Credit Markets Issues Affect Small Business

Posted on October 26, 2008


Everyone is talking about the credit market, the turmoil on Wall Street and the issues surrounding the banking industry, and the ever present question is– How does this affect me?

For the entrepreneur, this question is of utmost importance.   Undoubtedly, the economy is affecting entrepreneurs (see Sunday’s NY Time Article, “Economy to Entrepreneurs: Turn Back“).  Banks are requiring more (more collateral, more information, more everything) before lending money.   Empirically, we have heard that the companies who are in a position to do something (and there are not many) inquire, the banks are not willing.

Bank’s unwillingness to loan capital to small business will cripple small business.  Small businesses often run on credit lines that renew annually.  If those lines do not renew on reasonably consistent terms and rates, then many small businesses will be out of business overnight.

Also problematic for entrepreneurs is the housing downturn.  The Home Equity line is one of the leading ways to fund a new business or growth in an existing one.  With less equity, an individual’s ability to use their home equity decreases.  Consequently, the ability to get a good business up and running is decreased.

Let me offer two suggestions as to how small businesses can weather the storm:

  • First, friends and family.  No one knows where to put their capital to begin with.  You cannot trust the Wall Street firms, so why not invest in your nephews business, even if it is absolutely crazy.  At least he cannot drive to Thanksgiving in a new Mercedes unless and until he has taken your money and his company public.  On the angel side, if you cannot trust public companies and the S&P, then investments that you can assist in their development may be a more lucrative route
  • Secondly, the Small Business Administration (SBA).  The government has numerous programs through the SBA to assist small business.  Expanding those programs should help facilitate lending to small businesses (see following blog).

No one believes that the economy is going to recover overnight.  I believe that a return to the basics of capitalism will lead us out: I sell a product for $5 that cost $4 to make; I loan you $1 if you pay me $1.10 next year.  Financial institutions move too far away from these metrics and are paying the cost.  The only way to rectify this is at the small business level.

Mike Goodrich, Goodrich Law Firm, LLC