The dominoes on Wall Street, Bay Street, London City as well as other markets around the world are still falling and everyone from the man on the street to central bankers is more than concerned; rightly so.There are unfathomable amounts of money being lost.Banks are loathe to lend because no business is stable these days, not even their own.Where does this leave the small and medium sized business?On a very thin line between survival and failure.
Small and medium business employ approximately 70% of Canada’s workforce.It is equally logical that they account for approximately 70% of our domestic economy.A significant portion of this business is in the realm of “Mom and Pop Shops”.That is to say they are small businesses that are family managed.In today’s environment this could be disaster on an unprecedented scale if government continues to focus exclusively on the bigger players.They seem to forget that the dirt washes down.The small business is likely more dependent on the big players for their survival than most government officials realize, or if they do, want to admit.Small business is just as vulnerable to the markets if not more so than the big boys.They don’t have the contingency funds or borrowing ability the large companies enjoy; at least such as it is today.Theirs is an even tougher environment.
There are no stock options or performance bonuses.There are no corporate retreats complete with spas and golfing packages in the Caribbean.There are no one hundred dollar a plate luncheons to listen to some politician stroke their egos.Their lives are a lot more dire.For the small business, the shoebox money in and money out is the rule of finance.Today, it isn't enough.
As world markets shrink we are hearing another nasty word creeping into the vocabulary; deflation.This is from contracting prices, output, trade and it is global not just domestic.It is going beyond recession because with deflation, trade balances are also shrinking along with commodities and currencies fluctuations as traders try to figure out which one is the most stable.It is like trying to predict which jumping bean will stop jumping.It isn't near depression but just one more step toward that disaster.
Small business is getting squeezed on multiple fronts.Declining consumer confidence combined with increased e-commerce is pressuring retailers more than ever.Declining manufacturing and particularly in light of the shrinking trade balances is doing the same to the small industrial business.For them it means receivables are being stretched by their customers while their suppliers are less prone to offering favourable terms.For the retailer it means inventory that has to be purchased equally has to be turned over as quickly as possible.In both cases, it isn't a favourable business environment.Their options?They have to go to the banks to borrow, except the banks aren’t listening.Times are tough and they have hundred million if not billion dollar corporations to worry about.The ten million dollar or less a year account is chump change; or is it?It is a myopic view on the part of the banks.They are ignoring the 70% for the 30%.Do the math.
The banks are very skittish about loaning, and despite incentives from the central banks with lower overnight (or today more likely monthly) lending rates, the banks are increasing their lending rates to the consumer and small business.They are also increasing the collateral requirements required to make a loan.For the banks this is increasing their liquidity with a larger point margin and longer repayment on their borrowing.For the business and consumer it is withdrawing money from the market that they need for their own survival.It is a big picture lose/lose situation.They pulled this same stunt back in 1988 to 92 and watched millions of personal bankruptcies pile on top of hundreds of thousands of business failures.The difference then was extremely high interest rates.The cause then was the same as it is now.Reduced credit availability.
While higher rates can and do have nasty implications for the borrower, so equally does the point spread that makes up the bank’s profit margin on loans.
As the economy slows, this situation only becomes more difficult.The small business will cut back as labour that can be reduced and replaced by increased participation by owners will be the rule of the day.This is increased unemployment, increased personal financial strife, decreased consumer confidence and suddenly one day the headlines will not say the small d word, it will be the Big D.
It will be too late to blame the investment banks, the central banks or the government.That 70% of the economy will have been abused to the breaking point and that breaking point will finish the fall of the domino chain.
Government needs to wake up from its snooze and look at the domestic economy and it needs to act fast, stepping in and regulating credit rates so the survival of the country, not survival of the fittest becomes their priority.