This time last year the financial markets were deeply in trouble with the collapsing sub-prime residential real estate market. Large banks that had significant exposure to the mortgage market immediately tightened their own business credit standards. As the big banks pulled back on credit, most regional and community banks did so also.
As families lost their homes to foreclosure, nervous consumers throughout the country began tightening their own belts, causing a ripple effect on retail businesses, their suppliers and other businesses that serve consumers.
As consumers and small business owners started feeling the slowdown last summer, the price of energy began to skyrocket. Gasoline prices have gone up in some parts of the country $1.00 a gallon during the last year. Heating oil, natural gas and electricity prices have also drastically increased. Airlines started charging much higher ticket prices, and then surcharges for checking more than one bag.
Transportation and energy cost increases have caused tremendous stress on small business owners who often have not felt they could pass along all of their additional costs to the consumer. Giant retailers like Wal-Mart and Target have resisted passing along added costs which have put significant competitive pressure on retailers that don’t have the cash reserves to do the same. Small business retailers I talk to are pessimistic and are having a hard time figuring out how to hang on.
Businesses that rely on imported goods have been hammered by the devaluation of the dollar, putting additional pressure on small business owners.
All of these factors have affected the small business owner. Business credit from banks for small businesses has become non-existent for all but the strongest businesses. Start-up businesses and businesses that have had uneven profitability are simply not able to get business credit from traditional finance sources. Fortunately, credit is still available from non-traditional credit sources like non-profit and community lenders, factoring companies, and commercial finance companies.
How long this credit crunch will continue is anyone’s guess. While the price of oil has moderated somewhat in the last month, consumers who have been driving our economy for the last 15 years are still very cautious about spending money. The sub-prime mortgage crisis has another six months or so to run its course, but the worst is over. People with good credit are getting mortgages at attractive rates, and lately the dollar has gained some strength, which will help moderate the price of imported goods.
Most experts are predicting a very poor retail Christmas season. I think we will see a number of major retailers file for bankruptcy protection or close their doors after Christmas and unfortunately many small business retailers will close too.
The good news is this cycle will turn around, consumers will start spending again, business credit will again loosen up for small businesses and the economy will recover. In the meantime, small business owners should focus on strategies that will minimize their exposure to customer credit risk, keep the least amount of inventory possible, and take whatever cost cutting measures may be necessary to keep expenses as low as possible.