No Credit; No Action: Karl Denninger has posted an article about small business funding, basically stating that businesses are better off without it.

According to Karl, "You don't really need loans to set up and operate a small business. You need guts and the willingness to work long hours and take risk. Personally. Yes, you'll grow slower. So? You'll own what you earn - it will be yours, not the bank's. You'll keep your opportunities to yourself, instead of always looking over your shoulder. And when the time comes to expand, whether it be by buying more stuff, adding employees or moving to a new, larger location you'll do it based on cash flow, not on whether you can make the minimum payment on some note and pray that you'll be able to roll it over at reasonable interest rates in a year or two."

Well, maybe that's true for zero-inventory, minimal accounts receivable businesses like consulting or accounting. Or certain wholesale businesses, where margins are so high that cash management is irrelevant. In the early days of the software business, you packaged 80¢ worth of floppy disks and a $10 manual and sold it for $400. In such a scenario, it was easy to self-fund expansion with the $389.20 which remained. That's how Adobe, Microsoft and Intuit could grow so quickly in the 1980s. Alas, most businesses aren't so lucky.

When I owned a manufacturing business, I needed to borrow funds in order to grow. Most 'ordinary' manufacturing businesses have 30-35% gross profit and net 10% or less before taxes. A 30% growth in sales means that you have to buy 30% more raw material inventory, you'll be carrying 30% more work-in-process and finished goods inventory and your accounts payable will jump by 30% as will your receivables.

Your increase in profit dollars (at 10% NPBT) won't be nearly enough cover these increased expenses. Therefore, if you can't secure working capital, you can't grow and your business will stagnate. Others - your competitors - will step up and meet customer needs.

What would Mr. Denninger have you do when a good customer calls and wants to double this month's order? Without access to funding, a small business may not be able to handle increased orders.

While my manufacturing business was in the upper quartile of its peers for both net profit before taxes and return on total investment, we borrowed more every year. Our debt as a percentage of net worth was continually decreasing - a healthy condition - but we couldn't grow without access to capital.

Loading a trailer with freshly-manuactured, boxed Plexiglas store fixtures on shrink-wrapped pallets in 1985, using our ancient 1955 yellow Hyster forklift in Tangent, Oregon. In '85, two of our larger display fixture accounts increased their orders by 309% and 71% respectively. Without access to loans, we couldn't have fulfilled their requirements and would have lost both accounts.

When small businesses are denied credit (capital access), the economy stays dead in the water.

William Dunkelberg, chief economist at the National Federation of Independent Businesses, has commented: "While news about the economy has been positive for two or three quarters, small business owners remain quite pessimistic about the future for the economy. The Optimism Index has been below 90 for 18 consecutive months and below 90 in all but four months since the recession started in January of 2008."

Dunkelberg noted, "Since small firms produce half the private sector GDP, it is hard to envision a sustained recovery without their participation. Once the gains from inventory rebuilding are exhausted, it is hard to see what will fuel growth. Small firm capital spending is at 35 year low levels and plans for future expenditures are equally low. Plus, hiring plans remain 'negative' as more firms still plan reductions than increases in their employment)."

Small businesses overwhelmingly continue to cite 'Poor Sales' as their number one problem.

Bank lending has declined each month for the past year. According to Federal Reserve statistics, U.S. banks have reduced corporate lending in each of the last 12 months. While TARP and other government programs kept dead banks afloat, these programs ensured that the institutions saved with others' money would not aggressively lend for a long time. NY Fed President William C. Dudley has noted that "the banking system is still under significant stress. This is particularly the case for small- and medium-sized banks that have significant exposure to commercial real estate loans. This stress means that banks have been slow to ease credit standards as the economy has moved from recession to recovery."

Until the banking mess is straightened out and lending institutions begin to loosen their purse strings, the economic recovery will be anemic. I predict a check-mark-shaped recovery rather than a V-shape. (posted 5/31/2010, permalink)

Bleak Opportunities: Here's a scary fact: One of every five men 25 to 54 isn't working. According to an article in the Wall Street Journal, "Even more alarming, the jobs that many of these men, or those like them, once had in construction, factories and offices aren't coming back."

"A good guess … is that when the economy recovers five years from now, one in six men who are 25 to 54 will not be working," Lawrence Summers, the president's economic adviser, said recently.

In the past, technological changes simply shifted opportunity within the U.S. "As farm jobs were eliminated by mechanization, factories hired more. As factories increased productivity and moved work offshore, more Americans got jobs in health care and other services."

Nothing in any textbook says that the supply and demand for workers will intersect at a wage that is socially acceptable. Therein lies the problem.

Bill McBride of Calculated Risk has added, "In the early '80s, the 27 weeks or more unemployed peaked at 2.9 million or 2.6% of the civilian labor force. In April 2010, there were 6.72 million people unemployed for 27 weeks or more, or 4.34% of the labor force. This is significantly higher than during earlier periods."

At present, the 'official' national unemployment rate is 9.9% but if "you also include all of the people who are still discouraged and all of those who want to work full time but can find only part-time work, that unemployment rate in April was 17.1%, a rate that has increased since the beginning of the year."

Low-paying jobs in restaurants, nursing homes and health clubs are hard to automate or outsource will probably always be around. But how do we make America the Land of Opportunity again?

There are no easy answers. (posted 5/24/2010, permalink)

I Hereby Declare The Recession Over: When people are paying over $8,400 for a can of car wax, things must be getting better.

Yeah, you get free refills but it'll never pay off unless you're obsessively waxing an H-Class battleship. (posted 5/4/2010, permalink)

The residents are all for it - the plant would create construction jobs and 50 permanent positions making it instantly the city's biggest employer. The company would also become the city's biggest taxpayer generating close to $1 million for little Cascade Locks.

But Portland environmental groups are upset and want the evil plant stopped. You know ... that Portland, Oregon - a city which never saw a bioswale, bike path, homeless camp or streetcar that it didn't like.

Greenies are disturbed because the plant will use those wasteful and environmentally-deadly plastic bottles which people may not necessarily recycle - so, they are not just viscous killers, they are single-use killers as well. Plus, people might toss partly full water bottles out of their speeding, energy-wasting malevolent automobiles, injuring or killing an innocent bicyclist, spotted owl or homeless bum. Instead, these eco-overlords want people to drink from taps or use old WW II canteens. And patch their worn-out Birkenstocks with old chewing gum (Black Jack is the best, I'm told).

Furthermore, there is a state-run fish hatchery in Cascade Locks which raises endangered sockeye salmon that are trucked in from Idaho's Snake River. The city of Cascade Locks proposes to replace the diverted water for the bottling plant with some of the city's own well water. The state of Oregon is currently "testing the well-water to see if it's suitable for the fish." Oregon has never worried whether this same water was suitable for the residents, who've been drinking it for years. I suppose they're not as important as fish.

I think I'll just sit back and watch this fight, although I am pro-business and generally sympathetic to thirsty people. Hmmmm. Might Nestle would be interested in my bottled water idea? (posted 4/14/2010, permalink)

Once the Golden State, California used to be a beehive of industrial activity. Ford had assembly plants in Richmond, Long Beach and Milpitas. My 1939 Plymouth was made on a Los Angeles assembly line. Many World War II soldiers who tasted California on their way to the Pacific, relocated after the war, driving the great California post-war boom. That hot Golden State economy was fueled by industrial jobs - mostly manufacturing, including high dollar items like cars, electronics and aircraft.

Today, the factories are largely gone, driven out by the high cost of doing business and by a left-wing legislature that doesn't seem to care, making ghost towns and ghettos of once-thriving metropolises.

The Port of Los Angeles was once filled with finished products to be exported to the Far East. Today, much of LA's exported product is waste paper - shipped to Asia to be converted to cardboard boxes for manufactured goods exported to the United States.

In its quest to find more tax revenue, California is now proposing to decimate its giant wine industry by increasing the state excise tax on a 750-ml bottle of wine from four cents to more than five dollars. Trader Joe's may soon be selling Seven Buck Chuck. (posted 4/8/2010, permalink)

Capital One is the third-largest U.S. issuer of Visa-branded credit cards, and the fifth-largest issuer of MasterCards.

In related news, a recent study by John Burns Real Estate Consulting "estimates that five million houses and condominiums on which mortgages are now delinquent will go through foreclosure or related procedures that put them on the market over the next few years. That would represent the bulk of the estimated 7.7 million households behind on their mortgage payments."

Finally, credit information firm TransUnion has reported that "mortgage loan delinquency (the ratio of borrowers 60 or more days past due) increased for the 12th straight quarter, hitting an all-time national average high of 6.89% for the fourth quarter of 2009. This quarter marks the first time the mortgage delinquency rate increase did not decelerate after doing so for three consecutive periods.

This statistic, which is traditionally seen as a precursor to foreclosure, increased 10.24% from the previous quarter's 6.25% average. Year-over-year, mortgage borrower delinquency is up approximately 50%." (posted 2/17/2010, permalink)