Small Business owners are being squeezed

As we all trudge through this latest phase of our economic slow-motion train wreck, it's now painfully obvious that small business owners have been the big losers from the developments over the last three years. Covid policies including lock-downs and distancing/capacity measures decimated smaller operators and favored large ones. The stimulus flood primarily helped large banks and their customers and the subsequent jab requirements destroyed small business hiring & retention rates.

Now we enter the phase where the effects of prolonged high interest rates & inflation which both take time to affect the broader market start to kick in. Add in current the banking crisis which is just the latest iteration of the decades long destruction of our economic base from which all businesses, especially small ones, get their capital to grow and thrive. The result is a squeeze felt mostly by smaller owners but, once it starts being felt by the large banks, it will mean chaos like what we saw with SVB and others.

Think of the banks like holes in the Dyke and we have a limited number of fingers to plug them with. Sooner or later, the flood of consequences from years of unchecked monetary policy dumbfuckery will overwhelm us.

Federal Reserve Open Market Committee

Nothing can stop the re-valuation of risk happening right now urgently in the offices and board rooms of every single lender in the world. Small business owners of very high quality credit are being turned away and they don't understand why. (Hint: It's not just them, it's the banks.)

"NEW YORK (AP) — When Nat West, owner of cider-making company Reverend Nat’s Hard Cider, decided to supplement his wholesale business by opening a taproom in a bustling neighborhood in Portland, Oregon, he thought getting financing would be a breeze. After all, he was only seeking $50,000, has been in business for 11 years, and takes in more than $1 million in annual revenue. In February and March, West reached out to three lenders he had previously gotten financing from, including one where he has an existing line of credit. To his surprise, he was rejected.
“I feel like it’s really weird, it’s such a small amount of money for a business that has so much ongoing, sustained revenue and has been in the same community for a long time,” he said."

It's not that funding isn't available, it is. In fact, lenders are very anxious to place their money with borrowers however, the increased risk has changed their guidelines  cutting off access to much needed capital for a large percentage of owners. Some industries can't even get a quote right now like trucking w/less than 3 vehicles.

A recently released survey from the Federal Reserve shows how the pandemic has altered the financial landscape for small business. About 85% experienced financial difficulties in 2021, up nearly 20 percentage points from 2019. Back then, more than half of owners who sought a loan were looking to expand; last year, the majority of applicants needed funds just to cover every day operating expenses.

In last week's post I talked about the signs I consider when I make estimates about economic conditions. Every business owner looks at some metric or another to make daily estimates about how business is doing in general. I speak to many of you during the week and the observations I'm hearing about revenue, expenses, delivery times and new vendor payment terms are all pointing in the direction of slower demand and less profit margin.

The leading (and lagging) indicators are also showing the same thing:

6-Month ROC of Leading Economic Index
This metric has an uncanny record of accurately predicting recessions

The economy pumped when they flooded it with free cash (PPP, EIDL, Endless QE,) and now it's dumping as the money spigot turns off. We can see that also in the pricing of many luxury items because, what did a lot of the recipients of the government largess do with the money? They bought a gold Rolex of course!

Less Kaching for the bling!

As I said in the beginning of this post; Small business has taken it on the chin from every. Single. Change that our society has been put through primarily from government policy and also other external reasons. Unless policy changes soon and is directed to supporting the small business owner, we stand to lose the greatest source of innovation, economic growth and employment in our country.

"Companies with fewer than 100 employees are a critical part of the U.S. economy: they employ 35% of the private-sector workforce and generate a quarter of gross output. And they rely disproportionately on small banks for borrowing, receiving almost 70% of their commercial and industrial loans from banks with less than $250 billion in assets and 30% from banks with less than $10 billion in assets (versus 45% and 10% for larger businesses, respectively), Goldman Sachs economists Ronnie Walker and Manuel Abecasis wrote in the team’s report. Put another way: At least 70% of small business lending is done by smaller banks in 95% of counties, which account for more than 80% of GDP."

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