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Talking to entrepreneurs (half a dozen of them) on a daily basis, there is obviously lots of discussion on "the current situation". No, I'm not referring to the steroids and the crisis in the Baseball League.
Most of my interlocutors would are concerned about the Sub Prime Mortgage crisis, lowering of interest rates and finally the uncertainty in Wall Street. A typical question is 'How does this impact me as a medium (and small) size company?'
Let's start by clarifying each of these issues...
Sub Prime Mortgage Crisis: Big, big mess. It is MUCH larger (in dollar terms) than the S&L Crisis (remember?)... but because our economy is many times bigger, it is not expected to create as much havoc (key word being "expected"). Also, because the economy is much more globalized, it has spread to the four corners of the world. The cause of the mess is the securitization (creating shares and debt) out of billion dollar packages of mortgages of questionable credit. We cab blame
- the credit rating companies that were VERY lenient in their clasification of debt;
- the banks and mortgage brokers that sold it;
- Wall Street (and subsequently other world markets) that invested in them without further due dilligence.
What are the challenges? We have not seen the end of the write offs. Companies that bought and sold these assets (Lehman Brothers, etc.) are sighing in relief; the ones that held to them (because of the high yield, like Citi and Bank of America) have not finished writing-off billions of dollars.
Lowering of Interest Rate: Due to the Sub Prime Mortgage Crisis, the price of oil (hovering around $95 as I write) and the slow down in the Real Estate market, the economy clearly hit a speed bump in the III Quarter. The Fed decided to cut interest rates by a quarter point to try to put back some energy into the system. Ideally this should trickle down into the whole economy by the first quarter... but there is much debate about whether it was enough of a cut and whether it will relieve inflation fears.
Wall Street: The stock market works based on only one principle: expectation and degree of certainty of future profits. It is easy to see how the factors mentioned above are creating a drag on an otherwise very strong economy.
How does this impact you and your ability to secure credit?
Clearly, banks and other insitutional lenders are VERY skeptical and careful, so it might be difficult to get them to commit (or renew a line of credit).
Credit Rating companies have a tremendous fear of being dragged into lawsuits (that will surely come, as they put their stamp of approval on very questionable collateral). Don't expect them to be gracious with their rating any time soon.
Right up to July, equity loans on personal homes and stocks were an abundant source of easy cash for the smaller entrepreneur. Borrower with a good appraisal and reasonable credit, got 90% loan to value with a low teaser rate of 3% for the first 5 years. How wrong can you go with a rising real estate market... right? Unfortunately, those sources of cash for growth have dried up as well.
What makes the situation even more complicated is that unless you happen to be in a real estate related business, you could be experiencing very sustained growth opportunities, as the economy - overall - remains surprisingly strong. Also, the mood of the consumer appears unabated (just look at the very robust holiday shopping numbers... we all mistakenly thought that the price of gasoline was going to put a damper on it). This undoubtedly creates cash strains that require looking at different financing alternatives.
The Fed - as discussed above - is trying to ease credit, but it might be too little too late to avoid a substantial slow down. Let's see how the situation plays out in the next few weeks.
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