Signs of life

Given the evidence from the US and Europe, showing growing levels of unemployment and the strong advice from major lending institutions that they are still facing more credit crises, smart companies are still going to have to carefully manage their terms of trade and cashflow. As in the United States, SMEs will rely on family finances, friends and personal associates to cover their growth in the coming months.

Gary Edstein of DHL Express Service believes that new exporters are much more confident about benefiting from the revival of contracts for overseas trade than older exporters (64% versus 34% of a survey he has conducted). Those with clear growth plans and firm orders are able to access funds from lenders who are checking credit more carefully at this time. “New exporters were more confident about their prospects than older firms”.

In mid-July the weekly Roy Morgan Consumer Confidence Rating is 114.0 (up 0.5pts) and is 22 points higher than a year ago (July 2008, 92.0), based on interviewing conducted on the weekend of July 11/12, 2009. A majority of Australians say ‘now is a good time to buy’ major household items, compared to 23% (down 1% – and the lowest since February 2008) that say ‘now is a bad time to buy’ major household items.

Gary Morgan says: “The weekly Roy Morgan Consumer Confidence Rating (114.0, up 0.5pts – to the highest level since February 2008) is virtually unchanged for a second week in mid-July. After rising strongly in June (up 9.2pts in the month to June 20/21, 2009), the weekly Roy Morgan Consumer Confidence Rating has been comfortably above the long-term average (106.1) for the past month.”

Australia’s retailers are being supported by positive consumer sentiment arising from the flow-on impact of the economic stimulus packages and the return of the equities market to a significant growth trend. The Government nevertheless is still talking of a rocky road ahead.

As more Australians become unemployed and under-employed it is not surprising that 38% (up 6%) of Australians believe their family is ‘worse off financially’ than a year ago. On a positive note, the fact that people are saying that ‘now is a good time to buy’ major household items is welcomed news for retailers that have been forced into heavy discounting to spur sales over the past year.

With these signs that business and consumer confidence are on the up, we can learn from the US experience that suggests that growth oriented firms that are able to get credit approvals are more successful and ready to take advantage of the new credit conditions.

The US Office of Small Business Advocacy has just released Evidence from the Survey of Small Business and Income Finances, offering insight into the ways SMEs get their funds to grow their business. This includes what they borrowed and the way that small businesses use financing, based on data from financial suppliers.

Commercial banks and other depository institutions such as savings banks and thrifts remain the most important suppliers of credit to small firms. For more details see here. https://www.sba.gov/advo/research/rs348.pdf.

A report by George Haynes and James Brown finds that internal funds are critically important to small firm growth; in contrast to the outside capital used by publicly traded firms. While outside capital is often needed, internal capital is critically important for small business growth.

Small growth firms are more likely than non-growth firms to have lines of credit, motor vehicle loans, capital leases, equipment loans, and loans from commercial banks and finance companies. These results highlight the importance of programs that effectively reduce the costs of borrowing and increase net profits in fostering the growth of small businesses, especially very small businesses.

Research by Rebel Cole classifies small businesses into four groups based on their credit needs – non-borrowers, discouraged borrowers, denied borrowers and approved borrowers. Cole provides an analysis of credit availability that accounts for the inherent self-selection involved in the credit application process: who needs credit, who applies for credit conditional upon needing credit and who receives credit conditional upon applying.

Nonborrowers – those who do not need credit – look much like approved borrowers (those who apply for and receive credit), consistent with the “pecking order” theory of capital structure. This suggests that firms opt for funding from sources with the lowest degree of asymmetric information. That is, they rely on a hierarchy of financing sources beginning with internal funds, followed by debt and then equity.

Discouraged and denied borrowers – those who need credit but fail to apply for fear of being turned down, differ significantly from approved borrowers along a number of dimensions.

To be an ‘acceptable borrower’ it is vital to work with your sales and marketing team to identify the growth prospects, develop an effective business plan for the coming recovery and lock down forward contracts at today’s prices. The next six months offer a real opportunity for export market penetration and access to the necessary finance against sound marketing plans.

Dr Colin Benjamin
Entrepreneurship and Strategic Thinking Consultant
Marshall Place Associates, www.marshallplace.com.au

Marshall Place Associates offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship.

Email dr.colinbenjamin@marshallplace.com.au
Contact: CEO Dr Jane Shelton, Phone +61 3 96400099  

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