I give the NFIB credit for their analysis, but not for their “education” during the last bubble – and this collapse.
- The prime problem with small business is slow or declining sales, and is worse today (by six points) than last year, which was the so-called “formal” bottom of the recession. Access to credit is the prime problem in only 8% of small businesses.
- 38% of small businesses are using credit cards as a funding mechanism (!!!) At today’s pricing this is suicidal. If this number indicates those small business who have effectively been forced into this use of credit (and I suspect it is) we’re in deep kimchee – nearly 4 in 10 small businesses are likely to fail in the next two to three years as a consequence of this.
- Far too many (11%) small business owners are collateralizing real estate as a means of funding operations. If I’m reading this report right, these are businesses where the owner has pledged his or her personal residence as security.
If you remember yesterday’s Ticker on this subject (which included a nice jab at Krugman), along with the “meat” of yesterday’s Blogtalk Radio Show (available always on the right sidebar of The Ticker) you’ll find most of the problems are one of a small business person’s own making, and NFIB is not helping matters one iota with their bleating about “more credit availability”, nor is Bernanke and his evil minions issuing various comments about the same issue.
Let’s face it folks: Interest charged on borrowed money has to come from gross margins, and in the marketplace the person who has the fewest and smallest parasitic factors increasing their costs wins.
Some parasitic factors are not under your direct control (think taxes) but others are. Taking credit and thus embedding interest costs into your operations is one of them.
Self-liquidating trade credit (e.g. Net 30 terms on purchases) is one thing – you generally don’t pay materially for that, although for those suppliers where you can negotiate a 2% 10 discount you should take it. Even a 1% 10 discount adds up to 12% over a year’s time, compared to paying Net 30. If you want to know where your margin is going, look at the poison you willingly and knowingly ingested in the form of financing costs.
Ditto if you’re a small business and are not being paid on time. This is just plain suicidal – and for those small businesses in places like Illinois, if you have business dealings with the state you must get this problem under control or it will BURY YOU.
I know all the common excuses – “I need that contract”, or “we won’t survive without them.” Well folks, how will you survive when you have a 10% operating margin on some product you’re selling and the state doesn’t pay you for six months, forcing you to finance the operation on your credit card at 29.9% interest? You’re thus taking a forced loss on every unit you sell!
Forget it folks.
If you’re a small businessman or woman you need to take a hard-nosed no-credit approach to operations. That which you can’t pay for you can’t afford. That which your customers can’t pay for on normal commercial terms consistently you must refuse to ship. Those suppliers who won’t provide you with the ability to squeeze outward your margins by paying them promptly you must replace with suppliers who are hungry enough to give you that 1% or 2% 10 day discount.
I’ve been there and done this folks. Before MCSNet was an Internet company we did cabling and PC work for various businesses. It was a fairly decent-volume but tight-margin business, and we would have been cooked to a crisp instantly without hard-nosed cash management. But never – ever – did we go hit the founders and owners equity in their homes. Yeah, it was thought about – for about 30 seconds.
It was thought about again when I became the only “principal” owner of MCSNet and was running it as an Internet concern – for about another 30 seconds.
NFIB needs to pull its head out of its ass, to be blunt, and start talking about sustainable business practices. This means dropping the reliance on credit that sucks precious margin points out of your operation and gives them to the $%%$#ing banks! Who are these clowns over at NFIB trying to fool – and exactly who are they serving?
“Will that be your left arm, right leg, left testes or your house you’d like to pledge today Mr. Jones?”
My answer to all of them?
Figure out how to run your operation without these sharks folks, because while such nonsense may work for a while it is a road that leaves you with less and less margin between solvency and bankruptcy over time – and thus is and should be utterly unacceptable.