Wednesday, April 30, 2008
Credit and sustainability
This post won't be fun but it needs saying.
Many people are turning to self employment as corporations seize up and meta markets constrict.
In the past, many new entrepreneurs turned to their bankers to locate funding to start their enterprises. Often, the choice between acceptance or denial was the backup provided by the Small Business Administration (SBA). You may not have been able to convince your bankers of the worthiness of your idea, but if you could get that loan backed by the SBA, the loan went through.
There are a number of ways we could connect with the SBA, but over the years, it's influence has become greatly intertwined with the banking system and importantly, state Departments of Commerce. Entire programs to develop small businesses have grown up around this relationship.
In talking with friends in this world, I've learned that the SBA loan programs, in many cases, suffered from the same lax standards we are reading about in the general credit market. Often, diligence was not fully applied and as a result, the SBA default rate is up and standards are about to change.
Tomorrow, May 1, a new set of loan standards, called their standard operating procedures (SOP) will go into effect for all new SBA loans. These involve tighter standards and more oversight. In light of the wider credit crisis this is not really a surprise, but I am surprised by the lack of press this is receiving.
The new Small Business Administration SOPs are likely going to raise havoc in all existing programs you may know about at the state and local levels. Havoc in the sense that previously available programs will themselves begin constricting and possibly disappearing as regional governments fight their own fiscal battles.
Is this the end of small business? Of course not. Is this yet another sign that building a sustainable small business structure is your best bet to succeeding in turbulent times? Yes.
Going forward, startups and small businesses will need to control their enterprises carefully. They will need to manage for cash flow and profit, not debt repayment and outside funding.
This is indeed the renaissance age of entrepreneurship. There are problems galore that need fixing. Just don't make your new business one of the problems.