Laying Off Small Business - Part I

Part 1. The Problem

Small Business America is the countries largest employer and also the largest contributor to government revenues (i.e. taxes on profits, matching contribution to SSN, unemployment taxes.)
Premise. The fourth quarter, peak holiday season 2008 financial tsunami, fueled by our political process, media, energy shortage and real estate/mortgage loan meltdown, will carry over into the 1st quarter 2009 and is so severe that few of our nations small business can survive an unprecedented two quarter consumer spending boycott. Even the good merchants and their suppliers cannot survive 50% drop-offs in revenue or selling merchandise below cost.

We are a nation where our Consumers have the power to NOT spend and even conserve on necessities. Consumers demonstrated they can even hold off driving and impact the supply/demand ratio with gasoline. Consumers are a powerful dynamic in capitalism. Fueled by the media, NOT spending is almost in vogue. For others, it is good old fashion fear. Small business and major corporations react. They jettison employees, scale back production into a self-fueling, self-made depression frenzy similar to a run on the banks. It is a run on consumer spending. If consumers can do it over the biggest spending season – they can really do it in non-peak times.

Consumers are smart. They know their sacrifice has a silver lining. Capitalism will yield to supply and demand and the end result will be bargains galore…from the price of gas, to consumer retail goods, to housing. Waiting is smart and will yield a major dividend.

Or will it? A tsunami is too much of a good thing – gone bad. A perfect storm is too many bad things combined to create a major disaster. Can this happen to capitalism. Can we stretch the traditional limits of the supply/demand model to create a tsunami that undermines the infrastructure of our small business and destroys Americas largest business and largest employer creating downward spiral to where the only jobs – are government jobs. Isn’t that called socialism?

How did we get into this cycle? It was a combination of self-inflicted body blows. The mortgage loan was a major catalyst. The failure to recognize the real problem was not lowered loan standards forced by the government fair housing act that went bad – but accounting practices devaluating real estate assets on the books impacting the net worth of the mortgage holders resulting in a reduction of credit lines, stockholder confidence and net worth leading to insolvency at the primary and all secondary markets. It impacted the asset valuation of the big boys who had real estate as a part of their investment portfolio. (i.e. Lehman Bros and AIG) with required public disclosure.

The Governments tried and true “Greenberg” throttle of tweaking interest rates could no longer regulate the consumer confidence engine – driven primarily by Wall Street. A shaky stock market tanked. Government bi-partisan efforts to bail a couple of majors to restore consumer confidence and avoid a run on financial institutions and the stock market did not work. When the consumer confidence tanks, spending tanks. The first to go, or put on hold, are vehicles, home purchases, recreation and pleasure travel. This forces the shaky big three to declare a state of emergency and soon to follow will be the government subsidized airlines.

Kick yourself in the groin. Add to this scenario the media propensity to hype anything negative to make it a headline and you brainwash the guy who pays the bills – the consumer. It only gets worse when one political party amplifies the problem for their political gain and when in office, claim they inherited the problem from the other bad guy.

Do it right and you turn the consumer confidence snowball into a capital consumer confidence crisis that is the “perfect storm” that now dramatically impacts consumer spending for “everything.” Now the problem is not just big ticket items….it is non-necessities like restaurants, clothing, travel, family vacations, and electronics. Consumer driven items represent 62% of our economy and in a tsunami, it just went away, along with the supporting wholesale and distribution infrastructure. It is beyond stimulus checks from our government. Guess what – Government (state and federal) revenues take a major hit on every front.

Add another dynamic to the 2008/2009 financial tsunami. We are talking about the big “C.” Not cancer, but the equally powerful…CREDIT. Yes, credit funds major corporations, and also consumers who buy houses and cars, TVs and Appliances. Credit was acknowledged as a “problem” for big business, with little mention about its impact on the nations largest employer – small business. Credit drives both the wholesale buy and consumer sell side of small business. From the consumer side, credit cards make up over 70% of all purchases.

Credit is vital to start and sustain a small business. However, even in good times, credit is impossible to get from banks who view small business as a bigger risk, with less security than holding a mortgage. At least they can sell a mortgage to the secondary market, unlike most small business loans. The small business value to a bank is checking and savings accounts, money markets, merchant banking and maybe stock portfolio management. When a business fails – it is a major hassle and business assets worth nothing. When is the last time you saw a business foreclosure sign? Therefore, banks make small business owners personally guarantee and collateralize loans for the full loan amount – or more. Imagine if that were a requirement to buy a house. When collateral devalues in a down stock market, the bank forces the small business owner to add collateral or liquidate assets to cover the loan.

Enter a new 2000 dynamic. It is the emergence of the credit score. First on individuals and now business point scoring is rapidly following the consumer model. Credit scoring is an unregulated black art. It is more than the 1899 historical credit reporting tradition of objective reporting on how bills are paid.
Today’s subjective weighted credit risk point score measures open credit vs. available credit along with other factors, such as who is looking at my credit report, or has turned me down. Miss a monthly payment, and instantaneously, your computerized score and even credit line comes down further impacting your credit score.

The Credit Score is what banks and other credit grantors use to justify offering higher rates to “high-risk” consumers. Gone are subjective factors like years in business or credentials of the owners. With major bank consolidation – loan decisions are made using ONLY the point score. It is efficient, the first step and pass or fail saves needless investigation by bank officers who were tellers a couple of weeks before.

In business, credit grantors use the officers/owners personal credit score if they cannot get adequate scores on the business. My point….play it forward and imagine the aftershock of the 2008/2009 financial tsunami will have on credit reports and the ability to get credit – even if the credit markets were to reopen. This credit reporting age is not your fathers “wonderful life” loan arena. Big Brother will impact…..no it will KILL any recovery for the merchant owners of small business.

Forecast. Small Business has taken a direct hit in the fourth quarter 2008 and it will continue in full force during first quarter 2009. It will get worse because we live in the age of the rich and plenty, where consumers can easily abstain and don’t have to buy anything except bare necessities. It is more than a consumer course correction. A legitimate small business (one that is not a hobby) cannot cover a two quarter consumer boycott and loss in cash flow. Even the good cannot survive. Selling the majority of a retailers merchandise at below cost is not sustainable and without major reporting consequences. Add fuel to the fire, when small business credit lines (like the big boys) are secured with stocks that have been devalued. Slow pay, personal or business and with today’s electronic reporting – good luck getting credit to bail out. It won’t happen!

Laying off Small Business. Our Government is sensitive about laying off the employee work force. We have unemployment compensation and the business pay unemployment insurance to insure they don’t lay anyone off without cause. The more business layoffs - the business owner is accessed a higher unemployment premium to offset the government expense.

What happens when we lay off a small business owner? The owner must pay the Government ALL taxes due. The owner must liquidate all business debts and personal guarantees. If they can’t satisfy all debtors, they must defend in law suits in court, or file bankruptcy and hope the courts decision on asset disposal is equitable. This action will immediately impact (and destroy) the business and business owners (even executives) personal credit reports. This will cause all existing card holders to recall and/or reduce their credit limits to the minimum. Unlike the unemployed, the small business owner has no job, no credit, can’t qualify for anything. They may not be able to get a job if the employer checks credit as a condition of employment. Also – forget about getting insurance or buying a car or house. They check credit. With today’s credit scoring, this condition exists with or without filing bankruptcy! This is free enterprises finest hour. The good news is…the stigma and residual only lasts for seven years. Good luck. You would be better off in federal prison.

How do we get out of this mess? The traditional rule of thumb says… it just has to play itself out. The weak will fail and the strong will survive. The consumer will – when they are ready, bounce back and start spending. Some will argue bargain hunting will force consumers out of their cave. This holiday season even 75% off didn’t work. Consumers can’t buy the $2 million dollar house for $700,000, if they can’t sell their current house, or they are unemployed.

Can we stretch the dynamics of our capital economy too far where even the strong cannot survive? Worse, will it be the offshore strong who come in and scoop up the deals. That is an issue in good times. Or, has our economy impacted the global economy to level the playing field? Not really for the aggressive.

Can the government or anything bail out Small Business? Consumer stimulus checks didn’t really work. Bailing out wall street didn’t work. Saving GM from GM is a finger in the dyke. Saving small business is tougher – or is it? The government cares about small business. They even have a GM Czar for small business called the SBA. You may have missed their testimony before congress on their bail-out plan to restore this countries largest employer responsible for 62% of our consumer spending. I am not sure if it was before or after the GM, Roger Clemons, or the Freddie Mac/Fanny Mae hearings. You missed it because it didn’t happen. The executive team representing small business did not have to fly in on private jets – they live inside the beltway.

Bailing out Small Business. As presented in PART II, I believe we have a simple solution for small business and one that works within a revitalized and technology proficient SBA. Unfortunately, it follows the scenario that an ounce of prevention is worth a pound of cure. If implemented at traditional speed of government, and after the damage impacted by the 2008 financial tsunami, the damage and aftershock will already be done making recovery long and painful - if even possible. It will be another New Orleans. However, it could be more than a bailout. It could be a stimuls to revitalize America. It could not only SAVE, but refocus, reenergize and put the locals back to work in their community.

Larry White
www.elink.to/1ltLarryWhite