| The Three Types of Small Businesses: As I have | | | | The rhetoric is stating we are healing, the bond market |
| previously wrote I have observed three main types of | | | | is indicating the economy still is in choppy weather. |
| small business. The first is the largest of the groups | | | | Either, the rhetoric is correct and interest rates will be |
| and they are small businesses who depend on other | | | | moving up sharply soon or the bond market is correct |
| small businesses and consumer discretionary spending | | | | and the economy still has injuries which need to heal. |
| for their revenues. Generally speaking these | | | | How can you win no matter which side is right? On |
| companies have had ineffective business models and | | | | the savings side, purchase short-term bonds. This will |
| were slow to respond to the economic conditions. As | | | | allow you to re-invest the monies in the future at hire |
| a result they have poor financial health and were late | | | | rates and have liquidity. If you are borrowing, lock in |
| to take action (beginning of 2009) to change their debt | | | | your debt for as long as you can at the current low |
| based business model to a more efficient and | | | | rates. |
| effective one. This group also has the lowest barriers | | | | Second, unemployment is stagnant. The unemployment |
| to entry in their industries and will see an increase in | | | | rate was stated to decline due to more individuals |
| competition over the next 3- 5 years. This group | | | | giving up looking for a job. Needless to say, this is not |
| continues its challenges with pricing pressures and | | | | the healthiest way for unemployment rate to |
| other deflationary forces since this group depends on | | | | decrease. We have minimal job creation as the |
| other small businesses and consumer discretionary | | | | companies which generate 70% of the employment |
| spending. Other small businesses are price sensitive | | | | historically are small businesses. These types of |
| and the consumer is only spending money if there is a | | | | businesses are suffering, have ineffective business |
| deal. | | | | models, are financially struggling and see minimal |
| The second group is the second largest group and | | | | increase in demand for their products and services. |
| they depend on acts of God and or Mother Nature | | | | The situation of small business will not allow them to |
| (roofing, disaster recover, etc.). The housing and | | | | hire in the near-term. Unemployment will continue to |
| commercial infrastructure in our nation is aging and | | | | stay in the 10% range for several years to come. |
| some of the more modern structures quality has not | | | | More importantly, the U-6 known as the |
| stood up to standards. A result is replacing roofs and | | | | underemployment is currently around 17%. This data |
| pipes breaking. Certain areas of our country have | | | | set will need to significantly decrease for the economy |
| gone from drought to flooding. Basements and houses | | | | to begin to grow once again. If you are employed you |
| have been flooded and need to be rebuilt. This industry | | | | should save as much monies as you can, reduce |
| has stayed stable through our Great Recession. | | | | short-term debts and thank your employer. This may |
| However, the name of the payer for these companies | | | | causes a shock to your life-style, but it is necessary to |
| is not the owner of the property, but the insurance | | | | survive. If you are unemployed, it may be a good time |
| company. The risk to this group is the insurance | | | | to chase a dream (hike up a mountain, start your own |
| pay-out amount and timely delivery. These types of | | | | businesses, etc.). If you are a business owner which |
| companies should remain stable over the next 3 years | | | | depends on consumer spending understand you may |
| or as long as insurance companies remain financially | | | | not have pricing power for years, take advantage of |
| healthy. | | | | when consumers are optimistic and spending and |
| The smallest of the three main small business types is | | | | understand when consumers are cautious. This may |
| the small business which depends on large | | | | mean you will have to gear up and down frequently. |
| mega-corporations (Fortune 500 companies). This | | | | Third, Gross Domestic Product (GDP) has been |
| group has not felt the effects of the Great Recession. | | | | revised downward two quarters in a row. The fourth |
| In a matter of fact these companies have been | | | | quarter of 2009 and the first quarter 2010 both were |
| growing at full throttle during the past few years since | | | | materially decreased when revised. The second |
| the mega-corporations have outsourced projects to | | | | quarter 2010 was lower than anticipated at 2.4% |
| them to save costs. These companies should continue | | | | (before revisions). It makes me wonder if the initially |
| to grow over the next several years since the | | | | numbers are being released to make me feel safe so I |
| mega-corporation have lots of cast, clean balance | | | | will go out and spend again (which will drive the |
| sheets and are using this type of small business to | | | | economy). By the time the GDP is revised downward |
| save costs and to fill unique niches. Their biggest risk is | | | | it is too late not to spend since I already made the |
| for the mega-corporations to cut their budgets and to | | | | purchase a month or two ago. Future growth is now |
| lengthen payment cycles. | | | | being revised downward by many analysts and CEO's |
| The warning signs: The first sign of the second wave | | | | are not willing to brag about future earnings due to |
| is interest rates. The rhetoric, including the Federal | | | | poor visibility. An omen to slower future growth might |
| Reserve Chairman and your evening news, say the | | | | have been the plugging of the consumer confidence in |
| economy is recovering, stabilizing and even growing. | | | | July 2010 of 66.5 from 76 just a month earlier. Small |
| However, interest rates have continued to decline. The | | | | businesses need to take advantage of the current |
| 2 year Treasury is only yielding 0.569% which is the | | | | economic conditions of the willingness of individuals to |
| lowest yield ever for this type of bond. The 10 year | | | | spend. Then, small businesses need to use these |
| Treasury has fallen from a 4% yield in April to a 3% | | | | profits to help reposition their company. They can |
| yield in July 2010. The signs which state interest rates | | | | invest in themselves by improving operational |
| should be increasing include our population's credit | | | | efficiencies which could help profits in the future; pay |
| scores are at one of the lowest levels in history and | | | | down debt which could help future cash flows; or keep |
| the Federal Reserve and US Treasury have stopped | | | | the cash to build liquidity which will allow them to |
| purchasing mortgage securities in March 2010. If the | | | | reposition in the future. |
| economy was healing shouldn't the interest rates be | | | | Most small businesses have a challenging road ahead. |
| rising? One reason rates might have been lowered is | | | | Action is needed today to meet tomorrow's challenges |
| to help banks make their financial positions appear | | | | and to survive this economy. The aforementioned |
| healthier. Banks make loans at locked in interest rates | | | | solutions can help, but if a small business does not |
| and then record the loan as an asset on their books. | | | | have the right business model, business plan, great |
| When interest rates rise the loans with lower interest | | | | team members and a board of advisors to hold them |
| rates have a lower fair market value. However when | | | | accountable amongst other items they may not be |
| interest rates decline the loans with higher interest | | | | able to survive the second wave. |
| rates are worth more! | | | | |