help all small businesses, including franchises, but many banks are still leery of lending to possibly risky ventures.  SBA loan analyst Bob Coleman expects that it will take several years for lending to return to previous levels, and points out that SBA lending was off about 35% for 2009.  More and more, franchisees will need to work with community banks and lenders rather than the big national companies.

One important lesson that franchisers and franchisees are learning is the need to work more closely together than many have in the past.  The parent corporations are realizing that simply dictating policies and procedures to franchisees is no longer a workable arrangement.  They have come to see that a partner relationship, where the franchisees are able to provide suggestions and ideas based on local situations, is beneficial to all involved.  There has also been an increase in the creation of franchisee associations that support the individual franchise owners and provide a unified voice to speak to the franchisers.

 

Another change is in the choosing of franchisees in the first place.  Gone are the days of simply "getting the contract signed."  Parent companies are becoming more careful to pick candidates who fit a particular "profile" that will ensure, or at least increase the likelihood, of success.  To that end, companies are using detailed research on what makes a good franchisee to make decisions.

 

The future for franchises is probably only slightly better than for individual startups, because of the support from the parent companies.  However, as Bob Coleman indicates, and I have also said, it is going to take some time for the business climate to return to anything like the days before the Recession came down on us.  More flexibility and fewer regulations on lenders will help, but those are not likely to happen with the current direction government is taking.  More on what I think in my next post.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722.

TARPing Funds Out of the System

There was an article in the January 16, 2010, Wall Street Journal editorial page about the taxes being imposed by Obama on the largest banks.  These banks, in some cases, were forced to take TARP funds “just in case they needed them.”  This was the roundup you may have heard of when, in late 2008, the Fed chairman and Secretary of the Treasury lined up the bankers late night one weekend and told them they would need to take about $120,000,000,000 of federal largess.  But the TARP funds had strings attached.  Some involved preferential dividend payments to the Fed (ala the income noted in the WSJ article); some involved threats to replace officers and board of directors if the dividends were not forthcoming each quarter.

 

The Obama administration then changed the contractual rules when Ken Feinberg, the Pay Czar, told all the recipients of the TARP funds that their pay would be limited to $500,000 a year.  In some case that would result in a 90% reduction of promised pay and bonuses to many top ranked and top notch bankers. This breached contractually promised pay levels for the top officers of these banks.

 

I am not sympathetic to bankers as a whole, since I was one once, but if you tar and feather the people who are the most capable of running these multi-billion and -trillion dollar business and force them to accept a salary that many could not live on, you kill off the best people.

 

These major banks immediately set in place means to repay the TARP funds.  By early to mid 2009, these major banks were gathering funds from stock sales and equity placements and forking over the TARP funds to the government, with interest and bonuses attached. Goldman Sachs was one of the first to do so, since their bonuses averaged $800,000 in 2009.  Fearing a bonus-ectomy, every single one of the rest of the large banks paid back TARP, despite the fact that Obama threatened to refuse this payment.  The constitutionality of this threat did not hold. Even a first year law student could see this ploy would not work.

 

Once these billions were repaid to the Fed, we then saw this early repayment yielded a substantial net profit to the government.  To say the least, Obama was really steamed by this plan.

 

Since that time, Obama has furiously turned up the heat on the bonuses of these major bankers.  His fingers were burned when he tried refusing the return of the money.  Once the money was returned, the bankers and investment firms were free of the Pay Czar and you can see the mega billions of bonuses being paid.  You recall Obama jaw-boning and trash-talking the bankers in the last month or so.

 

Infuriated, Obama saw his plans to nationalize the banks through the power of TARP regulations was thwarted and his strangle hold on the bonuses was removed.  He now wants to put a punitive 50% tax, a windfall profits tax, on the bonuses of the bankers.  Of course, this is also unconstitutional and the bankers are certainly within their rights to reject his plans.

 

The upshot of all of this is a systematic and regular extraction of funds that could be used by the small business community. By way of comparison, the entire SBA funding in 2007 was about $25,000,000,000 and represented over 35% of all business loans to the small business community. TARP repayment was nearly 5 times that amount.  If you wonder why small businesses are having trouble finding loans, ask yourself. If you drain $120,000,000,000 from the banking system, will you have more money to lend or less?

 

TARP was designed to prop up a weakened banking system and ultimately provide lendable funds to businesses. Before those funds could be injected into the economy, the bankers realized they had signed a pact with the devil.  Obama was going to strip mine them of their capital stock ownership investments, turning these lenders into wards of the state.  This is best noted in the only lender still in the thrall of the government.  GMAC and Ally Bank lost $3,500,000,000 in 2009.  The government owned 35% of the stock of this firm due to the loans the Fed made to GMAC when they were in trouble in 2008.  Their companion firm, General Motors is, of course, 80% owned by the government.  So GMAC naturally turned to its financial provider, Uncle Sam, and got the $3,500,000,000. For that loan, the government got another 23% of the capital stock.  GMAC is now nationalized, with 58% of their capital stock in the hands of the federal government.

 

This lesson did not go unnoticed by the financial community, and the transfer of power of GMAC and Ally Bank to the government simply hastened the process of returning TARP funds, subsequently draining more lendable capital from the banking system.

 

This brings us to the latest debacle which consists of excess profits tax proposed by Obama.  He claims this is a fee for the use of the TARP funds and a compensation for providing funds to the banks when they were on the rocks.  But these lenders paid back their TARP funds, plus interest, dividends and fees in full.  That is how the Federal Reserve made $45,000,000,000.

 

With that said, this one question now remains.

 

When Obama attempts to strip mine the lenders of their profits through a Bonus Tax, does he not once again pull vital lendable funds from the banking system just when these funds, as were those of TARP,  desperately needed by the US business community??

 

Which then makes this next question inevitable: Does Obama care about the US small business community?  Or is he just interested in extracting more fiscal resources from the banking sector, businesses be damned?

 

Next week we will talk about the next shoe to drop: Commercial real estate deflation and its impact on the banking sector.  TARP 2 and its consequences.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722.

"Crushed" at Both Ends

Shortly after I finished working on the last post I came across an article about a small company in New England that is filing bankruptcy after over 60 years in business.  What struck me most was that this is, sadly, a perfect example of the "business as body" I just wrote about.  According to the story in the Hartford Courant, the company's problems are "a result of being 'crushed' on both the expense and credit ends of its business."  In other words, they ran out of food (insufficient sales to cover expenses) and oxygen (inability to renegotiate $2 million in unsecured loans), and now are at the point of having to return money that customers had put on deposit for merchandise.

As I said, the economic situation is not going to improve quickly, especially with the continued attitude of banks to not lend in light of government regulation and pressure.

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722     

Survival of the Business Body

In my last post I discussed bank lending practices, government regulations, and their effect on small businesses and job creation.  Today I'd like to use a comparison of small businesses to the human body.  If we are in good health we have an adequate supply of food, water and oxygen.  That is a condition of homeostasis. Intake and output are in balance.  We can grow if we get more of any of the aforementioned catalysts to bodily well being.  If we are deprived of these substances, we start to die.  If we own a business, we grow or die in a manner similar to that of the human body if we are supplied with or deprived of similar assets.  Food is sales, water is the ability to provide our clients with credit.  Oxygen is the credit available to the business body itself.  These are measured in years, months, or days of survival.

 

We can go for a long time if deprived of adequate food, just as a business can continue for a year or more in a declining sales environment, like the one we find ourselves in today.  While not optimal, it is survivable.  We lose weight in a calorie-deprived environment, but we adapt.  A business adapts to a lower sales environment and also survives to grow another day.

 

If the cash flow is constricted, our ability as business owners to provide credit to our clients and acquire more assets like inventory, employees and equipment is curtailed.  This temporary situation can be worked past just as we can work past a reduction in water.  But that can't continue for years.  The money or water must flow.

 

 But the most vital component of business capital, the day to day cash flow needed to pay bills and employees, has a very short life span.  Just as we will die if deprived of oxygen for more than a couple of minutes, a business can fail in the span of a couple of days or at most two weeks, if the supply of their capital is shut off or simply not available.  The business dies if the pay cycle is stopped and the employees go unpaid.  They are out of business, as is the business.

 

This is really where the bank-funded business cash flow cycle is causing the worst cycle of failure and business collapse since the Great Depression. Banks can't or won't lend, no matter what the Administration wants or promises.  The banks are being held to a much higher standard of lending quality by the Feds, while facing the continual erosion of earning of their primary clients, the small business account holders and borrowers. The bank's capital is depleted by former bad loans written off.  So their capital base is reduced.  When faced with a reduced capital base, banks must cherry pick from loan applications.  This results in what we see in numerous articles like that of CNN and WSJ.

 

 The cycle of business weakness will create more layoffs and essentially cripple the business community.  The easiest way to reduce costs is to remove the most portable asset: an employee.  So the businesses most affected by sales declines and lack of credit react in the only way open to them.  They lay off employees or fail to hire new employees even when the economic environment indicates that hiring would be a good idea.

 

Why does this happen?

 

Because the money is not available to stop the sales decline or to take advantage of potential economic advantages in one or another particular business field.  And this is not going to get better before it gets worse.  Banks are still heavily damaged and trying to get back on their financial feet.  And they will not be able to do this until the financing and economic environment improves and the administration stops trying to force banks to lend while bringing down new taxes  and regulations on this industry.

 

I have been through 4 major banking lock downs in the last 35 years.  This is very much like the last 4, only worse; and it is going to take quite a while, possibly 2 years or more, before employment starts back up.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722    

Small Businesses and the Money Game

The recent article from CNN Money makes a serious point about the continual loss of jobs in the small business sector.  This critical part of the US economy continues to bleed jobs with little end in sight.  Sixty-five percent of job growth and its corollary, job loss, comes from the sector representing businesses with 50 or fewer employees.

 

Large firms have potentially come to the end of their job reductions, since the forces that affected their economic activity may have flat lined, and could see some small increases.  Job reductions that have a powerful affect on the bottom line of the publicly held firms have run their course, given the third and fourth quarter earnings results. That does not mean they will open the floodgates of hiring. The rapid increase of the S&P, Dow and Nasdaq show that the cost reductions commensurate with employee layoffs created this unexpected growth in earnings, and the managers of publicly traded firms are very sensitive to the measures that rebuilt earnings growth.  Top line growth of sales was often negative since these largest of the businesses in the US have sacrificed employees for earnings.  These managers won't hire unless they have signs that the business warrants increased employment.  So their hiring is static at best

 

While it sounds cavalier to say that reducing headcount is a good way to help shareholders and earnings, the holy grail of the stock valuations, it does not take into account the pain caused by layoffs. Shareholders are insulated from this form of hurt when they read the financial statements of the public company.  And these large firms may actually start modest hiring campaigns to fill the ranks depleted by the recession and dramatic reduction of worldwide economic activity if the managers see a need to refill the ranks in their firms

 

The top officers are charged with the responsibility of maintaining and building the business cash flow and earnings so that the stock rises in value.  Nonetheless, these large firms must take these actions of hiring and firing because they are accountable to the shareholders.  In the small business arena, this takes place at a more intimate and personal level, and this essay attempts to address the troubles facing the small business community and its financing woes due to the lack of lendable capital.

 

Much has been said by the administration about their concern over the plight of the small business owner and their employees. Rightfully so, the politicians are concerned by this because their election chances are affected by whether they pay attention to this critical part of the well being of the country. They must show their constituents the appearances of doing something.

 

So we have much jaw boning about the job losses with the attendant flogging of the SBA to do more to help these unfortunate victims of the financial lock down we see in this sector of the economy. The Obama administration claims 4,500,000 jobs saved or created, but the unemployment rate has risen from 8% to a near Depression-like level of 17.5% when you include the people who have dropped off the unemployment roles and given up seeking jobs. Despite the government's attempts to jumpstart the economy and job growth with stimulus  funds nearing $1,000,000,000,000, the effect is about as credible as pushing a rope upstream.

 

Keyensian pump priming has never worked, and this time it is even less likely to work since the political establishment is focused on job killing legislations called Cap and Trade and Health Care. The government dollars are not going in the right direction, back into the small business economy with an attendant reduction in taxes and regulations. Without the political will to do what works, politicians can't force banks to lend money any more than they can forces small businesses to spend it, even with the backing of the SBA. Banks are not going to sign a suicide pact with the government by making what they see as more loans to a still weak part of the economy.

 

This may be shortsighted on the part of the bankers since they are denying loans to both qualified and unqualified borrowers, but they have reacted to the bad loans and poorly thought out federal policies by behaving as banks always do when the lending environment is poor. They stop making loans.  Period.

 

The banks were, for the most part, some of the principal agents of the recession due to terrible lending policies in the Sub-prime mortgage market, investor/developer financing, and loans to clearly uncreditworthy borrowers.  And this lending avalanche of the last 15 years was aided and abetted by state and Federal guaranty programs and regulations that frog-marched the bankers into a lending trap that made the traditional lending criteria of quality underwriting a moot point.  Hence the reason banks are absolutely not going to fall into the trap of relying on government promises of federal help and guaranties in order to replace their new-found reliance on good underwriting.  And that is the problem of the present credit lock down that we and the small businesses in Europe (see the WSJ article of January 12, 2010) suffer from today.

 

Tomorrow: a different way of looking at businesses.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at 888-666-9722    

Is Job Loss Good News or Bad News?

Normally one thinks of job loss as bad news.  But recently CNN Money pulled out a “silver lining” that the cuts for small businesses (50 or fewer workers) last month were the lowest since July 2008.  Still, smaller companies cut 25,000 jobs in December, which is not good news if you were one of those cut, or if you were a business owner who had to make those difficult decisions.  Overall, for 2009, “the nation's smallest companies cut 1.8 million jobs last year” according to estimates by Automatic Data Processing (ADP).  This in spite of a reported hiring of 11,000 workers by “service-oriented small businesses” in December.

 

The article quotes Joel Prakken of Macroeconomic Advisers as indicating that private employment could begin rising soon “if recent trends continue.”  On the other hand, President Obama recently talked about how efforts were “reducing the deluge of job losses to a relative trickle,” but not creating the jobs at the rate needed.  So where does that put the country?

 

In the article an example was provided of the difficulties small businesses are facing: the trials and tribulations of 4D Equipment & Services LLC.  This woman-owned company wanted to expand its business, and needed $3.3 million in financing for the project.  However they have been turned down by two lenders and are still waiting to hear from two others.  Because their request is over the current $2 million limit, they cannot qualify for an SBA-backed loan.  If a proposed increase of the cap to $5 million passes congress it could help the company acquire the funds it needs to expand and provide an estimated 104 jobs.  But what about other small companies in similar situations?  Not every company can get CNN to profile its problems.

 

The country and the economy are dealing with difficult times, and there are questions and accusations flying left and right.  In my next two posts I will try to bring a measure of understanding to the situation at hand.

 

Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com or at            888-666-9722