October 24, 2008

I run a 7-year-old small business that does two main activities: strategic consulting and management for a regional association for telecom professionals. The way my business has been impacted paints a picture of the position many SMBs are in: 

• We have been insulated so far, because the ripple effects have not yet made their way through the economy to the majority of consumer or B2B business purchasing decisions. This may or may not happen, depending on whether confidence and liquidity are restored. Small businesses that operate in high-value items (cars, spas, renovations) pay the piper early.
• Given the uncertainty, we have evaluated our cash position and are increasing our holdings, reducing some optional expenditures, and trying to increase the amount of work/revenue that we get right now. A bigger buffer is our goal. We haven’t stopped spending in a panic but are cutting back.
• We were considering moving the business to a larger location but put all that planning on hold until the credit markets regain stability.
• We secured lines of credit years ago, even though we did not need them. I assume that I can thus tap into this credit as needed, without the difficult task of asking for a loan in case our cash is exhausted.
• We have considered, and planned for the possibility of a sustained economic downturn. Although we don’t think it likely, radical cost cutting would be the next step, followed by layoffs if absolutely necessary.
• We are not concerned about holding cash in our bank, due to remaining confidence in the FDIC.
• Our personal portfolios are hurt but not devastated. Bank valuations have dropped like bricks, but a diversified portfolio is looking thin but surviving.

Essentially, we are in good standing, have a disaster plan, and should be OK if the problems remain at the scale they are right now. If the economy grinds to a halt, we’d be doomed just like everyone else.

So now we have to consider what’s been called a bailout for the big banks.  Certain businesses are “too big to fail.” I don’t think airlines or car makers fit into this group. Let the market handle their failure. Take out the national pride about domestic ownership of the local auto industry, and the decision is much easier. But when it comes to our investment banks, liquidity in the financial sector, systemwide confidence in the currency, the economy, the instruments of finance — well, then I reluctantly agree that we can’t let the banking system fail.

We need to buy up their distressed assets at a fire-sale price, insert liquidity into the market, and restore confidence with a grandiose action. We should also (like B of A) buy these mortgage-backed securities at a price that is likely to make a profit. The stars are aligned. For once, Congress can buy something low, sell high, and fix a problem at the same time! Why are so many people against a “bailout” when other banks are doing similar things for a profit motive? Must be because we are rightly jaded at our government’s ability to actually negotiate a good deal for us. But why?

Government in this country often ignores small business, and it’s a scandal. It’s like Hollywood or any other winner-take-all sector: The most visible and most popular get all the attention. The stars get all the press coverage. Enron, HP, big oil, Google, etc. Their ability to spend money getting close to politicians makes them front of mind. Politicians get the mistaken belief that what these companies say, do or want is “good for business.” But the majority of the American GDP, the majority of American jobs and the majority of American innovation come from small businesses. And “what’s good” for the top 5% of businesses is not often what’s good for the bulk of us that operate with courage, dedication, entrepreneurship, and fresh ideas — but under the radar.

[Editor's note: To read what the National Federation of Independent Businesses, an organization that represents small business in Washington DC, has to say about the "bailout" plan, click here.]