Archive for June, 2009

FEMA Housing Proposals Should Motivate You

Sunday, June 7th, 2009

It started with a plan for transition to those displaced by Hurricane Katrina. It ended with a proposal for temporary housing for disaster victims that should motivate people to put their own plans in place. The federal government plans to donate approximately 1,800 mobile homes to 3,400 families living in those homes since they were displaced by Katrina. The government also plans to distribute $50 million in rental vouchers to low-income trailer residents to move into targeted housing projects and will assume from the State of Louisiana the responsibility of helping those people secure permanent housing. Excess trailer homes from FEMA’s inventory (the Federal Emergency Management Agency) will be donated to state and local governments and nonprofit groups.

These actions are motivated by a desire to provide a more humane transition to more vulnerable populations that were facing FEMA’s threatened eviction action after the trailer program ended on May 1, 2009. FEMA’s housing assistance program typically provides support for 18 months. In the case of Hurricane Katrina, FEMA extended assistance for 45 months. Since many local jurisdictions in the Gulf Coast will not change their zoning ordinances to allow trailer homes, this initiative may be of limited benefit.

Meanwhile, FEMA officials told the Associated Press that they are evaluating options to house Florida hurricane evacuees in foreclosed homes should a severe storm exhaust the availability of all other housing options. This proposal is motivated by concern to stabilize disaster-affected communities rather than having evacuees disperse across the country and possibly not return, which was the experience of Louisiana in the aftermath of Katrina. Given the legal issues involved in determining ownership and rights to a foreclosed property and the uncertainty around the condition of the properties, this seems an unattractive option. Foreclosed homes are generally not maintained and lacking basic utilities. Residents of hurricane-exposed communities should begin to put their own plans in place.

Opportunity Arises

Saturday, June 6th, 2009
A Few Clouds on the Horizon, But Blue Skies, Too

A Few Clouds on the Horizon, But Blue Skies, Too

Much of the business media focus on the usual platitudes around managing in a recession: now is a good time to start a new business because inputs are less expensive, many great businesses were started in economic downturns, etc.  I am not sure I agree with that thinking; in a booming economy, you can keep your cash flow stable with regular employment while preparing to launch your business. In the current environment, you have fewer opportunities to diversify your risk.  And you are trying to sell new products and services at a time when everyone else is cutting back. I don’t mean to be negative. I am an optimist, but those who have never before launched small businesses seriously underestimate the risk and stress involved. You need to temper your optimism with a realistic plan to manage through tough times. But I do see two very attractive opportunities that have been overlooked.

The first concerns the unmet needs here at home. I was stunned to learn that the U.S. exports only 10% of its Gross Domestic Product. China exports 10% of its GDP to the U.S. alone, a single export market. The U.S., alone among world economies, can have a home-grown recovery. In recent years too much of our labor force has been focused on what I call “spam” products: mass distribution to see what sticks with negative value-added. Like the mortgage brokers qualifying borrowers for loans that they could not reasonably expect to service, it was all phoniness. But we have some very real social needs and there are opportunities for wealth creation and social enterprise for those who can innovate to meet those needs. That is what I hope to do with Prepared Small Business. The second opportunity concerns the challenges of working in a credit-constrained world. We make better decisions in times of scarcity. In times of abundance, every idiotic idea gets funded. But when we have to make tough capital allocation decisions, we think more carefully about our commitments. This is what separates the passionate entrepreneurs from the dilettantes and what, I believe, will help us to develop solutions to our most pressing needs – not cheap inputs in an economic downturn, but higher value-added solutions.

Business Owners Policies and the Recession

Friday, June 5th, 2009
Not the Business to Be In Right Now

Not the Business to Be In Right Now

MarketStance, a research firm that provides analytics to the insurance industry, offered an unusual perspective on the significance of the recession for smaller businesses. They report that “the depth and duration of the current recession, when combined with the financial crisis and current soft market conditions, represents a perfect storm of unique proportions for the commercial lines industry.” In an earlier blog posting, I explained how the dual threats of poor underwriting results (due to high catastrophic insured losses in 2008) and poor investment performance signaled rising rates for insurance. Cash flow underwriting, a strategy for profitability in which returns on the investment portfolio compensate for underwriting losses, no longer works in this market.  Insurers have the choice between hunkering down and waiting for the cycle to turn or proactively managing their books of business to try to reposition for profitability. MarketStance believes that $600 million of business owner policy premiums will be lost through year-end 2010 as a consequence of the recession. These losses will result from both business failures and declines of surviving businesses in recession-sensitive segments of the small business sector, such as the construction industry. But over the same time frame, four times as much new premium potential will emerge from new business formation and growth, more than offsetting the losses due to the recession. The white paper published on MarketStance’s website, presenting an analysis of the business owners policy market, is really about the possibilities of entrepreneurship and creative destruction.

Their research found that 60% of the small business market, roughly $14 billion in written premiums, is experiencing significant stress due to the recession. Not surprisingly, this varies significantly by region, with states such as Arizona and Michigan faring worse than average. But states such as Nevada and Florida are doing much better than average, notwithstanding their experiences with the construction boom and subprime mortgage crisis. Other states, such as Texas, Alabama, North Carolina and Maryland, have more broadly diversified economies, with most of their small businesses working in either growth areas or at least areas that are not tied to the economic cycle, such as tourism. For policymakers, this report offers an instructive lesson on the benefits of economic diversification. For small business owners, it is a lesson on the importance of choosing a suitable business niche. But recession-sensitive or not, all small businesses must prepare for what will likely be a challenging insurance renewal season.

Well, At Least Two Senators Tried

Thursday, June 4th, 2009
The Senate Lost Its Way

The Senate Lost Its Way

Last week, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act that will put into effect within 45 days certain protections against credit card abuse that the Federal Reserve had scheduled for implementation in July 2010. The law prohibits retroactive rate increases on outstanding credit card balances for cardholders in good standing; requires at least 45 days’ advance notice to raise rates for new charges; bans double-cycle billing, a practice which allowed for fees to be charged for balances that had already been paid down; and prohibits universal default, a practice that raises credit card charges to customers who are late making payments on unrelated accounts.  That is the good news. The bad news is that this new law amends legislation that governs consumer credit, the Truth in Lending Act, so it does not apply to business cards.

Senators Mary Landrieu (D-LA) and Olympia Snowe (R-ME) proposed an amendment to extend the protections of the new legislation to any businesses with 50 or fewer employees. Unfortunately, this measure did not pass the Senate, which instead directed the Federal Reserve Bank to examine credit card use by small businesses.  So if you use your personal card to make business purchases and are reimbursed by the company, you will benefit from the new protections. Additionally, business cards based on your personal credit, such as those used for businesses organized as sole proprietorships, should be protected as well.  However, I would seek legal guidance on these matters as commingling personal and business credit to avail yourself of the benefits of consumer protections could leave your business exposed in other ways.  I suspect that this is what many small businesses will wind up doing anyway in this tough environment.  According to a recent survey conducted by the National Small Business Association, 60% of small businesses used a credit card as a financing tool over the past twelve months. And over one million small businesses just learned that as of May 30, 2009, Advanta Corp. has stopped their credit. Even worse, the credit loss may hurt the FICO scores of the affected small businesses. Advanta announced on its website that its small business customers “should be aware that ‘utilization percentage,’ which is a way of describing how much of your available credit you use, may be affected because your available credit will decrease as a result of the closure, and this may affect your credit score.”  We have to commend Senators Landrieu and Snowe for trying and express our disappointment to their colleagues who did not support this amendment.

The Single Best Policy Option for the U.S. Treasury in Support of Small Businesses

Wednesday, June 3rd, 2009
Better Than Green Shoots

Better Than Green Shoots

I have written several blog entries on the topic of government policy to unblock the flow of credit to the small business sector. I was motivated to do so by the recent hearing of the U.S. Senate Banking Committee at which small business credit was the topic that absorbed most of the focus of Treasury Secretary Geithner and the Committee members. Clearly their constituents are making known their displeasure with the fact that while small businesses create more than half of all U.S. employment, Wall Street investment banks, whose payrolls were shrinking even prior to the credit crisis, availed themselves of substantial government bailouts, with virtually nothing going to small businesses. Having critiqued the substance of what was discussed at the hearing, I would now like to put forward my own recommendation for a positive policy option.

The U.S. federal government has substantial purchasing power; it is the world’s largest buyer of goods and services. Contracts with the federal government are typically on net thirty day payment terms. Yet the federal government has been stretching out payments to its small business vendors to 140 – 150 days. I have had dealings with this issue as my small business was a bidder for microfinance contracts of the U.S. Agency for International Development. I know that this experience is not unique to me; I travel around the country speaking to small business groups and hear that this is a universal phenomenon. Last June, for example, I spoke at a small business awards luncheon of the Colorado Springs Small Business Development Center. As the Air Force Academy is located in that area, there are many local small businesses that are contractors or sub-contractors to the federal government. Their owners reported to me the same issue of delayed payments, to 140 – 150 days.

This means that small businesses are unwilling creditors, financing interest-free purchases to the federal government for up to five months at a time. If the federal government were to pay its obligations in a timely manner, that could substantially alleviate, but not eliminate, the strain on working capital that many small businesses are experiencing. This would allow small business contractors, in turn, to pay their obligations in a timely manner and would recycle funds in the economy. But wait, you say. We have a credit crisis. The federal government is printing money to monetize its debt. It cannot afford to pay its obligations in time. But it does – selectively. The banks that received TARP aid (Troubled Asset Relief Program) all received their funds within days. Paying small business promptly, as they are contractually obliged to do, for work performed is the best “assistance” that the federal government can provide our sector.

If the U.S. federal government were to pay its small businesses in accordance with the terms and conditions for payment, which are typically net 30 days, we would be playing catch-up with what other governments are doing to support their small business sectors. In Ireland, for example, Fine Gael leaders have proposed a small business rescue package that requires prompt payments to businesses from the government for procurement contracts.

Pop-Up Storms Change Our Timeframe

Tuesday, June 2nd, 2009

So-called “pop-up storms” are a new phenomenon confounding hurricane forecasting. Typically during the Atlantic storm season, hurricanes would form off of the coast of Africa and travel westward towards the United States, providing ample notice of impending landfall. But meteorologists are noting a new trend, possibly beginning with Hurricane Umberto in 2007, in which storms “pop up” off the coast of the United States and make landfall very rapidly. This means that residents of affected areas have less notice to prepare evacuations. Of course, you should have your small business prepared to evacuate on short notice, as the more statistically significant risks, such as fires, do not come with early warnings as do hurricanes. Unfortunately, however, residents of hurricane-affected areas tend to distort their risk assessment based on this unique exposure. So how should the new trend of pop-up storms motivate small business preparedness? You should tighten your time frames for response to such threats. Begin with your home and office telecommunications strategy.

Here is a tip verbatim from the Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition, 2008). Think in reverse for forwarding critical business calls. The cell phone is the natural backup solution for landlines. The question is how to automatically connect land- and cell-phone based service so that the cell phone service would take over once the landlines have failed. The problem is two-fold: once the landlines have failed, it is not possible for you to forward them to the cell phones. Moreover, in an emergency, such as an earthquake, you want to evacuate quickly and should not put yourself in harm’s way by returning to your office to deal with the phones. The solution is developed by thinking in reverse. Use the cell phone as your general business contact number. Program the phone in such a way that any incoming call is forwarded to your land-based business phone number when the cellular phone is switched off. If your land-based line fails (or you are unable to return to your office to access it), you simply switch on your cellular phone, and voilà. This is what I did on the morning of 9-11, when I evacuated the World Trade Center, but it was not safe to return to my office. I went home to shelter in place and turned on my cell phone to receive all incoming office calls. If you implement this strategy right away, you have a plan for continuous telecommunications and it is one less thing for you to worry about if you have to evacuate on short notice.

Tough Economy Means Tough Choices This Hurricane Season

Monday, June 1st, 2009
Can We Afford It?

Can We Afford It?

Today marks the beginning of the 2009 hurricane season and with it, heightened anxiety among Gulf Coast residents.  We are particularly vulnerable as the U.S. Census Bureau reports that 12% of the population, close to 36 million Americans, live in areas at risks to Atlantic storms. Last year, in response to Hurricanes Gustav and Ike, Louisiana evacuated two million of its residents from the coastal areas, the largest mobilization in its history. They are preparing to do so again this year and increase the number of residents who may be sheltered within the state. In an earlier blog posting, I wrote about how the team at the New Orleans Small Business Development Center told me of their clients who did not have the funds to pay for a fourth evacuation in the 2008 hurricane season should one be called. State officials realize that the 2009 season may be worse, as with the weak economy, many people won’t be able to afford the cost of the evacuation and may choose instead to shelter in place which, as the events of Hurricane Katrina showed, could be a fatal option.