Enterpreneurs and small businessman are all atwitter about the impending gold rush. Not real gold, but instead a massive infusion of capital that will sweep across American business in the next year or two. The crisis in 2008 forced a lot of people to the sidelines in terms of preserving capital. The fear was of the unknown, and it has lasted for over two years. Don't be fooled by the stock market - the gains have been mostly illusory in the last five months. The real money in investment is working its way in as investors seek to jump in with both feet and make money now, while the government is divided.
Contrary to popular belief, government incentives don't do much for the economy. They help pad bottom lines and subsidize unprofitable industries, but it's rare to find a government program that can really goose hiring or business creation. The truth is government just isn't smart enough or fast enough to respond to the market. We can see this in California bureaucrats signing incredibly short-sighted energy contracts or small business stimulus bills that come 12 months too late, all with the result of meaning very little to wealth creation.
Here's a little peek into what was going on in the minds of small businesses in 2008, and what they are going through now.
The big news story in late 2008 and early 2009 was the drying up of credit. Without credit, businesses don't have a safety net should their AR fall behind or a client go bankrupt. A lack of sources of funding made it difficult for newly retired and laid-off workers start microbusinesses to keep them going after their severance and unemployment benefits ran off. This is a traditional source of new businesses, from franchises to small shops and cafes. Lack of credit added to the uncertainty, and so many people took their money and sat out, searching for safe harbor in municipal bonds and gold, if not just their bank accounts.
And then the banking crisis hit, and the recognition that large amounts of cash in banks was a dangerous strategy. Even thought the FDIC raised the limit, many small businesses with a cash cushion pulled their money out of the banks and put in into several different accounts. Think for a moment what this does to your expansion and hiring plans. When you're scared of losing all of your wealth in a run on the bank, are you going to invest in your business? Are you going to make hiring decisions quickly, or only when absolutely necessary? You hold off on everything and cross your fingers.
For those small businesses who were already in debt (most of us), a different dynamic occurred. We all had lines of credit that were use to prevent shortfalls of cash, and with the bank crisis came the fear of elimination of those lines of credit. Anyone in the home building business saw unatapped HELOC's getting cranked down, sometimes in the middle of refurbishing the kitchen, and while I personally didn't hear of it happening, I know several business owners who pulled out the maximum of their business line of credit and put the cash in multiple accounts.
Credit lines were down near 1.5% (and today are only 2.5%), a pittance to pay for access to credit. It's just $1000 a year (written off in business interest) for every $40,000 you take out. It makes no sense to pay that line of credit off at those rates. You're better off investing, for a time. It's better to pay $80 a month for access to money than need it and find the bank saying no. If you have the means, you pack the money away and work on creating a cash surplus before you pay off the line of credit. It's a good place to start from, as you take the loss in the first year, but spread it out over the better years, dropping your tax burden (say in 2011 when rates go up). If you pay off the line of credit in your best year, the value of that payment is a dollar to dollar reduction in income taxs for limited partnerships and S-corps.
Of course, that strategy depends entirely on your ability to make more money than you spend. You look for a way to
For those businesses with thin margins, or those in industries the most affected by the housing crash (retail manufacturing and consumer spending are included in that), a different kind of calculation takes place. They're already in debt. They already maxed out their lines of credit. And while the low interest rates help you stay in business, you lack the ability to pay them off. If interest rates go up, you lose everything. But for the moment, you're at least in business. And for many people, they could maintain their lifestyle if they just closed their eyes and pretended it was all going to work out. Business ticked up a little, enough to prevent you from going out of business, but you aren't making headway on your debt.
That's more small businesses than you think.
The banking standard for a line of credit review was 5 years from your last review. In the good times, you could go in and ask for more based on your revenue (typically 20% of the gross), and after five years the bank would review it. Knowing this gave you time in 2009 and 2010, and as I pointed out, if you worked at it, you could cut spending and boost sales and use cash going forward.
Stop for a moment and ask yourself a question. How many small businesses understand this? Credit was easy to get for a long time, and then it was impossible. For businesses that don't normally make large investments, the line of credit is not regularly tapped. It's a safety net that is convenient, but there is little oversight. You just take it and put it back and check it at the end of the year. So what happens if you're still in debt when the review comes? You better hope your financials are sound - way better than when you started. Banks don't want you to default, but if you do, they want to spread the losses over time. A massive wave of defaults would break the bank, so to speak. Those credit reviews are important for them to assess the health of their accounts.
So in 2011, with taxes probably going up, and bank reviews from 2006 coming due, businesses need to have made smart decisions if they want to stay in business. All those people who maxed their line of credit in late 2008 need to have boosted their balance sheets to pay it off and create a cash surplus. For those who can, or those who already did, 2011 will be a very, very good year. Legislation will be stalled, so there won't be any nasty government surprises. Companies have been stockpiling cash and are ready to spend it. As more and more companies spend, their competitors will join in.
Hiring of talented workers away from large corporations will increase, as the fear of leaving stability will decrease, as that resulting churn will mean more employment (though not enough to impact the overall rate). In short, we're going to see a lull of the storm before the impact of QE2 is realized. For those companies and people prepared and flush with cash, it's going to be a big opportunity to grow.
The presidential election, along with the continued decline in the finances of the mainstream media will lead to a bullish 2012. Democrats will be focused on economic armageddon, recognizing that while the economy has stabilized and improved, the conditions for core blocs of their voters (the young and minority) won't see a lot of improvement. In fact, failing cities and states will continue to see massive cuts in spending, affecting Democratic constituencies most of all (unions, government workers, and those dependent on state aid). The media, beset by its own woes, will be affected and their reporting will share that pessimism. Attempts to talk up the economy to benefit Obama won't work, and bailouts of states and industry sectors won't make it through the Republican House.
The resulting financial implosion of blue states will doom the re-election chances of Obama, while pushing more state legislatures into Republican hands. The gridlock in 2012 will be good for business, but the recognition of the failure of statism will cause tremendous turmoil in the middle classs. Some businesses will do spectalularly, bouyed by amazing techological advances and smart employee management. Others will flame out, and these big names will be the big stories in the press. While the economy continue to grow, it still won't make a significant dent in the unemployment numbers, and Gen Y, in particular, will find themselves learning the hard lessons that the Depression Generation learned about scarcity.
Businesses that have not cleaned up their balance sheet won't last much past 2012. Credit lines from 2007 and 2008 will force the hard decisions about staying open or giving up the ghost.
This is where we find out what we're made of. Is the era of American exceptionalism over? Are the problems of a complex, wealthy society to great to manage? Do we have the leadership to weather the storm as responsible adults, and the voter populace to avoid flipping back and forth between political philosophies? We'll be into our fifth year of the "new normal" at this point. Entrepreneurs will understand the new rules and either discover new ways to grow, or will instead play it safe and start heading back inside major corporations who receive lots of government regulations to help them stay afloat. In 2013 is where we'll make our real decisions. Will we turn into France, or continue to run a fre market where small businesses can grow and swallow their former name-brand competitors? Will we put a fix to our entitlement program, or will we just push it out further? The crisis will be real in 2013.
2013 is three years away. If you want to prosper, you'll need to have eliminated all of your personal and business debt and be ready to handle whatever comes. This is true for all households. We've been granted a reprieve by the money system, but it's short-term. Can you alter your habits for now, and for good?
Glenn Beck and Dave Ramsey talk about this all the time. If you are in debt, you cannot be free. Push comes to shove and most men are tempted to sacrifice their principles for the safety of their family. If you have lived the last ten or twenty years as a debtor, it's going to be hard, but you don't want to find yourself desperate in desperate times. If too many of us find ourselves there, then freedom will be lost.
A nation in debt doesn't have the luxury of ignoring the siren calls of a savior. The strength of this country has always been its economy and the will of the people. If we don't prepare now, we won't be able to resist the tide. Your job in the next three years is to prepare yourself for the future, and be a voice of reason to those around you. If you don't, you'll be tempted by the voices of fear who promise you bread and shelter at the mere cost of your free will.