December 21st, 2009
I was at a lovely Christmas party this weekend. I ran into a friend of mine who is trying to buy a new house. He said he put in an offer quite a while ago, but hadn’t heard back. I said “I’ll bet it’s a short sale”. He said “how did you know”.
I knew because he hadn’t heard back on his offer in weeks. He wanted to know why. I explained to him that banks won’t really move on short sales because it means they have to write down the value of assets they hold on their books. That could increase their capital requirements. He really didn’t get it.
Let me explain…. Earlier in the year, Congress modified the Mark to Market accounting rules banks have to obey in order to make it easier for them to keep mortgages on their balance sheets at a value greater than thier worth. While this was a shady move, it did accomplish the goal of stabilizing the banking sector. It also made it harder for them to dispose of mortgages that were subject to a short sale. The way I understand it, people who are selling a home on a short sale are still paying for the property. Maybe not. However, it strikes me as obvious that a home on which the owners are no longer paying the mortgage would be a foreclosure. Either way, as soon as the home is sold to a new owner, the value of the current mortgage is written down. Do that enough, and you have a sketchy portfolio of homes that could make the FDIC a little nervous.
The long and the short of it, no pun intended, is that the hosing market is much worse than we are being led to believe. The stability of banks is far more fragile than we are being led to believe. The FDIC is allowing the situation because they don’t have enought premium dollars available to bail out all of the insolvent banks in the country - including some for the Super TARP banks. It follows on that the housing market is a long way from recovery. Foreclosures will continue on for years unless drastic action is taken to change the situation.
I hoep my friend gets his short sale home before next Christmas.
Tags: FDIC, Mark to Market, Short Sale
Posted in FDIC, Foreclosures, Mark to Market, US Economy | No Comments »
November 13th, 2009
I know… you are all sick unto death, pardon the pun, with Health Care Reform. I have been waiting to weigh in with my two cents worth until after the sausage making is done and the bill lands on the President’s desk. I can no longer hold my irreverent and uncivil tongue. Simply put, we do not have the luxury of maintaining the status quo or anything near the status quo when it comes to Health Insurance Reform.
I am in favor of a single payer system which was shot down by Max Baucus at the Senate hearing stage earlier this year. Completely lost in the debate was the very simple yet collapsed notion that single payer does not equal free. It has been so frustrating to listen to pundits, talking heads, senators, and the like discussing Health Care Reform and not hearing the obvious: if we were to move to a single payer system, we all would pay premiums. Single payer would not be free. The benefit would be zero - that is zero premium diverted to advertising, executive salaries, overhead, mortgage payments et al. Instead, I reckon that 95% or more of the premiums paid could go straight to health care. Wow, what a concept!
We don’t have that on the table right now, in fact nothing close to that. I won’t really focus on the bill until it is ready for final vote. In the mean time, consider this: what is the true impact on economic development and small business in particular of health insurance premiums either now or after reform? Obviously the cost factor associated with providing health insurance either for an individual or small group can be a significant impediment to business growth and creation. I see little in the House bill or Senate bill for that matter that controls costs or limits the amount of premium that can be allocated to indirect health care costs. Further, an entrepreneur with an innovative idea or creation might be dissuaded from starting a business if they have a pre-existing condition, or a family member has a pre-existing condition or can’t afford COBRA payments. We all lose in the world in which we find ourselves currently. It is impossible to quantify the loss of potentially created jobs because of health insurance or lack thereof.
In the bigger picture the health care and big corporate lobbies have won the battle, at least for now. A small business is at a competitive disadvantage if they have to take money away from talent or innovation in the name of health insurance premiums. Bigger businesses have more clout and can negotiate for better rates, or self insure. Logically, if most of future job creation depends on small business, it is in the best interest of the country to deliver a Health Care Reform bill that frees small business from the shackles of competitive restraint.
Tags: Health Care Reform
Posted in Business Incubator, Economic Development, Entrepreneurship, Small Business, US Economy | No Comments »
November 10th, 2009
Today’s post comes courtesy of the Kauffman Foundation. They are a fine group dedicated to the age old, sewn in the fabric of America, notion of entrepreneurship. You can find them at www.kauffman.org . In an e-mail I received today, they highlighted with graphic elegance the true state of lending to small business.
I’d like to slip this in the President’s daily briefing book. Which part of Clear and Present Danger is not obvious in the above chart. You don’t even need to know what it is to know that down like that isn’t good. To quote Kauffman -
“Business loans have plummeted during this recession. Worse, the most recent trend–beginning in late 2008 through today–is sharply downward. The administration’s move to expand some SBA loan programs, raise the caps on others, and offer more aid to community banks is thus welcome news for America’s young firms, which do the lion’s share of the job creation and hiring in our economy. These are steps in the right direction, but we need policies that have a long-term affect that will sustain a robust entrepreneurial environment–like a fundamental revision of fixed bank capital standards, which do not vary with economic cycles; and more flexible standards that allow prudent lending in bad times, when many firms need it the most to survive or meet demand when it begins to grow.”
To keep myself sane, I perform stand up comedy with a troupe. To take a page from that book, here is the punch line:
In previous blog posts I have detailed the impact the financial crisis has had on entrepreneurs and small business people. I have shared my story. I have detailed the dearth of lending sources. I have pointed out that start up companies can’t get loans. Now, I have proven, thanks to my friends at Kauffman, that there really is no lending. That chart goes back to 1959 incidentally. So, what do we do?
If you look at money like water, the solution is relatively easy - control the flow. The Government is in a powerful position to control the flow of money vis a vie tax policy. I suggest several things. First, re-authorize the Research and Development Tax Credit. Second, create a special fund to provide outright grants to entrepreneurs who have innovative ideas. If an entrepreneur attaches to a Small Business Development Center, a Business Incubator, of Community Economic Development Agency, they should receive two years of start up capital free of charge. Statistics show the amount of money needed is between $50,000 and $200,000. At the end of two years, they either receive a loan or venture capital or they are done. In the long run, the few successes will more than offset the losers. There would be fewer of those if entrepreneurs received the early guidance that Business Incubators can provide. Funds for such a project could come from a Hedge Fund Earned Income Tax Credit that provides a one to one write off for money deposited into the fund. Failing that, a 1% EI Tax should cover the project nicely. Finally, we need to channel excess capital away from trading markets and toward entrepreneurship. A similar EITC or tax should be levied on ALL large traders or bank trading desks. That would result in capital being allocated to growth not greed. 100% of small business lending, angel investing, and venture capital should be 100% tax deductible if given to new business in their first two years of operation.
There’s the punch line. Now, lets see who gets the joke.
Tags: angel investors, banks, congress, credit, Earnings, friends and family, Hedge Fund, leverage, SBA, SCORE, US Economy
Posted in Business Incubator, Economic Development, Entrepreneurship, Rants, Small Business, US Economy | No Comments »
November 9th, 2009
I sent an e-mail detailing the dire predictions for small business credit made by Meredith Whitney last month. She said there would be a bunch of bankruptcies and failings among small business credit card issuers and ancillary banks. Sure enough, on the heels of CIT came Advanta, a small business credit card issuer. In all fairness, I was a client of Advanta, much to my satisfaction, during the time my partners and I owned our clothing company. While their interest rates were usurious, at least we could use them as a payroll float. Now, they are gone.
Advanta stopped lending in June, and sunk further into debt as losses mounted. They are attached to Advanta Bank, whose capital reserves have fallen below Federal guidelines, and is likely to be shut down by the FDIC any day now.
To coin a phrase used by Ed Schultz - folks, this spells trouble for Main St. Small business is the literal backbone and hope for economic recovery in America. Another nail went into its coffin today.
Tags: Advanta, Ed Schultz, Meredith Whitney, MSNBC
Posted in CNBC | No Comments »
November 2nd, 2009
I read an article in my local newspaper over the weekend written by a SCORE representative. For those of you not in the know, SCORE stands for Service Core of Retired Executives. They do a great job of assisting small businesses with various issues. They are free. I love that. The article talked about various finance options available to entrepreneurs. It detailed programs offered by the Small Business Administration. The programs are loan guarantees, meaning you still have to go to a banker who won’t read your business plan or understand your business model. They will charge you at least 3 points higher than prime - if you are lucky. An entrepreneur still needs to have a business in existence for at least three years to even apply for a business loan. The sentence that stood out for me said, there is no free money to start a business. You still need to use family and friends,or maybe angel investors.
Before I go further with this post, I need to create a couple of distinctions for readers of my blog. For me, small business is any business with 25 or fewer employees. For some economic developments wonks, the figure can go as high as 500. I think they are wrong. I would go to 50 employees at the most. ALL businesses started with an idea and from 1 to a few individuals who tried to implement that idea. Further, small business requires and should get assistance from the idea phase forward. Finally, it should be a public policy issue to create and implement programs geared toward ideas and new entrepreneurs. At last tally, 97% of all new jobs in America will come from entrepreneurs and small business. I’d like to coin the phrase too small to fail.
OK… back to the post at hand. We have talked about friends and family. I have mentioned the relative uselessness of the SBA. Now, let’s take a look at our better angels. Over the weekend, the Wall St. Journal ran a piece about angel investors. Those are a group of individuals who hope to strike it rich by financing the next Google at the garage stage. There are a lot of problems with angel investors.
They are hard to find. An entrepreneur either has to subscribe to a service with a hefty feeor belong to a group at a hefty fee to gain access to angels in most cases. Either that or they need to be networked into their local big time financial advisors or lawyers. Angel investors look primarily at technology plays. It has been my experience that they lack the basic understanding of business or innovation beyond technology. Even then, they tend to bite on shiny morsels that may or may not hold promise. Innovation, a topic I will spend a great deal of time on, holds little sway with them. In summary, good luck with angels.
Interestingly, and importantly, US Income Tax structure does not support the work of angel investors. In other words, should an angel lose, they are consigned to writing off $3,000 a year. If we really wanted to assist the formation of new business and the creation of jobs, the first thing we would do was allow angel investors to write off their entire loss in the year in which it occurred.
Tags: angel investors, SBA, SCORE
Posted in Business Incubator, Economic Development, Entrepreneurship, Small Business, US Economy | No Comments »
October 30th, 2009
If you look on the internet or talk to “experts” about how to start a business, you will hear that the place most people go to fund a start up is “friends and family”. What that means in practice is an entrepreneur puts together a business plan, and then goes to mom and dad or aunt or uncle begging for money. If the entrepreneur is lucky, their “friends and family” will understand their business model and idea. If they are really lucky, “friends and family” will have money to lend. For the past two years it is hard to imagine an individual who has not been negatively impacted by the housing crisis, stock market crash, and rampant unemployment.
I say in jest that I am amused by the assumptive thinking on the part of “experts” in business creation. What if an entrepreneur does not have friends or family with money? What if an entrepreneur does not have the equity or desire to mortgage their home to the hilt in pursuit of their idea?
We still live in a theoretical “Horatio Alger” world where it is noble to suffer and struggle in search of entrepreneurial glory. That halcyon view of the world is as dated as middle class income progression and single earner households. Put succinctly, the way we finance innovation is outdated and does not serve the people who have created or will create between 65% and 80% of new jobs in America.
For Monday, what can we do to help? And, what about venture capital?
Tags: friends and family
Posted in Business Incubator, Economic Development, Entrepreneurship, Rants, Small Business, US Economy | No Comments »
October 29th, 2009
Yeah, I know, no one ever talks about the costs of being an entrepreneur. Let’s say, for example, that an employee of an engineering firm thinks he or she has a better idea of how to accomplish a certain task. They believe so strongly that their idea is better, they quit their job and start their own firm.
When a person quits their job and starts their own firm, they still need to pay the mortgage, credit card bills, health insurance, car payment, utilities etc… Until there are enough customers to pay the bills, the entrepreneur must use savings to cover overhead. If the entrepreneur doesn’t have savings outside of their 401(k) they may be tempted to take out a loan against that 401(k) for overhead and operational expenses. If the entrepreneur is successful, he or she simply pays back the loan and moves on with life. But, if the entrepreneur can’t pay back the loan, not only have they potentially lost their business, their job, and their vision, they have lost their retirement savings. Potentially, that entrepreneur could become a public burden because he or she was forced to spend their future to finance their fledgling business.
What if the entrepreneur has credit sufficient to finance the early stages of their business? Well, if they use that credit - meaning credit cards - they accrue interest at an obscene rate as those rates are not regulated. If they can’t pay back those credit card bills, their credit is ruined. It things get really bad, the entrepreneur may be forced into bankruptcy. Again, the entrepreneur loses, and so does society.
It is important that individuals and public policy makers understand that in this day and age, it is not OK to put one’s retirement savings on the line in order start a business. It is not OK to have to put one’s home on the line in order to start a business. It is most certainly not OK for an entrepreneur to have to turn to credit cards to finance their business. It is not OK to have to burn through one’s savings to start a business. There is much wrong with where entrepreneurs are forced to turn to finance their dreams.
Remember, entrepreneurs and small business people will account for 60% to 80% of new job creation and 35% or more of Gross Domestic Product. Does it not then follow on that entrepreneurs who contribute so much should be spared from risking their futures in the process? In coming posts, I will outline ways that financial risk can be mitigated for entrepreneurs.
Tags: 401(k), cash flow, credit cards, leverage
Posted in Economic Development, Entrepreneurship | No Comments »
October 28th, 2009
There have been a couple of times in my life where I have seen or experienced something that I just knew cut to my essence. The first time, I was in freshman Economics 101 in college, and my professor drew a supply and demand diagram on the chalk board. Yeah, they used chalk boards back then. The intersection of supply and demand looked like nirvana to me. It made perfect sense, and in the viewing, I knew I had found a place where I wanted to spend as much time as I could - meaning economics.
The second time I felt that same sensation was when I heard the word entrepreneur. Deep in my heart, I knew that word meant me - the very essence of me. I was and am an entrepreneur. Entrepreneurship and economic development have become my passions. Especially in light of our current economic mess.
I find myself in the middle of this new blog thread because, as a country, we don’t understand entrepreneurs, would be entrepreneurs, and the challenges they face in today’s economy. The world is different in so many ways for people who have a great idea or want to start a business. I want to point those ways out to readers of this blog, and suggest ways we can make the world a better place for entrepreneurs and people with great ideas to share.
Until tomorrow….
Posted in Business Incubator, Economic Development, Entrepreneurship, Small Business, US Economy | No Comments »
October 27th, 2009
I don’t often use those words, for a lot of reasons. Chief among them being, things are usually fine just where I am, it is my perception that needs to shift. But, to varying degrees, since 2007, I have come to believe that something is wrong.
If you are a fan and have listened to webinars on which I appeared, or read my bio page, you know I called the stock market top not only in 2007, but way back in 1987 when dinosaurs roamed the face of the earth. If you are a paying customer, you also know that I was part owner of an international golf clothing line. Here is where the something is wrong, other than the market crashing down around our ears.
My business partners and I had a nice little golf outerwear line. The company was growing at a fantastic pace, but we were on top of it. At one point in the genesis of our business we needed a line of credit. We had positive cash flow, and a business plan. I went to banks with signed purchase orders for a season of orders from valued customers. All I needed was a line of credit to pay my factory to make the garments that were pre-ordered.
I went to 5 banks, all participants in the Small Business Administration loan programs. I was told by each that they would be happy to give me a line of credit, but not against my purchase orders, not against my inventory, but against my house! Take a minute to let that set in. I have business partners and we were asked to put up cash, or my house as collateral on a loan. As a clothing company, we could have gone to a process called factoring, but we were too small. Unwilling to put my house on the line, I prepared a plan to look for angel investors.
Angel investors don’t typically invest in established clothing lines, or any businesses for that matter. I could forget about venture capital. We were too small for them. Simply put, there was no place I could turn for financing that didn’t involve putting my family’s shelter at risk. In the economic development, and business incubator world, my partners and I had entered the “Valley of Death”, the gap where funding can’t be found.
The situation isn’t unique. Every year businesses go out of business because there is no funding mechanism in place for them that doesn’t involve ridiculous risk. The choice is keep your business or lose your home. That is not an acceptable choice. Depending upon whose statistics you believe, small business creates between 60% to 80% of new jobs in this country. They account for north of 38% of US Gross Domestic Product. In simple terms, the way the “system” is set up, it puts entrepreneurs at an even bigger disadvantage and risk than is necessary.
This is a new thread. Stay tuned for tomorrow’s episode….
Posted in Business Incubator, Economic Development, Small Business | No Comments »
October 24th, 2009
According to the Wall St. Journal, last week, Bill Gross, venerable PIMCO bond guru, disclosed that he shed some $30 Billion in mortgage backed securities in September. That brings PIMCO’s holdings to a 4.5 year low.
Bill Gross knows a thing or two about the US economy and the bond market(s). If Bill Gross is selling, we should be worried. His actions are pretty much a tacit admission that home foreclosures will accelerate after the new home buyer tax credit goes away, later this year and on into next. As I have said in my daily newsletter many times, unemployed people don’t buy stuff. People who are afraid of losing their jobs don’t buy stuff. According to an ABC News poll, 85% of those polled do not believe the recession has ended. Neither do I. Neither does Bill Gross.
Tags: Bill Gross, PIMCO
Posted in Foreclosures, US Economy | No Comments »