Public Policy, Economics and Entrepreneurship: February 2010 Archives

Denny Dennis, senior fellow with the NFIB Research Foundation, let me know a while back that he was working on a new small business survey looking at the impact of the recession on credit.  The NFIB released the report "Small Business Credit in a Deep Recession" today. Here are a few highlights of the report:

• Fifty-five (55) percent of small employers attempted to borrow in 2009; 45 percent did not, although five percent of owners, so-called discouraged borrowers, did not try because they did not think they could obtain credit.
• Forty (40) percent of small business owners attempting to borrow in 2009 had all of their credit needs met; 10 percent had most of their needs met; 21 percent had some of their needs met; and, 23 percent had none of their credit needs met. The current level of borrowing success is significantly lower than in the mid-2000s when up to 90 percent had their most recent credit request approved.
• The financial institution extending a line of credit changed the terms/conditions of the line(s) during 2009 for 29 percent of small employers having at least one. About 10 percent with a business loan had the same experience as did 22 percent with a business credit card. The most frequent change was increased interest rates.
• The best predictors of success in meeting credit needs were higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.
• Overwhelmingly, the most common planned purpose of credit rejected was to fill cash flow needs.
• Broad and deep real estate ownership is a major reason why small businesses have not yet begun to recover, why larger businesses have been able to recover more quickly than small businesses, and why this recession is different, at least for small business owners, from recent ones.

Dennis puts the findings in a clear context.  "The findings show that while obtaining credit has become more difficult, declining sales and/or depressed real estate values typically lie at the base of credit problems," said Dennis.  "That means current small business problems will not be solved by simply focusing on lending issues.  Policymakers need to tackle weak demand and real estate."

Tackling weak demand requires growth in the economy, not more liquidity in financial markets.  Weak demand will also not be cured by Keynesian government spending initiatives.

This is an important study that I plan to go through carefully.  I am sure it will inform future posts on small business credit.

"So are you seeing more students interested in entrepreneurship given the depths of this recession?"

I get this question a lot.  And it is a good question because historically we saw a small upswing in student interest in entrepreneurship when the economy and job market softens.

But this is a much deeper recession and more worrisome long-term economic climate. 

How are student reacting this time?

When the bottom fell out of the economy the initial reaction among my students was shock.  This generation is one that has been protected from failure and insulated from risk.  I tend to have graduating seniors in the class I teach, so those not already in business did not know what to do next.

But over the next few months, I saw a transformation.  My students began to accept the new state of the world and adjusted their expectations.  I began to think that this generation is ready to show their entrepreneurial spirit is for real.  Maybe they are willing to step forward and help rebuild our economy one business at a time.

Then, as interest in business majors began to decline overall -- some theorized due in part to disillusion with corporate America -- the number of students in our major held steady.

Finally, the other day I received a piece of data about our program that affirmed my theory.

Each year we usually see about 15-20 new businesses started by our undergraduate students.  Mind you, they do this in the midst of taking classes and often while also working part-time.

This year we have seen a tripling of new practicing student entrepreneurs.  We went from 18 last year to 54 this year.  Keep in mind that these students are not just our majors.  They are coming from all across our campus from many different majors.

So it seems at least among the young people I work with, the entrepreneurial generation is willing.  This news has certainly raised my spirits about our economic future.

I am also confident that our students will be not only willing, but also able the help rebuild the economy -- the success rates among alumni entrepreneurs are solid.

Now it is time to turn them loose.  It is time for policy makers to give them the capital they need by cutting income taxes and the freedom they need by cutting regulations so they can help build a better future for all of us.

Forbes has just released a survey of small business owners that offers some interesting insights.  "Small Business Outlook 2010" is a study issued by Forbes Insights, in association with CIT (the full study is available free on-line, but you do need to register to see it).

Here are highlights of this study with my comments:

• "Declining revenues brought on by the 2009 recession have put additional pressure on small business cash flow, forcing many firms to make tough decisions around cutbacks."

Those entrepreneurs who have been able to make the hard decisions and get back to their bootstrapping roots have survived the first phase of the recession.  While Wall Street seems to be trying to convince themselves that a recovery is around the corner, every indication is that we will be facing a prolonged period of high unemployment with a possibility of a double-dip downturn and significant inflation.

• "Small business owners are feeling the impact of this economic pressure, working harder and longer than ever before. Still, there could be a payoff: many feel they are now smarter about running their businesses and are better leaders."

Good!  They will need these skills to navigate the next several years, which will test them with many new challenges.

• "While cautious about the general economy, most small business owners expect their 2010 revenues to grow. But coming out of the recession, they see the world changing and they will have to do business in new ways to succeed in a more competitive marketplace.

As I mentioned in my comments on the American Express OPEN survey released earlier this week, we need the optimism of entrepreneurs more than ever.  We need them to have the confidence to put their collective heads down and forge ahead to rebuild our economy.

• "Small business owners know the importance of planning and want to spend more time doing it, but they appear to have trouble putting those intentions into action. Many also seem to be unclear about how to focus their marketing and employee retention efforts."

This finding rings home with something I have been working on.  I have become increasingly convinced that we have been focusing too much on the minutia of business plans and moved away from the critical art and science of business modeling.  We need to focus more on how all the moving parts of our business fit together and how the dynamic nature of the marketplace in today's economy demand an ever evolving business model.  I will be writing more on this in coming weeks, but want to thank my colleague and friend John Wark for challenging my thinking on all of this.

• "Economic stimuli enacted by Washington have had little to no effect on small businesses, but they remain hopeful that recent proposals to raise SBA loan limits will provide some benefit in the coming year.

No kidding!  Entrepreneurs understand that it is their efforts that stimulate economies, not massive government pork and waste. 

Regarding more available debt?  Be careful what you pray for...this is not the time to be leveraging your business.

American Express OPEN just released their latest Economic Pulse survey of small business owners.  This survey was conducted 1/28/10 to 2/1/10. 

Overall, 68% of small business owners surveyed say the economy stresses them out (on par with January 2009 results).  38% say their greatest concern is a prolonged recession/"double dip" and 32% list high unemployment. 

They are right worry about both of these problems, but they also better start paying attention additional problems that are likely to raise their ugly heads very soon.  I have been beating the drum about inflation and interest rate spikes for some time.  Now I am beginning to hear bankers start to quietly warn their clients about a sharp increase in prime rates.  I have heard estimates of between 3 to 8 basis point increases by the end of 2011. 

The good news is that small business owners have not taken on more debt, which will make them vulnerable to any interest rate spike should it happen anytime soon.  Almost 60% of small business owners have not pursued credit in the last 6 months.  Of that group, 22% worry about default or bankruptcy and 30% say there isn't enough demand for their products or services to warrant taking on new debt.

What is keeping them from expanding their workforces and helping to turn things around in the economy?  Customer demand is by far the greatest single incentive to hire (42%), compared to tax credits (11%) or access to financing (5%).

Overall, small business owners are more optimistic about the economy than they were one year ago (43% think it will improve over the next 12 to 18 months versus 30% in January 2009).  But then again, they are entrepreneurs so by their nature they are going to try and see the positive whenever they can.

An curious aspect of the unemployment data of late is that even though unemployment rates seem to have stabilized, and even dropped a bit this past month, we keep losing jobs.  One of the reasons for the discrepancy is that a large number of people are no longer looking for payroll-based jobs, but becoming consultants and freelancers. 

Even during the boom time a few years ago 20 of the 25 million small businesses in American were actually people who were self-employed -- also labeled as small businesses with no employees.

This restructuring from traditional employment to entrepreneurial freelancers and self-employed is accelerating the longer this recession continues.  We soon may be hearing the cry, "We are all small businesses now!"

Andy Tabar sent along a short video from CNNMoney of the boom of self-employed and freelancers and how the market is accommodating them.

The NFIB Index of Small Business Optimism for January finds that optimism has clearly stalled for small business owners.
 
"Small business owners entered 2010 the same way they left 2009, depressed," said William Dunkelberg, NFIB chief economist. "The biggest problem continues to be a shortage of customers."

The highlights:

• Employment --Owners reported workforce reductions that average .52 workers per firm, basically unchanged for the past several months.
  

• Capital Spending --the frequency of reported capital outlays over the past six months rose three points to 47 percent of all firms, an improvement from December's record-low reading, but historically very weak. 
  

• Inventories and Sales --Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stocks. 
  

 

• Earnings -- In a word -- weak.  "Don't expect much spending or hiring until these trends reverse," said Dunkelberg.
  

• Credit --Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. 
  

The engine of any recovery -- small business -- is still in a survival mode.

Ben Cunningham sent along a link to a story that looks into what actually happened with the $15 billion for small business support announced by the SBA last spring.  I had raised concerns about an artificial infusion of debt financing for small businesses when this was first announced (see here and here).

It seems that as of today, none of the money has been distributed.  From Jake Tapper with ABC News:

The source told me that the reason the program has not been officially utilized was twofold.

One, almost every potential participant declined to cooperate because they didn't want the stigma of using TARP funds given the tremendous public anger towards Wall Street and resentment about the $700 billion bailout.

Two, the specific purpose of the plan - to get the secondary market moving again for these SBA loans - was largely accomplished.

It may seem odd, but a story about government bailouts actually qualifies as a "The Glass is Half Full" post.

Why?

First, the public is not buying "government as the solution" policies and are pushing back against them.  Although the story only references TARP, bailouts and the wasteful spending they have created have been getting more and more bad press and scrutiny from the public.   

But even more importantly, the market worked on its own without the government helping with massive infusion of taxpayer dollars.

I doubt that most of those inside the belt-line in Washington understand the real lessons of this story, however.

The mood is still pretty down among small business owners.  For example, according to the latest SurePayroll Small Business Scorecard, business owners' optimism is at the lowest levels since last year about this time.

It seems that the mood of us who blog about the economy is at least as dour as the players we follow in the economy -- in my case, the entrepreneurs and small business owners in our economy. 

Ewing Marion Kauffman Foundation released a survey today reporting that 48 percent of economics bloggers said that the economy was "worse than official government statistics show."  (Although I am not an economics blogger, per se, I find myself writing about economic policy from the entrepreneurship slant, so have been included by Kauffman in this group). 

In the inaugural Kauffman Economic Outlook: A Quarterly Survey of Top Economics Bloggers, the Kauffman Foundation sent invitations to more than 200 top economics bloggers. The Foundation will be surveying the bloggers about their views of the economy, entrepreneurship and innovation every quarter to provide a new gauge for the nation's fiscal health.

"As independent thinkers who are immersed in discourse through the innovation of blogging, these economics writers have a unique voice and perspective, and potentially profound influence," said Tim Kane, senior fellow at the Kauffman Foundation and author of the study. "While they individually express themselves virtually every day, we think their collective voice needs to be heard."

Research highlights include:

• The bloggers expect the greatest growth prospects over the next three years to be in interest rates, inflation and the budget deficit. U.S. output and jobs are expected to increase, but with about half the intensity of growth in global output.

• The panel assesses conditions as "bad" or "very bad" for small business (52 percent) and bank lending to business (51 percent) and individuals (50 percent). The outlook for entrepreneurs is a relative bright spot, with opinions mixed between bad conditions (36 percent) and good (26 percent).

• Seven out of 10 bloggers say the federal government is too involved in economic matters, and they share a clear consensus for action. Tax cuts, especially on payrolls, are recommended, and three ways to cut the deficit had overwhelming support: Medical entitlements, Social Security and Defense should all be reduced.