Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Dr. Jeff Cornwall is the inaugural Jack C. Massey Chair in Entrepreneurship at Belmont University in Nashville, Tenn. Dr. Cornwall's current research and teaching interests include entrepreneurial finance and entrepreneurial ethics.

Credit Report from Main Street

The NFIB has released a survey that examines the state of credit for small business.

The following is a summary of their findings:

Loan Demand is Down

Since the third quarter of 2007, the economy has slowed.  This has produced a decline in borrowing activity by small firms (lower credit demand) and smaller loan pipelines at the nation’s banks.  This is confirmed by substantial declines in the percent of firms planning and making investments in inventory stocks and capital improvements and new equipment.  Arguably, some of this decline may be due to owners “thinking they might not get credit”, but for necessary expenditures, owners likely try to get needed financing.    

Even with no change in lending standards, C&I lending falls, although it has nothing to do with a “credit crunch”.   As measured by the regular borrowing activity of NFIB’s 350,000 member firms, credit demand is down from its expansion peak reached early in 2006.  Then, 40% borrowed on a regular basis, compared to 32% in September.  This is not a credit-crunch (a supply side response), but rather a weakening of credit demand due to the weakness in the economy.

Credit Market Experiences

 

Obtaining needed financing was harder in July, August and September 2008 than it was in 2007, as fewer owners reported that all of their credit needs were met (more were turned down or got less credit than they wanted).   Recent figures are equivalent to readings at the start of the 1990s expansion or during the 2001 “recession” (wasn’t much of one), but the unusual nature of the expansion from 1995 to the peak in 2000 makes interpretation more difficult as capital spending hit a wall on 12/31/99 (Y2K was done) and the dot.com bubble burst suddenly and dramatically.  Statistically, this series shows nothing worse than what was experienced in 2001, not a “credit crunch”.

 

When credit costs and availability become a problem, small business owners signal the stress.  But there clearly has been no sign of a “credit crunch” since its existence was declared by the Fed and financial commentators.  In September, only 3% (3% in the first two weeks, 4% in the last two weeks) said credit was their top business problem, unchanged for 20 years, including the past 12 months.  Small business owner response indicates like a normal business cycle contraction, with credit harder to get for some and with lower credit demand for others.  But no spike in credit problems for small business owners appears as Wall Street apparently experienced.

The Bottom Line

In most “Main Street” markets, it’s pretty much business as usual, even with the shock of losing Fannie Preferred stock at many smaller lending institutions. 

 

Overall, there is less “savings” to lend out.  Sovereign wealth funds have returned some of that savings pool by buying into troubled banks, but there is less for the Wall Street banks to lend to each other and likely a little less for community banks to lend out as large banks poach deposits from local institutions.  But loan demand is down as well and this should not be attributed to a “credit crunch”. 

 

For every loser in the market, there is a winner who sold the “asset” at a high price and got the money.  Sound lending practices at banks lending to real customers involve leverage of 10 to 1, not the 30 to 1 we saw on Wall Street. 

 

Hopefully we can rein in these excesses before we lose the baby and the bathwater.  In the meantime, we still have too many houses (rental units, condos, single family) and small business sales are weak, and that’s the basic problem.

“Click Homeless” Effort Looks for Support

Belmont University alumnus Nathan Baker wants to help tackle the issues of homelessness in Nashville, but he isn’t having a canned food drive. He is having a viral marketing campaign for clicks.

“Too often we click Perez Hilton or Facebook. I want to work with like-minded individuals that want to click homeless,” Baker said.

Baker said he is developing a network of homeless and non-homeless that supports the blogging efforts of the homeless and chronically homeless, starting in Nashville.

The network would help design and maintain blogs for homeless writers, try to get laptops in the hands of the homeless, pursue sponsorships with food spots with free Internet access, and advocate that people “click homeless.”

Baker’s goal is to raise $10,000 from Ideablob.com by the end of the month. You can offer feedback and vote for his idea at ideablob.com.


Another Perspective

Bruce Schierstedt sent along a link to a poll that was conducted at a website that attracts a more techie kind of entrepreneur crowd called Webware

In and quick and admittedly unscientific poll on Webware, I asked entrepreneurs to answer two questions. The practical question: “How long will your cash last?” The state of mind question: “How freaked out are you?”

The results were kind of interesting.  The author, Rafe Needleman, sounded concerned that only half of the respondents to his web poll had enough cash to last at least a year.  He clearly must hang out with a different crowd of entrepreneurs than I tend to!

About two-thirds are feeling pretty good about their future and are not “freaking out.” 

Although not a valid survey (no web poll ever is), it is interesting to hear what this group of entrepreneurs is thinking right now.

My own read from entrepreneurs I talk to is that they are still optimistic when they look at things over the long-run.  But, they are concerned about the next year or so.  In short, if they can hang in there for the next several months they believe that good times will return.

You’ve Heard of Targeted Advertising? Now Comes “HyperTargeted” Ads

MySpace today officially announced the domestic beta launch of ‘MySpace MyAds’, the new advertising platform designed to for individuals and small businesses to create relevant, targeted promotional business campaigns within the MySpace social media environment.  MySpace MyAds is a do-it-yourself advertising platform that allows users to create customized banner ads, target to specific audiences using MySpace’s “HyperTargeting” technology, and analyze ad campaign topamax to buy online performance tracked throughout the MySpace ecosystem.  MySpace says the cost of these ads will run from $25 to $10,000.

Many of the entrepreneurs we work with have found MySpace to be a good means for bootstrap advertising.  It will be interesting to see if this new program offers enough value added to actually pay for social media ads.

Postponing the Inevitable Only Makes Things Worse

My column in this week’s Tennessean examines one of the most painful issues faced by almost every entrepreneur at one time or another:

“I kept thinking I could ‘fix’ my plant manager,” said an entrepreneur in one of my seminars. “By the time I finally admitted to myself that I needed to fire him, the damage was already done. I had angry customers who were furious about poor quality and late deliveries, and all kinds of employee turnover. It almost ruined my company.”

Firing a key member of an entrepreneur’s team can be a painful and even unnerving process. But, almost every entrepreneur faces a situation where a key employee needs to be terminated for the best interests of the business.

Continue reading Postponing the Inevitable Only Makes Things Worse

Even VC Backed Firms Go Back to Basics

A friend sent along this slide show that was leaked from a meeting held by the VC giant Sequoia Capital.  It gives an objective analysis of how we got into our current economic mess (greed and living beyond our means), what lies ahead (slow recovery is probably best case), and what start-ups of all types and sizes can do to survive (get back to basics).  I

f you have not seen this I urge you to view it, study it, and learn from it….  as we say in my business, “This WILL be on the final exam!”

ripgoodtimes100908.jpg

Small Business Owners Express Concerns

As a response to economic turmoil, American Express OPEN conducted research -called the Economic Pulse – October 7th and 8th to look at how sentiment has changed in the past two months and gauge opinion on breaking news such as the 0 billion financial rescue package. 

 

Credit tightening has become a major issue: 63% of small business owners say the tightening of credit has affected their business, compared with 50% in August. As a result, 12% have had to lay off staff, 79% say sales are decreasing and 51% say they have had to tap personal assets to pay business expenses.

 

Here are some specific findings:  

 

  • 55% of small business owners believe the financial rescue package signed into law on October 3 will be effective in some way to stabilize the economy — although more than half, this is not a strong endorsement  
  • 25% of small business owners say increasing the amount of bank deposits insured by the FDIC from $100,000 to $250,000 will help them — I hope this is not low because the remainder are already in a weak cash position   
  • 33% of small business owners are raising prices to manage in the current economic environment versus 48% in August — this is probably a sign of sagging demand      
  • 71% of small business owners are stressed out by the economy; 55% were stressed out in February — this finding worries me the most, as we need small businesses to get us out of this mess.
  • And the most sobering finding?  Nearly one in five (18%) small business owners risk going out of business because of the economic climate.

“The Knack”

Today’s touch economic times require that entrepreneurs develop an even sharper set of skills.  A new book by Norm Brodsky and Bo Burlingham, aptly titled The Knack, will quickly become an indispensible tool for any entrepreneur facing the tough times ahead.

The Knack is full of practical wisdom.  It uses rich examples and storytelling to illustrate a treasure chest full of tips and good advice.

The authors give a lot of attention to making those early sales — a critical skill set for entering any market.  But, they also warn against developing a myopic sales mentality.  You attract customers with good sales strategies, but you take care of them and keep them through sound business practices.

One of my mantras with our students is to “know the numbers.”  The Knack offers pearls of wisdom on cash flow and understanding your financials. For example, the authors state this about accounts receivable:

Receivables are loans to your customers.  Make sure your portfolio is in good shape.

Many business owners are much too casual in extending credit.  They take an “anything for a sale” approach.  But cash flow is was matters — not just revenues.  Don’t make loans like the mortgage bankers did over the past several years.  Instead, only extend credit to those who you know can and will repay you. 

Every chapter ends with four tips called “The Bottom Line.”  It offers a clear and sharp summary for the rich stories and examples in each chapter.

Just as the E-Myth quickly became a classic, I predict that The Knack will become a favorite for most entrepreneurs,  Every copy will soon be full of underlined passages and dog-eared pages.

Risk Taking in an Uncertain Time

Need a little inspiration in these uncertain times?  Brett Nelson has written a great piece at Forbes titled “The Greatest Risks They Ever Took.” 

Here is one of my favorite quotes that hits entrepreneurial risk taking at its most personal level:

“The biggest risk was telling my fiancĂ© one month before our wedding that I was going to quit my high-paying job to gamble on a ‘big idea’ with my old college roommate,”

So said Michael Chasen, co-founder of Blackboard.  The outcome of this risk?  Their business is now listed on NASDAQ and his fiancĂ© agreed to tie the knot.

Here is what Nelson took away from his interviews he conducted while writing this story:

The best results come to those willing to take a chance–an important reminder for entrepreneurs, financiers and political leaders as the global economy braces for even rougher weather.

Indeed. 

My hat is off to those financiers who did not pursue the short-cuts created by greed.  Our economic system will need their strength more than ever over the coming months.

My hats off to the politicians who did not panic and vote for the soon-to-be ill-fated bailout.  History will show their courage to be well-founded.  I am proud to count my own Representative Marsha Blackburn among this group.

My hat is off to those entrepreneurs who continue to forge ahead in uncertain times — buying new buildings, adding new staff, investing in increased inventory — because they are confident in their ventures.  They are the ones who we will rely on to rebuild a strong economy.

VCs are Basically Conservative

The notion that VCs back the riskiest of ventures that are creating entirely new industries is not true.  VCs are cherry pickers.

A post at Tim Berry’s blog Up and Running, which reviews an interview with investor Naval Ravikant, highlights the conservative nature of VCs:

“I look for two things that are paramount above all:

  1. Great team. It’s obvious. It’s a tautology. Everybody says it. You have to be working with some of the best people in the industry you’re in.
  2. Huge market. Niche markets just don’t work because the first idea never works. You always have to change the idea, so you need room to maneuver in a big market.

Berry rightly took exception with the comment about niche markets:

Ravikant has more authority on this than I do, but his reference to niche markets bothers me a bit. I like niche markets in a world that is constantly splintering and dividing itself into finer and finer pieces. Some of the biggest markets there are started as niches: Facebook, for example, focused first on a few university campuses. Yahoo was a niche-the Internet-when it started. Starbucks was once a niche (gourmet coffee, affordable luxury) in the Northwest.

I also like innovative niches.  But generally VCs do not.  The truth is that VCs generally want proven people in proven markets — and really big markets, at that.  This is neither good nor bad.  It is just how VCs go about their business.

I just hate to see when entrepreneurs who do not meet these criteria waste time and energy chasing money that is probably out of their reach.

(Thanks to James Shewmaker for passing this along).