Wall Street vs. Main Street

The recent turmoil involving Lehman Brothers, Merrill Lynch, and AIG have cost the economy billions of dollars, led to thousands of layoffs, and conjured up comparisons to the Great Depression. But how will the crisis impact entrepreneurs? The answer might surprise you.

To borrow from John Lennon, we read the financial news today… oh, boy.

This week saw Lehman Brothers file for bankruptcy, Merrill Lynch swallowed up by Bank of America, and a federal bailout of AIG. On Monday, as the startling news became reality, the Dow dropped 504 points -- its biggest fall since the aftermath of the 9/11 terrorist attacks. All of this comes on the heels of federal bailouts of Bear Sterns, Fannie Mae, and Freddie Mac, major slumps in the housing and automotive industries, and a national jobless rate at 6.1 percent, the highest in five years.

So does a slumping economy mean it's time for entrepreneurs to panic? To gauge what impact the crisis on Wall Street will have on Main Street, we assembled a panel of business owners, money managers, and finance gurus to offer their take on the real ramifications. The outlook, it seems, may not be as grim as you think. Sure, for the foreseeable future, money is going to be harder to come by, but, as with every business cycle, the strongest companies will survive. And it never hurts to have cash on hand.

Roughly a third of small businesses are backed by home equity loans. What will the effects of the mortgage crisis be?

Victor Cheng, president of Bookmercial Productions, a San Francisco-based branding and marketing company: If they have a home equity loan already, it won't affect them, but it will be hard to refinance. If they have a home equity line of credit, it will probably be reduced, if it hasn't already.

Clint Greenleaf, chairman and CEO of Austin, Texas-based Greenleaf Book Group: Even after Freddie and Fannie, the mortgage rate is still right around 6 percent, which is pretty good. If you already have the money, you shouldn't be in too much trouble.

Christopher Sobecki, managing director of private equity for Invus Group: It's obviously going to be more difficult and small businesses are going to have to look more broadly for financing. Being able to exercise equity in housing seems to have disappeared.

Eric Janszen, owner of iTulip, a finance and economics website, and the former CEO of Bluesocket and AutoCell, and managing director of Osborn Capital: It's going to affect them badly. Banks have already reduced the traditional means of credit and replaced them with revolving credit. Credit cards are more profitable and home equity loans are no longer economical.

Will there be something of a small-business correction?

Cheng: I think there will be a correction, but the bigger problem many entrepreneurs may have is that their personal finances are co-mingled with the business.

Greenleaf: For me, that's a tough question. I hate to say we're counter-cyclical, but our primary revenue is through book sales. When times are tough, people want to educate themselves and a book isn't a big-ticket item. I've seen a few deals fall apart because of financing, but I don't think it's more than normal. We're overextended as a country and people made a lot of dumb loans, so this is the natural progression.

Sobecki: I don't think a lot has changed in the way we go about finding companies to invest in. We look for long-term businesses with good management and provide capital. Whether the stock market is up or down is irrelevant.

Janszen: The economy is contracting, lending standards are tightening and banks want to increase deposits, so things are tough. The economy is evolving, though, and I see it going away from what I call the FIRE economy [finance, insurance, and real estate] back to an entrepreneurial investment economy where owners make products and invest the profits back into the companies. Good old-fashioned capitalism. Unfortunately, I think it will be a couple of tough years rebuilding the real economy.

Will entrepreneurs have a tougher time raising capital?

Cheng: Banks are under enormous profit pressures, but they still have to make money. They will be more conservative, but it has always been slightly harder for business owners to borrow money. On the order of magnitude of the real estate market, in which maybe 40 out of 100 loans from last year would qualify, business lending will only be off by 10 percent.

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