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Recently I met with one of the Managing Directors of Equities at Sandler O’Neill, investment bankers and research analysts to financial institutions. Our conversation centered on the current state of the capital markets, a topic very important to FTRANS as our mission is to provide small and medium businesses access to the cash flow they need to run their businesses.
He had several charts tracking 20 years of year over year changes in bank and non-bank credit availability. Two charts grabbed my attention. One illustrated non-bank home mortgage availability dropped from a $700 billion increase year over year to a $300 billion decrease, a $1 trillion change since the beginning of this year. Yes, a trillion. The other chart, clearly showed the recent, significant drop in non-bank consumer credit which together declined a whopping $1.4 trillion year over year. The decline in these non-bank shadow credit markets was chilling.
Why does your typical small to medium business owner care that home mortgage lending and consumer credit have cratered? Experts estimate that at least 20% to 30% of small businesses have used to the equity in their home to start up their business, ease a cash flow crunch or grow their business. Additionally, according to a June 18, 2009 article in the New York Times entitled, “A Credit Squeeze for Small Business Owners,” by Andrew Martin, 59% of small businesses in the US rely on credit cards to finance their day-to-day operations.
A quick Google search uncovers recent articles touting the benefits of leveraging the equity in your home as a funding source for small and medium sized businesses. Housing prices were rising and the interest was deductible. Of course, we are also aware of the low, introductory “teaser” rates formerly offered for credit card balance transfers when opening a new card account. As illustrated by the charts, both of these financial markets have diminished significantly. As a result, for most businesses, these funding streams are now dry and businesses are going to have to tap alternative sources of capital such as leveraging their receivables. If you are a small business owner, the health of your Customer Portfolio (your sales + your ability to convert those sales into cash) is going to, more than ever, play a significant part in the viability of your business.
The page one article in today’s Atlanta Journal-Constitution tells the story of 600 plus creditors of Peanut Corp. of America probably getting “cents on the dollar” due the bankruptcy of the company. These creditors range from large manufacturers of food product to small growers of peanuts. (I started to say “small peanut growers,” but that opens questions of ambiguity and charges of being redundant!)
This is not the usual bankruptcy that one might have predicted from a decline in the financial condition of the company. This bankruptcy was reportedly caused by the company’s lax enforcement of sanitation practices that resulted in salmonella contanimation, something not visible even if one used a microscope on the financial statements.
Whether financial or bacterial in cause, the result is the same — the unsecured creditors who provided much of the capital for this company are simply out of luck.
What can a company do to protect itself from this risk of customer failure? Traditionally, there were three solutions:
- Require payment in advance or on a credit card, which the CFO likes but the sales team hates;
- Do a really good job of credit decisioning on each potential customer, which is time conuming, requires skills most companies do not have, and will not spot all problems; or
- Buy credit insurance.
The third option, buy credit insurance, is a good option for large companies, but not really an option that is availabile for most smaller companies. And, today, most of the credit insurance carriers are not writing coverage for new clients.
A fourth alternative is now available: Trade Credit Express from FTRANS, which enables a B2B seller to outsource much of the credit administraiton and payment risk of operating an in-house credit system, and be paid for invoices in 5 days rather than 50.
The need to protect your company from the financial failure of your customers has never been greater. And, the economy will probably get worse, but more on that later. Meanwhile, I continue to look at the jars of peanut butter on the store shelves and wonder if they are safe to eat. And, I continue to be proud of the the fact that if an FTRANS client had sold to Peanut Corp., their loss would be minimal.
Never has this statement been more true than it is today for many American businesses. The world credit crisis that began in mid-2007 has caused the global credit markets to contract and US banks to become much more restrictive in their lending.
Over the years, I have started many successful companies, and I am impassioned about the growth of American small business. Particularly in this economy, entreprenuers have to be creative to be successful. While there is a restricted access to capital from traditional forms of financing, in this credit crisis, there is significant opportunity for B2B sellers to grow their businesses by granting to their buyers more credit on more flexible terms. At the same time sellers are growing their businesses, they are building relationships with buyers that can be an enduring competitive advantage for years to come.
I started this blog to explore the many benefits of outsourcing trade credit, and I look forward to discussing alternative sources of financing with you.
