Archive for May, 2009

How Not to Help Small Businesses Access Loans

Tuesday, May 19th, 2009

Harder to FindIn a recent address to a conference of community bankers, U.S. Treasury Secretary Timothy Geithner invited them to participate in the federal government’s Troubled Asset Relief Program (“TARP”). Geithner’s stated reason for offering TARP funds to community banks, those with less than $500 million in assets, was to expand the pool of capital available to underwrite small business loans. Expanding access to capital for small businesses is one of the stated reasons that the federal government is offering the bailouts to large financial institutions. I wonder whether the government is sincere in this effort, and fails to appreciate the unintended consequences of its policy decisions, or if this is cynical pandering to the small business constituency.

Consider the idea of including community banks, which have generally been friendlier to small business borrowers than the big banks receiving TARP funds. Last fall, when certain banks were rumored to be takeover targets, small business owners transferred their accounts to other banks perceived to be more stable. While the protection of the Federal Deposit Insurance Corporation would make depositors of failed institutions whole, the relief is not instantaneous. Customers of the failed IndyMac, for example, had to wait several days or longer than a week for reimbursement. Many small business owners, out of an abundance of caution, transferred their accounts out of IndyMac upon hearing the concerns of Senator Charles Schumer (D-N.Y) of the Senate Banking Committee.

The reason is simple: small businesses cannot weather the disruption in their cash flow if they have funds tied up in a failed bank. Small businesses generally cannot defer their obligations. Laws vary from state to state, but generally employees must be paid their salaries within two weeks of their having performed the work. Failure to meet this obligation is one of the few instances in which the corporate veil can be pierced and the small business owner exposed to personal liability. In addition, small business owners often have to provide personal guarantees for many of their commitments. If small business owners continue to behave as they have in the past, they will likely withdraw accounts from TARP-participating banks. It would be a shame if community banks, which have been pillars of small business support, failed to appreciate the consequences of public perceptions of TARP and institutional stability.

Be Careful About Your Information

Monday, May 18th, 2009
Each One Adds Up

Each One Adds Up

I had advised that small business owners should write to each of the publications to which they subscribe advising that your name, address and other contact information should not be shared with third parties. The idea is to reduce the amount of time that telemarketers can waste. This will improve your productivity in normal business operations. It will also help you to focus on critical communications in the event you are disrupted by a disaster. Spam, telemarketing and unwanted solicitations become more than a nuisance when you are operating from a remote location and trying to deal with a serious disruption to your business. I recently had the experience of receiving persistent calls from a telemarketer who played coy in response to my question as to how he obtained my personal information.

Business that seek contracts with the U.S. federal government are required to register with Dun & Bradstreet, which I did for my own small business when I was responding to a Request for Proposals of the U.S. Agency for International Development. As my registration was a matter of some urgency in order to ensure that I would meet USAID’s deadline, I gave my cell phone number to Dun & Bradstreet solely for the purpose of processing  my registration.  Unbeknownst to me, Dun & Bradstreet re-sold this information to third parties. I began to receive telephone calls on my cell phone from Fortune 500 companies seeking to sell products and services that are totally inappropriate for my small business. Ordinarily I would switch off my cell phone in business meetings out of courtesy to the others present. But as I would explain to other participants at the beginning of each meeting, my circumstances were not ordinary. As my mother was recovering from a traumatic brain injury, I needed to ensure that I could be reached at all times. Since that was the only use of my cell phone, you can imagine how my heart would race and my palms would sweat whenever that phone would ring. And you can further imagine my fury that the calls were unwanted solicitations. When I traced the source of the calls, I notified Dun & Bradstreet in writing that my information is not to be sold to third parties and I wish to be placed on their internal “Do Not Call” list. You should do the same. I think it is an appalling practice that D & B would re-sell this information without the consent of the small business owner, facilitating the abuse and waste of our time. It is particularly offensive to me because we are a captive audience, required to register with D&B if we want to bid on government contracts. Stop the abuse; notify them to keep your information private.

At Least They Told Us This Time

Sunday, May 17th, 2009

The largest disaster drill since September 11, 2001 at the World Trade Center site took place this morning. New York City officials staged a mock explosion on a PATH commuter rail train in the tunnel linking Lower Manhattan, at the World Trade Center terminus, to northern New Jersey. Hundreds of police officers, firefighters and Port Authority of New York and New Jersey officials participated, along with 150 volunteers who pretended to be victims of the explosion. City officials advised downtown residents in advance of this drill. PATH rail service was suspended Sunday morning until the drill was completed.

Credit Crunch for Small Business Cardholders

Saturday, May 16th, 2009
Complex and Interconnected

Complex and Interconnected

At the end of last year, Advanta Corp. was the 11th largest U.S. credit card issuer with approximately $5 billion in outstanding balances and the only major credit card company focused on the small business segment.  More than one million of those small business customers are searching for new sources of credit as Advanta will stop lending against credit card accounts on June 10, 2009. The stated reason for this action was that uncollectible debt reached 20% of the total outstanding, according to public filings of the company. Advanta has set aside $1.4 billion to buy back securitized credit card loans at 65 – 75 cents on the dollar.  Advanta finds itself caught in a squeeze: it has been unable to sell its receivables for cash in the asset-backed securitization market since June 2008 and rising unemployment rates suggest further deterioration in their credit card receivables. William Dunkelberg, chief economist of the National Federation of Independent Businesses, questioned how many business owners depend solely on their Advanta credit card and noted that credit is harder to find than ever before.

As I had advised in Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition, 2008), mitigate your risk of third party failure by diversifying your suppliers. Never rely on a single provider, unless it is absolutely unavoidable, which was certainly not the case with U.S. credit card issuers.

Storms Leave 150,000 in Missouri Without Power

Tuesday, May 12th, 2009
Power Outages Affect Us All

Power Outages Affect Us All

This weekend, hundreds of homes and businesses were damaged or destroyed in Kansas, Illinois, Kentucky and  Missouri as a result of powerful storms. The Governor of Missouri declared a state of emergency as 150,000 residents of his state were without power. This is a timely reminder to evaluate your protection against power outages, starting with the protection of computers and data. Even when electrical power is available, there are quality issues, like peaks in voltage as well as micro-outages. Since IT equipment is sensitive, use an uninterruptible power supply unit (UPS), which is usually a surge protector, together with a small buffer battery that would supply energy for about 10 minutes after the electricity supply is terminated, enough to finish important work and to shut down the system. Most units support an automatic shutdown before the battery is completely depleted. Some buildings supply self-generated backup power. Please note that this power is usually much “dirtier” than power from the outlet. Under these circumstances, you must use a UPS unit, preferably one that is designed to smooth out erratic electricity supply.

Certain high-rise apartment and office buildings have back-up generators that provide low levels of power for up to fourteen hours after termination of the central electrical supply. Many workers and residents of these buildings mistakenly believed that a volt of electricity is a volt of electricity irrespective of whether it comes from the central utility or a back-up generator. During a recent power outage, they used their home and office computers with electricity delivered from a back-up generator, without the benefit of a UPS unit, and damaged their computers in the process. Also, remember to turn off appliances and equipment during a power outage as power supply may be erratic when it is initially restored.

Global Similarities, Part Two

Monday, May 11th, 2009
An Uphill Battle

An Uphill Battle

In an earlier blog posting, I wrote of the difficulties small businesses in the United Kingdom were experiencing with respect to access to credit, even in obtaining loans from banks that had received government assistance. It isn’t just the Anglo-Saxon countries where the flow of credit to small businesses is blocked. Zwanzig Minuten (a daily newspaper, the title means “Twenty Minutes”) reports that the Swiss government is establishing a loan fund to aid small and medium enterprises throughout the country with loans of up to CHF 40,000.  We tend to think of the large corporate enterprises as dominating employment in Switzerland, particularly the banks and pharmaceutical companies. In fact, in Switzerland, as in the United States, small businesses account for more than one-half of all employment. The Swiss economy is also in recession, with economic contraction of 2.2% projected for this year. Switzerland also had its version of a government bailout: UBS (Union Bank of Switzerland) accepted government assistance, Crédit Suisse did not. And, consistent with the trend we have seen, Swiss small businesses are also struggling with issues around access to credit. I lived as an ex-patriate in Zurich, Switzerland; this photograph is the famous Matterhorn, perhaps symbolic of the tough obstacles small businesses everywhere face.

Swine Flu, the Sequel

Sunday, May 10th, 2009
Global Connections

Global Connections

In a previous blog entry, I wrote about swine flu motivating small businesses to consider telecommuting options, for employees for whom this arrangement is feasible. This could both slow the spread of the illness, by keeping people out of crowded workplaces and public transport, and allow employees to stay home and care for their infected loved ones, where necessary. Establishing procedures for working from remote operations, such as data storage and network security, is critical for all types of disasters, from fires to civil emergencies. And now there is another reason to look into telecommuting. While the swine flu appears to have slowed down its rate of new infections, it may be poised for a second wave of infections in six months’ time.

I remember reading the book about the influenza epidemic of 1918 (when you work in the reinsurance industry, you focus on many cheerful topics). One-fifth of the world population was ultimately infected with the flu, but this damage was inflicted largely in a second round of the virus, six months after the first one. And with the travel patterns in our global economy, an epidemic in this era would become a pandemic more readily.  Public health officials are now predicting that history might repeat itself and we should prepare for a second outbreak in the winter. Doctors report that the warm temperature of the summer months is not conducive to spreading the virus; the next threat will likely occur in the winter months. So let’s take advantage of what may be a six-month reprieve to prepare our small businesses for temporary remote operations and know that the effort will pay off, irrespective of what happens with the flu.

Across the Ocean, Things Are Much the Same

Saturday, May 9th, 2009
Global Similarities

Global Similarities

In earlier postings, I wrote of the possible appearance that the small business stimulus appears to involve substantial, undisclosed risk to the taxpayer and that the SBA loan program to emerge from the stimulus bill has limited benefit for small businesses. This appears to be a universal theme.

In the United Kingdom, the Treasury Select Committee, a group of politicians representing each of the political parties, produced a 121-page analysis of the collapse of the banking sector. The analysis relied on interviews with government ministers, including Treasury Minister Alistair Darling and bankers. Not surprisingly, the report was critical of the failure of regulators to prevent the collapse of the largest banks in the U.K. including Royal Bank of Scotland. The Committee also noted that they were “very concerned” about the lack of credit for small businesses that also faced higher charges and arrangement fees. Specifically, the report stated “We deplore the behavior of a number of those banks who have received so much public money and behaved in such an insensitive manner particularly to established customers”. The Committee demanded that banks that received had taxpayer funds provide more disclosure as to their loans to the small business sector.

The findings of the Treasury Select Committee contradicts a report published one week ago by the British Bankers’ Association which claimed that lending to small businesses rose 5%, or more than £270 million, year-on-year. The British Banking Association further stated that small business lending rose in each of the three months of the first quarter of 2009.

As small business owners, irrespective of where we are, we face similar issues in dealing with big businesses and with big government. In writing Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses, I tried to be a inclusive as possible, to serve the needs of a global small business audience, while also offering specific, actionable advice. There were fewer than five pages of the book in which I discussed information unique to an American audience; specifically, the programs of the U.S. Small Business Administration and the Federal Emergency Management Agency. But I had hoped that there, too, the information would have broad relevance as, while policy specifics may differ from country to country, the underlying risks inherent in dealing with government agencies are the same. I had hoped that readers outside the U.S. would also find the lessons helpful and applicable to their specific circumstances. I hope to see Prepared Small Business build a global network of resilient small businesses as we have much to learn from one another, whether in dealing with access to credit or other issues.

Sit Tight and Follow the Fortune 500

Friday, May 8th, 2009
Follow the Fortunes

Follow the Fortunes

In a previous entry, I wrote about anticipated increases in property-casualty insurance premiums. Reinsurance broker Guy Carpenter, published a report Cats and Credit Push Prices Up: Global Reinsurance Review January 2009 in which it found that property casualty rates rose only 11% across the United States this year. You may wince at the word “only”, but this rate increase is dampened as compared with what followed Hurricane Andrew in 1992, the terrorist attacks of September 11, 2001, and Hurricanes Katrina, Rita and Wilma in 2005. This is remarkable given the level of catastrophes (close to $20 billion in insured losses) in 2008 and the financial losses on the investment portfolios of insurance companies. The rate hikes could have been much, much worse. What typically happens after two or three annual renewal seasons of increasing rates is that the Fortune 500 will seek alternative means of financing their risks at lower costs. This might include self-insurance through corporate captives, for examples. Four states – Michigan, Missouri, Louisiana and Connecticut – are enacting legislation similar to the statutes in Vermont to establish captive insurance companies in their jurisdictions or to persuade existing captives to re-domicile. The recent announcement of President Obama concerning increasing scrutiny of offshore corporate vehicles (corporate captives are commonly found in places like Bermuda and the Cayman Islands) may accelerate this trend. What this means is that supply and demand will eventually favor the small businesses. As large corporate insureds withdraw from the expensive primary insurance market in favor of less expensive alternative risk financing vehicles, demand declines and price follows. Small businesses can then purchase their insurance at lower costs. In other words, sit tight, Fortune 500 companies will soon look to cut their insurance expenses and we will benefit from the lower prices that follow their actions.

Watch Your Workers Compensation Costs With Extra Care at This Time

Thursday, May 7th, 2009
It Escalates!

It Escalates!

An economic and financial crisis is a non-natural disaster and poses different risks to small business workers compensation. The first is cost-shifting. The National Council on Compensation Insurance reports that medical losses constitute more than one-half of total losses attributed to workers compensation insurance. An employee who is without medical insurance would easily be tempted to report an injury as job-related in order to avail himself of the medical coverage. Likewise, as deductibles and co-payments rise, employees who are under financial stress may face the same temptation. The shift of medical costs to workers compensation insurance may increase the burden to the small business. I recommend mitigating this risk by using a higher-deductible medical plan (first dollar losses are always the most expensive) and then funding the deductible on behalf of the employee.

The second risk concerns fraud. I remember a discussion I had more than one decade ago with the chief financial officer of a major underwriter of disability income who reported the impact of pending healthcare reform in California. Specialist physicians faced caps on their reimbursement rates and so, the insurer was able to prove, injured themselves to benefit from own occupation provisions of their disability coverage and workers compensation insurance. I had a similar conversation with the chief executive officer of a top five underwriter who reported the same phenomenon. Unfortunately, this is what happens in times of economic stress. Mitigate this risk with careful product design: your benefit should cover medical, psychological and occupational rehabilitation with an emphasis on returning the employee to work.

The problem with these costs is that they tend to be “sticky”: the costs rise in an economic downturn, but when the economy recovers, they don’t fall back to pre-disaster levels. So the small business owner is locked in with higher experience-rated premium payments. In a tough economy, where we are all looking for cost savings, this is an important area.