Small businesses are in no doubt crucial to America’s economy and by extension, the global economy. This phenomenon makes the study and understanding of small business an important venture, both to current and prospective entrepreneurs. Economic articles and journals provide an excellent source of knowledge about the current state of small business. The articles in Bussinessweek.com in particular are some of the most acclaimed sources of information about small businesses. They are written by same authors with vast experience in small business. Their diligent authorship is consistent to give up to date in-depth understanding of the challenges and successes facing small businesses. These journals purely provide information about the status of small business. As such, the arguments herein may or may not be justified. This paper is directed towards giving an analysis of the articles authored by J. Tozzi and S. Shane in the Businessweek.com.
Undercapitalization is rated as one of the leading challenges facing small businesses today. Stringent economic times occasioned majorly by the credit crunch, and real estate turmoil of 2008 are pushing business owners against the odds. Securing 504 loan facilities to either start or expand a business venture is proving to be a formidable challenge. Banks are tightening up their loan eligibility requirements while reducing its loan sizes simultaneously. Collateral backed loans are not only beyond the first time small business’ reach, but also disappointing because most investors are shying off from capital properties. John Tozzi quotes that ‘Commercial lenders have not been able to sell their portions of 504 loans after investors lost their appetite for asset backed securities in the financial crisis, prompting many lenders to drop out of the 504 loan program’.
The essence of this is a reduced secondary market for Small Business Administration 504 loans with a direct effect of cutting out finances for small business expansion. Small businesses are destined to shrink further with some imminently closing down hence job losses? It is therefore, paramount that the government ensures the availability of both 504 loans (fixed asset acquisition loan) and 7a (financing loan). Facilitative consultations between the sector players and regulators are prudent to ensure the success of reviving the secondary markets. For instance, terms governing the issuance of the government subsidized loans, like the percentage risk to be taken by banks should be acceptable to all. Thus, the government has to convince investors who purchase loans to take up the 5% risk while it takes up 80% and the banks take the remaining 15%.
The availability of SBA 504 loans does not fix the problem faced by small businesses overnight. A reasonable timeframe is equally vital if quantifiable results are to be realized. All the players in the financial sector, namely; the banks, investors and small business owners need time to adjust to the new state of affairs after the loans have been disbursed. For example, investors would naturally wait to see the net effect of loans to the economy before they can fully purchase the loans from banks. On the other hand, banks would asses the market interest rate and their effect on profit margin before creating more loans. This therefore means that with the waivers and loan guarantees set to expire in the near future, investors will be cautious to see if the introduction of SBA 504 loans will provide a conducive environment for capital investment like real estate once the expiry date passes.
If real estate recovers, investor confidence will be restored and small businesses can once again access credit with capital assets as collateral. If however, the market fails to respond to the stimulus package, Small businesses will continue to suffer the burden of a slump in real estate. Meaning expansion of existing companies as well as creation of new ones will be at an all time low. It’s also a high possibility that a spring back of profitability in real estate, is a positive step towards the elimination of credit crunch and a sizeable bet at stemming the bottlenecks faced by small businesses in attaining credit finance. In the mean time, small business owners have had to think outside the box in sourcing credit finance as Commercial lenders remain skeptic about providing credit services to them.
Credit cards are one such a source of credit. After many fruitless efforts to get credit from banks, small business owners are switching to credit cards with much ease despite the high costs involved. They are more than willing to sign up with the only ‘caring partner’. In his article ‘Credit cards replace business loans’, Tozzi presents a situation where a couple resorted to credit cards after they failed to qualify for a bank loan due to lack of capital assets to back it up. This couple was later forced to abandon the use of credit cards when interest rate hit 30% and were finding it hard to service their loan. This example gives an insight of how hard it is for small businesses to access credit facilities in the present economic situation. Such situations usually befall the first time small businesses seeking finance for take off.
This is because Credit cards are always attractive and easier to get unlike the bank loans. Rejection by commercial lenders simply gives no other options to small business owners. This completes the trap. The reality of this trap hits when the credit card holder receives a short notice about a whooping increase in interest rate from 21 to 30% on his/ her account. The most ridiculous bit of this is the fact that it’s purely legal for the creditor to engage in such acts. This is because Congress is yet to create neccessary legislation that specifically cushions small businesses from such acts. The sweeping credit card reform law signed into law by President Obama as quoted by Tozzi in his article is not doing much to protect small businesses from the ever changing terms of business credit card companies. This is due to the fact that the law only applies to consumer cards.
In fact, the law is expected to yield a negative counter effect of increased interest rate as credit card companies seek to cushion its profit margin pending the initiation of the new law. This loophole in the judicial system is one pain that holders of credit cards wish it catches the eyes of Congress soon enough. However, in stack contrast, credit card companies are taking full advantage of this gap. To them, its business as usual and all efforts are made to popularize the apparent attractiveness and usefulness of credit cards. They see an opportunity of creating a profitable business venture. J. Tozzi states in one of his Businessweek articles that “over the last decade, credit card companies have courted small business owners as issuers try to expand beyond the saturated consumer card market….'as Issuers have discovered the small business segments, they have become fairly aggressive about getting small business cards into the hands of some very early stage businesses’”.
The theory behind this is that small businesses have a capacity to attain growth levels that are high enough to justify the risk involved. Visa’s estimates put small businesses’ spending at 4.7 trillion dollars in 2007 alone. This theory is supported by the fact that these business owners reserve the right to alter credit card terms at will and with limited government’s interference. This means that credit card companies will keep calling the shots for as long as legislation regulating interest rates on business cards is passed by Congress. In the meantime, small businesses have to contend with credit card companies’ dictates, at the list until the alternative credit facilities come up.
Even with President Obama’s proposal to increase SBA loans to 1 million dollars coupled with a temporal green light on refinancing of owner occupied commercial real estate (CRE) under the SBA’s 504 program. Small business’ woes are far from being solved. (Shane) This is because Small businesses do not majorly depend on SBA504 loans for its credit requirements. The intention is for good but it will not remedy the situation of small businesses in particular. The input has to relate to the problem if ever it is to give solutions. Since the intention is evidently there, Obama’s administration should provide fitting solution by directing its efforts to the business credit card sectors. Perhaps it should start by reigning in on the ever changing interest rates plaguing credit cards.
Should this be made a reality, small business owners like Rosmann would not have to face a situation where his business credit card is subjected to 3% increase in interest in the name of ‘response to market conditions’ to market conditions (Tozzi). It’s necessary to note that a slight increase in interest rate leads to a more than proportionate impact on a credit card holder’s account. Legislation spelling out procedures to be followed before any changes in previously agreed terms of service between the credit card company and account holder is crucial. Such legislation will not only boost credit card holder’s economic security but will also allow strategic planning powered towards sustenance.
However much business credit cards may be attractive, prolonged dependence on them as preferred sources of credit is not encouraged. It can successfully cover a small business over its take off periods especially with dwindling commercial support. This should not, however, be a reason to extend a business’ dependence because the future is uncertain. There is certainly no guarantee that tomorrow’s interest rate will facilitate ample loan servicing with acceptable profit margin. Small business owners, in particular, have everything to gain by settling for bank loans in the long run as opposed to relying on business credit cards. This is because bank loans are governed by contracts that are binding. This means that a bank cannot change the interest rate after a deal has been sealed.
This however is not the case with business credit cards as companies are at liberty to alter the terms without as much a restriction as a mere notification about impending changes. For example, in the article ‘Credit cards replace small business loans’ by Tozzi, Mauzy, a small business man takes up business credit cards to start and run his business. This is after unsuccessfully trying to secure a bank loan. His business did well but he kept looking for a financier who could provide clear, dependable and predictable credit facilities. This is a cue that must be emulated by all business owners. The point here is seeking a stable financier as opposed to mere branding of credit cards as ‘bad’.
Naturally, credit card companies are destined to react to the proposed regulations in some way. This reaction can be moderate, meaning hiking of interest rate or adverse resulting to total withdrawal from credit creation all together. Whatever the reaction, the government has a mandate to put in place legislation that protects business from rogue companies out to fleece unsuspecting entrepreneurs. All financial transactions should perpetuate economic sense. With every deal, both parties must attain an acceptable level of profitability. Otherwise there would be no reason to enter a deal while conscious of the fact that such a deal leads to an automatic loss.
The recent credit crunch in the American economy had a big impact on both existing and prospective small business. For starters, all small business with any link to the troubled property market stares at imminent closures as commercial lenders tighten its credit finance. The fate of other small businesses is no different either. Loan facilities for expansion are fast drying up as desire for property backed loans is waning largely because of home mortgage troubles. Even the healthy businesses face an unpredictable future. This economic situation causes a state of confusion in the market.
In conclusion, small businesses face unique challenges as well as possess unique success factors. These unique factors should be cultivated with the aim of promoting small business success. The problems facing small business are nothing that a dedicated government’s policy won’t fix. The truth is that small businesses occupy an important position in our economy. As such, it’s paramount to build and promote them.