Wednesday, May 6, 2009

Federal Government Bank “Stress Test”; How will this affect small business?

We continue to hear about all the news surrounding the Federal Government stress test results that are due out tomorrow afternoon with a tremendous amount of speculation. In reading the preliminary news articles surrounding the release of information, I was surprised to find one of the banks a client deals with, 5th Third Bank, is likely one of the companies that will require additional capitalization. In reading that article, I forwarded a copy to the owners of the company to let them know that 5th Third was one of the banks. This news has created concerns and raised several questions in my mind. My concerns have created several unanswered questions; how will the bank raise capital? Could they re-call loans to raise capital? Will the banking relationship remain the same with small business or will this be the final straw that will put several small businesses out of business?

That has raised some concerns and questions with my client as they go through the process of renewing their line of credit for 2009 and 2010. I believe we have only begun to feel the effects of the "stress test" and I think we will be seeing additional efforts to pass the stress test down the line and will extend to the individual small businesses. Although I am not sure how the banks will raise additional capital I am confident that passing the same requirements on to business will be even more disastrous to our economy and we have yet to see the real impact of this recession on our economy.

Small business is the backbone of our economy, yet there are no government bailouts for small business. What will happen if a business fails a "stress test" and the bank says they need to raise more capital? Most businesses are forced to choose a banking relationship with one bank. So, if the company fails the stress test, where will they go to get more capital? Other banks are not going to be willing to hand out money to a business who has failed the stress test. Most businesses require loans to operate their business whether it is tied to an asset such as a vehicle or a line of credit tied to accounts receivable accounts. The reality in this day in age is the fact that trade credit forces companies to become the banker.

My client is financially strong, in business for more than 30 years, pays their bills in 30-45 days, but due to their client base have accounts receivable in excess of $1,000,000. This is a reality of business today. One customer, the most profitable, takes up to 120 days to pay. Some may suggest getting rid of that customer. But we are talking about Construction. We are talking about Construction activity in the state of Michigan. Not a lot to choose from. My client has even grown considerably over the past two years; but that growth has pushed the company to rely more on a line of credit than they ever have in the past. They are confident that payment will come through, but without a line of credit or a recall of a line of credit could put them out of business almost immediately.

So imagine how this "stress test" affects business. This company is growing in Michigan, top of the unemployment rolls, home of the automobile (you know, those guys filing for bankruptcy), employ about 75 people year round and have been in business for over 30 years. The business has experienced these cycles before, some years better than others, but the perfect credit storm is brewing. Even if a company is long standing, successful, doing well and providing jobs, the government stress test will surely have a ripple effect down to the backbone of our economy, small business. Those companies who manage their finances loosely and don't understand their business finances will surely feel the impact. The reality is the fact that banks will not be loaning money to those entities, and in effect put them out of business. We are talking about good, well established businesses. At a time when business needs credit the most, anxiety over what the impact of the stress test results is weighing heavily on my mind. How about you? What impact do you see? Where will we be without small business? BIG TROUBLE!!!

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