The housing market’s impact on small business lending

Today’s Wall Street Journal had a page 1 article called “When the Home Bank Closes” – which looks at the impact the housing collapse is having on small business lending. 

 As we all know, home equity borrowing is a great source of funds to finance the early stages of growth and development.  The article points out that Wal-Mart’s Sam Walton and Sam Adams beer brewer Jim Koch both used this technique for early funding for their businesses.  A 2009 survey conducted by Gallop for the National Federation of Independent Businesses found that nearly one in three small business owners borrowed against home equity or used the home as collateral to fund there businesses.

With the housing collapse, the balances of home equity lines of credit and second mortgages are down over 27% since 2007.  According to the WSJ, “That leaves cash-strapped small businesses in a jam.”  Or a pickle.  The article quotes Mark Zandi, chief economist of Moody’s Analytics, who estimates that “small business ownersextracted around $75 billion from their homes to fund their businesses in 2006.  That has fallen to as little as $20 billion now.”

The author found several examples of entrepreneurs who are short of capital due to falling home prices and credit lines that had been yanked.  The article concluded with a quote from one of them:

As an entrepreneur,  it’s your job to basically pull a rabbit out of your hat on a daily basis.  That’s how hard it is right now.



10 Most Common Startup Mistakes

Nick ran across this one in the Huffington Post Small Business America.  I think I’ve made all 10 – some more than once.  Interesting enough, the Number 1 Startup mistake is “Ignoring That Cash Flow is Blood.”  We at SurvivalWare couldn’t agree more!

Check out this video from Philip Campbell – his 4 simple rules for building Cash Flow projections you can trust:

Philip Campbell’s 4 Simple Rules for how to create cash flow projections

A Brighter Future – Maybe

This was the title of an Article in today’s Wall Street Journal in the Small Business section (page B5 of the print edition).

A Brighter future for small business






Some interesting tidbits:

They estimate the number of American small businesses at nearly 30 million.  There are a lot of us out there!

Companies loosen their purse strings – a little:

Many of the outlays will be geared toward improving sales without hurting cash flow.  That means investing in technology to reduce overhead, and increasing productivity through work-force training and development..

Sounds to me like there needs to be some serious cash flow planning going on.  Time to jump on the SurvivalWare bandwagon!

The bad news:

Continued weakness in the housing market is still a challenge for many business owners, who are prevented from tapping home equity or from using their homes as collateral for secured bank loans.

The good news:

Small business loan approvals by small banks and credit unions have climbed steadily since the start of the year and are now roughly half of all applications…

This in contrast to an approval rate of 10% from banks with assets of more than $10 billion.  I know where to target my next loan application!

Here is the full article:

Career Bureaucrats at OMB Analyze Loan Deals for DOE

This was meant to be published in September.  At the end of the day, not too surprising an outcome.

Solyndra is still in the news as a congressional committee holds hearings into how such a thing could happen.  The last line in an article that appeared in today’s Washington Post (“Lawmakers assail Solyndra loan decision – Administration officials defend efforts to rescue failing solor company” pg A15, 9/15/2011) gives a clue.  “At the end of the day, OMB staff used their best expetise.”

The way the process works for the $38.6 billion loan guarantee program (part of the American Recovery and Reinvestment Act passed in 2009) is that companies negotiate with the Department of Energy (DOE) for a government loan guarantee.  Then the Office of Management and Budget (OMB) must sign off on the guarantees, often changing terms.

In the private sector, we call this the blind leading the blind.

DOE claims the program has saved 33,000 jobs so far.  Guess where that number came from?  You don’t want to know.

Reverse Mentoring

A couple of posts ago, I talked about the SurvivalWare 20,000 Small Businesses Initiative.  The basic idea is to provide discounted software and training for younger people who could then help seasoned business owners and entrepreneurs apply financial modeling technology to their businesses.  

Just last week an article appeared in the Wall Street Journal:

Reverse Mentoring Cracks Workplace – Top Managers Get Advice on Social Media, Workplace Issues From Young Workers

In an effort to school senior executives in technology, social media, and the latest workplace trends, many businesses are pairing upper management with younger employees in a practice known as reverse mentoring.

The concept is the same as the 20,000 SBI.  There is a lot we can learn from younger workers, and likewise them from us.  Who better to help you harness the power of social networking than someone who spends 2 hours a day on Facebook?  And who better to coach someone on business mores and office politics, not to mention the importance of cash flow – than a 35 year verteran?

Reverse Mentoring Cracks Workplace - 11/28/2011 WSJ

Reverse Mentoring Cracks Workplace - 11/28/2011 WSJ

It seems like several large companies have set up formal programs – and that Cisco set up its “Gen Y Reverse Mentoring Program” nearly two years ago.

Of course, we entrepreneurs have been doing this informally for some time.  It is called nepotism.  Back in the old days, it meant hiring your kids to do menial tasks and learn from the bottom up, expectantly soaking up whatever wisdom you deemed willing to impart.  Now, it is much more of a two way street.  If only we could teach them not to gloat when they prove us wrong about something!

The SurvivalWare Jobs Act of 2011 – “100K, Here to Stay”

My Proposal to Help Small Business

By Rusty Luhring

Small Business Advocate

Founder, CEO of Luhring SurvivalWare, Inc.

Cash Flow Analysis and Projection Software

 The post mortems on Solyndra have been fascinating, to say the least.  I think what we are seeing is a growing mountain of evidence that Solyndra was doomed to happen when the loan guarantee program was created in the first place.  That perhaps expecting government workers to act like venture capitalists is no way to run a railroad.  I have an alternative to the American Jobs Program that I’ve started a crusade for.  It is called the “SurvivalWare 100K, Here to Stay” program.

But first, let’s talk about Solyndra.  It helps make my program all the more compelling. 

Here’s what we know, nearly 30 days after the bankruptcy filing August 31, 2011: 

  • The company may have had a better chance of surviving WITHOUT the loan than with it.  Wait, what?!  That was the gist of a Wall Street Journal Article on page B1, 9/16/2011, “Loan Was Solyndra’s Undoing.”
  • Solyndra Executives spent lavishly.  (“Solyndra’s ex-employees tell of high spending, factory woes” Washington Post 9/22/2011).  Let me do the math.  $500 million+  in federal loan guarantees.  Effective interest rate a little over 1% APR.  Did they sign personal guarantees?  Hard to tell.  And why are they pleading the 5th at the Congressional Hearing?  So who exactly is surprised they spent lavishly?
  • The encircling Republican partisans smell blood in the water, but they are not exactly blameless.  According to Dana Milbank’s column in today’s Washington Post (9/27/2011 pg A8) 

“What McConnell neglected to mention is that Solyndra was cleared to participate in this loan guarantee program by President George W. Bush’s Administration.  He also did not mention that the legislation creating the loan-guarantee program, approved by the Republican-controlled Congress in 2005, received yes votes from – wait for it – DeMint, Hatch, and McConnell.” 

  • Wait, it gets better. 

“Bush’s Energy Department apparently adjusted the regulations to make sure that Solyndra would be eligible for the guarantees.  It hadn’t originally contemplated using the photovoltaic-panel manufacturing that Solyndra did but changed the regulation before it was finalized.”

 You may call that highly suspect.  I call it good pro-active government relations strategy executed by a top notch lobbying firm.  They deserve kudos for early detection of the problem, and successful resolution.  They surely deserve a handsome payday.  And surely the dollar amounts will become published as the investigations continue. 

  • In no way am I absolving the Obama administration.  They are taking this tendency to enact grand plans and appear to “do something” for every ill – to unprecedented heights.  Rushing the Solyndra approval so the Vice President could speak at a photo op (via video feed at that!) was just plain wrong and revealing at the same time.
  •  Who in their right mind would put up with the uncertainty and the restrictions in order to snag one of these loan guarantees?  A year long period of time to negotiate the loan.  Tough luck if business conditions change.  I think it biases the applicant pool away from solid business people and more toward porcine operators used to feeding at the federal trough.
  • No scandal is complete without a mention of Goldman Sachs.  So guess who was Solyndra’s financial advisor?  I hope they were compensated handsomely, for I feel sure their advice on dealing with the Administration and Treasury department was priceless.
  • Final editing before publication: today’s Washington Post (9/28/2011) had a page 2 article about the “Foundation” connected to George Kaiser that was the principal investor in Solyndra.  It was not really a private foundation, and hence has no requirement to pay out 5% of its net assets per year.  Yet apparently gifts of cash and stock to this entity are tax deductible.  And it can use the word “Foundation” in its name.  This is getting off on a tangent – but I do hope we find out who voted for such a ridiculous law.  Thank you Solyndra for bringing this issue to the forefront, under the bright glare of publicity now associated with anything remotely related to your business or government dealings.

The SurvivalWare Jobs Act of 2011

Instead of doling out $500,000,000 at a time to the companies with the best lobbyists, how about chunks of $100k credit lines to any small business owner willing to sign personally.  Give a contract to Capital One to administer the program.  These would be credit cards.  Pre-approved.  Subject to the same penalties and collection efforts upon default as any credit card debt.  Healthy interest rates to cover a higher default rate. 

All you have to do is apply.  Swear under oath this is for a small business.  Agree that you will be a responsible steward and do cash flow projections on a regular basis so that you can avoid trouble and ultimately pay it back. 

As a business owner you would tap this debt only when you had opportunities that would return something higher than the interest rate.  The thing about small business owners in today’s economy is that they have to routinely pass up opportunities due to lack of capital.  If something has a 12 month payback, it doesn’t matter if there is insufficient cash to cover the wait. 

How much would The SurvivalWare Jobs Act of 2011 cost? 

Let’s say we want to help 4 million small businesses. 

At $100,000 each that would be $400 Billion.  Hmmm. That’s less than the President’s Jobs Act Proposal.  And that’s only if all 4 million borrowed the full amount right away.  And 100% defaulted. 

What would the impact of this?  Torrid investment, confidence, and growth.  That’s right, torrid. 

I don’t have an economic model to crunch the numbers and predict the exact number of jobs created, additional tax revenues collected, growth in the money supply, or impact on inflation.  I can tell you though what it would do for the vibrant, diverse, striving community of American small business owners and entrepreneurs.  It would build confidence.  It would show appreciation.  It would spur profitable investment and deliberate risk taking – what this economy needs to pull out of the doldrums.  It would unleash the animal spirits of American Capitalism like nothing else you can possibly do. 

Who am I? 

I’m just a small businessman, trying to make my dreams happen.  I’m trying to change the world, one small business at a time.  I’m trying to improve financial literacy and acumen among entrepreneurs and small business people.   So that their financial management skills become a competitive edge, not a cause for failure in a hostile business climate, stacked to favor heft and connections.  Being nimble financially is critical to our success. 

I want to help other entrepreneurs and small business owners succeed. 

We have a great country, a great economic system, a great democracy.  There are things we can do to unleash the American Competitive Spirit – our can-do attitude, our perserverance.  We want to make it easy for people to start new businesses.  To stay in business once they’ve started.  To add jobs, when appropriate.  To encourage innovation.  Not by prescription.  By reducing friction, and getting out of the way. 

And those things we can do to help do NOT include showering loan guarantees on politically connected companies with incredibly competent lobbyists. 

Frequently Asked Questions 

Q. What kind of paperwork to fill out? 

A. None.  Online applications only. Name, DOB, SSN# all that required.  Nothing about Income, Assets,  or  Debt. 

Q. How long to get approved? 

A. 3 minutes max.  This should be written into the Service Level Agreement with Capital One (or whoever). 

Q. How long before we get access to the cash? 

A. A week to 10 days.  Standard fraud protections and investigation apply.  So do standard upselling pitches by the issuer. 

Q. What are the costs?

A. I’d recommend a standard interest rate of 15.99% the first year of the program. (Re-negotiated annually by Treasury and the credit card company).  Capital One and the government should share in the profits.  The government at minimum earns interest at the rate it is paying on 10 year bonds for any capital tied up in the enterprise. 

Q. Can I start a new business tomorrow? 

A. We’d probably pick a start date to define when you had to be in business to qualify for the full 100K limit.  Start-ups would be treated like student loans – and maybe have a smaller limit initially. ($25,000 to $50,000) 

Q.  What can I do with the money? 

A.  Pay it back eventually.  Other than that, it is up to you.

The American Jobs Act – Take a Pass on it Now

Open letter to President Obama, Eric Cantor, John Boehner, Nancy Pelosi, Harry Reid, Mitch McConnell 

From:  Rusty Luhring, Small Business Advocate

Founder and CEO of Luhring SurvivalWare, Inc.

Entrepreneur since 1979 

Subj: The American Jobs Act – take a pass on it now 

Listen – there are 14 months before the next election, and I agree with the President that you all need to do your jobs now.  That is what we hired you to do.  Please listen to this small business owner’s point of view. 

I keep hearing from all sides of the political discussion that Small Business is the key to job creation and growth for this country.  Friday’s Wall Street Journal (9/9/2011) featured an article on page A7 with the title “Small Business Is Focus of Tax Cuts.”  A senior administration official is quoted from a briefing for reporters before last Thursday’s speech: 

       “We think economically there is significant differentiation between the largest companies that are sitting on significant cash, and many smaller companies who have faced a perfect storm in terms of more difficulty getting working capital.” 

I agree with that senior administration official in describing the nature of the problem facing small business, but I don’t see anything in the President’s proposal that remotely resembles a solution. 

I’d like to make five points: 

  1. I can’t see how a cut in the payroll tax is going to spur more hiring.  Think about it: payroll costs are typically 50% to 80% of a small company’s operating expenses in my experience.  So payroll taxes at 6.2% of wages represent about 3% to 5% of a company’s total operating expenses.  Cutting that in half is a net reduction in expenses of 1.5% to 2.5%.  And it is for one year only.  But not a lump sum – it is spread evenly throughout the year.  Hardly an incentive to hire a full time employee. 

2. I think perhaps that policy makers and economists have missed a web-enabled trend as significant as cloud-based computing and the internet itself:  the advent of the virtual company.  These are companies that rely on on-demand services from providers all over the world for all sorts of tasks that previously required adding to headcount.  This is not a bad thing.  I like to cite the example of AccountDepartment.COM.  They will do all of your book-keeping and accounting remotely through a well managed and extremely competent work force scattered around the U.S. working out of their homes.  They do not ship jobs overseas – rather they tout their 100% American work force as a key marketing advantage.  They allow small companies all over the country to get more done with less.  My take on the trend:  let’s make it easier for people to become entrepreneurs, even if they are providing jobs just for themselves initially.

  1. Focus on solving the “access to capital” problem for small business.  We have borne the brunt of the financial meltdown.  We are the collateral damage of the Dodd Frank act, the ill-fated stimulus program, and TARP.  That big sucking sound you hear is not jobs going toMexico, it is cash from our pockets going to institutions too big to fail.  Do you know how frustrating it is to read about interest rates being close to zero when we are lucky to get credit at 23.99% APR if we can get it at all?!  Listen, access to credit is what enables a small business to take risks.  It is a safety net.  Our thinking goes like this:  if we have some cushion, we can deploy capital to those opportunities with the highest return on capital.  The market sorts out the best uses of capital.  But if we have no cushion, we can’t afford to take risks, because even minor missteps can cause us to go out of business and lose everything.  Part of being in business is constant experimentation to see what works and what doesn’t.  It means that not every idea pans out.  We have to have room to fail, on occasion. 

4. Do you realize how totally ridiculous small business programs have been in the past?  Take the ARC Loan program cited by Karen Mills, head of the SBA, as an example of the good things they do for us miscreants (um – entrepreneurs).  This was in 2009 after the “unpleasantness” of the 2008 financial crisis.  You could borrow up to $35,000.  You had to show positive cash flow at least one of the previous two years.  (Funny – I don’t remember positive cash flow being a criterion for lending a helping hand to the auto industry, AIG,  or Fannie Mae).  You had to show hardship of some sort, like the reduction in a credit line or a drop in sales.  Fill out forms up the wazoo to document said hardship.  The SBA would guarantee 100% of the loan, and pay the banks prime plus 2% interest.  The banks gave the program a decisive yawn. 

5. Finally, this payroll tax cut is sending the WRONG message about the social security / entitlement problem.  What we are haring you say is this: “Let’s show we’re serious about solving the problem by cutting its funding in half for a year.”  I don’t think so.  Excuse me if that doesn’t make me more confident in the direction of the country’s economy, and the ability of our political leaders to put us on sound footing so that we can go about our business, hire more people, spend more money, and grow, baby, grow. 

What would I do?  I’ll have to make that the subject of another missive.  It’s Monday morning and I have to buckle down and do some planning so I can “put tacos on the table” the rest of this month and next.  Now that’s what I call a real economic incentive.