The Jobless Recovery and Small Business
By: Rene Velez Sept 28th, 2009
By most accounts in our current aspirations towards a recovery, we are seeing better times ahead but yet, everyone is asking, where are the jobs? Indeed as we somehow get ourselves out of this recession, jobs will continue to be hard to come by. Manufacturing, in the U.S. will likely increase production and take up any existing elasticity in their production capacity before taking on new employees. What’s more is that because we are essentially an information and technology economy, those with existing employment simply will have to do more with less labor as before. This is a kind of employment expectation creep. We are essentially assigned more tasks to perform, without increasing the labor pool. Typically, we simply work longer.
Many articles and studies show that as the global economy improves, emerging markets will have a greater increase in growth than some of the developed nations. This is in large part because companies from the developing countries shift their production activities to countries that have a lower cost of labor.
Small Business
Small business in the U.S. may play a very big role in adding jobs in the future, at least domestically. Many small businesses operate on profit margins that would not be considered viable businesses by larger corporations. It stands to reason that many small closely held businesses, have a very small net profit after covering employee salaries, overhead and salaries for their working owners. This profit in many instances may actually be so small that their no nothing left for a would be investor. Hence, the reason big business models do not consider them worthy of an investment.
We should understand that this does not mean they are not viable businesses. In the end they fulfill a very important role in our economy. They pay salaries, they employ many people, they pay taxes and they consume other services and products that further create jobs and help stimulate the economy. The multiplier effect of a small business is key to our current jobless recovery.
The Credit Crunch
During this recession banks have been forced to take a second look at their lending policies. Their mounting losses and the reduction of their capital base is being addressed by lending guidelines that are tightening up credit. I have come across many stories of banks reducing or terminating commercial lines of credit. In addition many small businesses rely on the owners’ home equity line of credit to meet short term needs when disbursements exceed collections. These too are under attack as banks are taking a second look and evaluating the underlying value of the real estate which is often the collateral for these loans. Even credit card companies are declining credit applications and reducing credit limits to shed the risk associated with losses and an overall tight credit market. I should mention that many small businesses rely on credit cards as the only means of short term borrowings to finance everything from inventory to the payment of taxes. All of this begs the question, how well will this jobless recovery pan out if these small companies that hire so many people could potentially be forced out of the market for lack of capital?
Government Reform or Banking Transformation
I see two possible solutions to the potential for small businesses to obtain much needed capital. (1) Government policy and programs to help small business. Kind of the SBA on steroids. (2) The banking industry taking on small business lending as with a high touch high service analytical lending model. Really get to know your borrower and business client.
Although government policy and programs are helpful, it does not seem likely that yet another government bailout program is going to be well received politically. The American voter , even if it means their own business, may not want the government to step in and create a small business welfare program. In addition , of the existing programs that are offered through SBA, the red tape and the work involved in meeting the program requirements and the banks hesitancy to administer these programs creates a barrier to many small businesses. Not just in the red tape but the cost of CPA’s and other people to get all the paperwork done. One just has to look at the SBA program to offer floor plan loans to auto dealerships and see first hand what comes of this. In all more government intervention may not be plausible.
The second idea is that banks get back into the business of lending to small business. Banks really are in the best position to do this. They have the bank account, they see the activity, they can request tax returns and informal financial statements. They get to know the character of the owners and in the end can form the best of relationships with their clients. The only real issue I see is whether banks are willing to take on risk, and whether they can gather the management and analytical expertise to do the job right. This last statement may not seem obvious to many people. But you should understand that banks are notorious for creating cookie cutter products that basically are form driven. If they don’t understand it, if there isn’t a form and if a loan committee can not analyze it; they simply do not lend you the money. I know that may be hard to believe but I can not tell you how many times I have had to explain to an MBA banker how to read a tax return and match it to a financial statement.
Knowledge Based Banking
My opinion of the failure of Wall Street and the banking system is that both became very entrenched on trying to assess risk based on some FICO score or some rating(which happens to be flawed) , and then transferring that risk via some fancy packaging we call a security debt obligation.
Let’s change how banking and Wall Street does business by doing what we should be doing better than any other developed country. By lending based on knowledge, analysis, skill level and the capacity to repay loans based on the probability of success. Sure this sounds like banking but, my point is banking has gotten away from its core function. A function of placing money where it has the highest level of achieving success and repayment.
Again this sounds easy and it sounds like what a bank should be doing but its hard work and requires a substantive infrastructure, of highly trained and well rounded business analysts to carry on the relationship.
By: Rene Velez Sept 28th, 2009
By most accounts in our current aspirations towards a recovery, we are seeing better times ahead but yet, everyone is asking, where are the jobs? Indeed as we somehow get ourselves out of this recession, jobs will continue to be hard to come by. Manufacturing, in the U.S. will likely increase production and take up any existing elasticity in their production capacity before taking on new employees. What’s more is that because we are essentially an information and technology economy, those with existing employment simply will have to do more with less labor as before. This is a kind of employment expectation creep. We are essentially assigned more tasks to perform, without increasing the labor pool. Typically, we simply work longer.
Many articles and studies show that as the global economy improves, emerging markets will have a greater increase in growth than some of the developed nations. This is in large part because companies from the developing countries shift their production activities to countries that have a lower cost of labor.
Small Business
Small business in the U.S. may play a very big role in adding jobs in the future, at least domestically. Many small businesses operate on profit margins that would not be considered viable businesses by larger corporations. It stands to reason that many small closely held businesses, have a very small net profit after covering employee salaries, overhead and salaries for their working owners. This profit in many instances may actually be so small that their no nothing left for a would be investor. Hence, the reason big business models do not consider them worthy of an investment.
We should understand that this does not mean they are not viable businesses. In the end they fulfill a very important role in our economy. They pay salaries, they employ many people, they pay taxes and they consume other services and products that further create jobs and help stimulate the economy. The multiplier effect of a small business is key to our current jobless recovery.
The Credit Crunch
During this recession banks have been forced to take a second look at their lending policies. Their mounting losses and the reduction of their capital base is being addressed by lending guidelines that are tightening up credit. I have come across many stories of banks reducing or terminating commercial lines of credit. In addition many small businesses rely on the owners’ home equity line of credit to meet short term needs when disbursements exceed collections. These too are under attack as banks are taking a second look and evaluating the underlying value of the real estate which is often the collateral for these loans. Even credit card companies are declining credit applications and reducing credit limits to shed the risk associated with losses and an overall tight credit market. I should mention that many small businesses rely on credit cards as the only means of short term borrowings to finance everything from inventory to the payment of taxes. All of this begs the question, how well will this jobless recovery pan out if these small companies that hire so many people could potentially be forced out of the market for lack of capital?
Government Reform or Banking Transformation
I see two possible solutions to the potential for small businesses to obtain much needed capital. (1) Government policy and programs to help small business. Kind of the SBA on steroids. (2) The banking industry taking on small business lending as with a high touch high service analytical lending model. Really get to know your borrower and business client.
Although government policy and programs are helpful, it does not seem likely that yet another government bailout program is going to be well received politically. The American voter , even if it means their own business, may not want the government to step in and create a small business welfare program. In addition , of the existing programs that are offered through SBA, the red tape and the work involved in meeting the program requirements and the banks hesitancy to administer these programs creates a barrier to many small businesses. Not just in the red tape but the cost of CPA’s and other people to get all the paperwork done. One just has to look at the SBA program to offer floor plan loans to auto dealerships and see first hand what comes of this. In all more government intervention may not be plausible.
The second idea is that banks get back into the business of lending to small business. Banks really are in the best position to do this. They have the bank account, they see the activity, they can request tax returns and informal financial statements. They get to know the character of the owners and in the end can form the best of relationships with their clients. The only real issue I see is whether banks are willing to take on risk, and whether they can gather the management and analytical expertise to do the job right. This last statement may not seem obvious to many people. But you should understand that banks are notorious for creating cookie cutter products that basically are form driven. If they don’t understand it, if there isn’t a form and if a loan committee can not analyze it; they simply do not lend you the money. I know that may be hard to believe but I can not tell you how many times I have had to explain to an MBA banker how to read a tax return and match it to a financial statement.
Knowledge Based Banking
My opinion of the failure of Wall Street and the banking system is that both became very entrenched on trying to assess risk based on some FICO score or some rating(which happens to be flawed) , and then transferring that risk via some fancy packaging we call a security debt obligation.
Let’s change how banking and Wall Street does business by doing what we should be doing better than any other developed country. By lending based on knowledge, analysis, skill level and the capacity to repay loans based on the probability of success. Sure this sounds like banking but, my point is banking has gotten away from its core function. A function of placing money where it has the highest level of achieving success and repayment.
Again this sounds easy and it sounds like what a bank should be doing but its hard work and requires a substantive infrastructure, of highly trained and well rounded business analysts to carry on the relationship.
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1 comment:
Pretty nice post, This blog is a good resource of excellent information about business. Thanks for sharing!
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