The Good, The Bad, and the We Should Be Paying Attention
Helping small business grow with borrowed capital
Small firms added 78,000 jobs in August. The good news is that number is up from a year ago when it was 73,000. Unfortunately, it’s the second month in a row where job growth within small business has declined from the high in June of 133,000 new jobs.
Small business traditionally holds the top spot for creating new jobs, but according to J.D. Harrison (someone I follow at the Washington Post), “…small businesses were responsible for about 38 percent of the total jobs added by businesses in August. That’s the second month in a row in which their contribution to total gains has dipped below 40 percent—not a favorable sign for the sector so often lauded as the nation’s job engine,” he writes.
Most small businesses either grow by bootstrapping with cash flow or use borrowed capital. As much as we’d like to believe that many small business owners can hook up with an equity investor or acquire capital through a kick-starter campaign, most small businesses like the mechanic who fixes my car, the dry cleaner who does my shirts, or my favorite Mexican Restaurant, don’t have the potential to scale large enough to attract an angel or other investor. The “Myth of the Shark Tank” just doesn’t work for 90 percent of the small businesses that create jobs and help local economies thrive. In fact, I’m convinced the Silicon Valley model of building a business has hijacked the way many small business owners look for capital and negatively impacts the way they run their businesses (but that’s a topic for another discussion).
This is important enough we all should be paying attention.
Fortunately, capital is available to small business, it’s just not in the same place it used to be and it’s more expensive than it once was.
Since 2008 regulations and the risky nature of small business generally has seen many bankers move upstream to bigger and less risky companies. It’s hard to blame them. Some statistics suggest only 10 percent of the businesses who visit the local bank get the loan they’re looking for. The bankers I talk to complain about business owners who don’t really understand what’s going on within their businesses, have credit histories that don’t make them a good (read safe) candidate for a loan, and can’t articulate what they need the capital for.
In other words, they make it tough to offer them a small business loan.
As I talk to small business lenders and borrowers, there seems to be a common theme—small business owners don’t know what they don’t know until it’s too late.
The world of small business financing is changing and the industry hasn’t done a very good job of keeping the marketplace informed about how those changes are going to impact acquiring capital, what that capital costs, and where to find the best capital to meet a business’ specific needs. In fact, I think that’s the key. Unless your business has great credit, has been around for a while, and has something to collateralize, there really isn’t a “catch all” category of small business loan any more.
That being said, small business owners have a little bit of responsibility here too. Granted, most small business owners don’t go into business because they want to become experts in finance, but I’m afraid they need to. At the very least, they need someone to help them understand their options and how to prepare to talk to a lender about their business. They can’t leave it up to their bookkeeper to keep tabs on the financial health of their business either. They need to be more engaged in the financial nuts and bolts of running their businesses. Having been a small business owner myself a couple of times, I know what I’m asking. I just think the landscape has changed enough that there’s no way around it.
This blog is a good place to start. We regularly talk about topics that will help small business owners better prepare to make their case to a loan officer, but I wouldn’t stop there. Spend time with your bookkeeper or accountant on a regular basis to make sure you understand what’s going on financially within your company. Make sure he or she takes the time to explain so you understand (if they don’t or won’t, it’s probably time for someone new).
Spend time learning about all the different loan types a small business owner can turn to for financing—there’s over 20 of them. You should understand those that might apply to what you’re doing. Understand the terms. Understand the costs.
Small business grows on borrowed capital. When borrowers and lenders are in sync, a growing economy can mean more jobs created by small businesses and healthy communities.