"...we as entrepreneurs are facing serious threats..."
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The Tipping Point

It seems as if the general business news is only getting worse these days.  Between energy prices, home sales and prices plummeting, and personal credit being stretched to the limits, we as entrepreneurs are facing serious threats.  Now, as you know from reading my blogs I am not nearly so gloomy, but only a fool would ignore what is currently happening. 

The current cycle has led to more and more borrowing by consumers, so much so that credit card support groups are beginning to pop up around the country like AA.  This led me to think about how so many of the businesses that I see that are in trouble need capital to survive but with things as they are, the costs are reaching the tipping point.  This means there needs to be a sober assessment whether the cost of money is so high that it is not worth the risk to take it.

I am not talking about the Fed funds rate.  This is low, but it is only a benchmark for the highest quality borrowers.  For most small businesses, they are not considered the bank’s best quality customer and so interest rates charged are much higher.  And when things turn dicey the bank usually becomes no option at all.

Up until recently, credit cards and home equity helped fill the gap for at least short term needs, but with home values collapsing there is little or no equity left to borrow against and credit card rates are usurious.

This all points to the need to sit down and make a sober judgment along with your advisors, in particular your accountant, as to the feasibility of taking on more debt.  It may be the case that you are far better off either drastically reducing costs, and I do mean drastically, or closing for the time being and making a fresh start later when things improve.  I see this a lot particularly lately in the building trades.

Sometimes the best decision is to punt.  How many times have you seen the “Hail Mary” play actually work in your lifetime?  Personally, I don’t like the odds.

Posted by Herb Kay on Wednesday, June 11, 2008

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