It’s understandable that most business owners have been ignoring the financial news out of Europe these days
- It’s far away.
- There’s nothing you can do about it.
Unfortunately that attitude is like living in New Orleans and ignoring the level 4 hurricane swimming around the Caribbean. True, you can’t do anything to stop it but you damn well better be prepared. I am here to tell you, Mr. and Ms. Small Business Owner, the thing you need to do RIGHT NOW in order to be ready.
If you think I’m being alarmist consider this: I talked to a lot of money managers while putting this column together. The first question I asked all of them: “I spend every day waiting for Europe to blow up. Do you?” They all said the same thing: Yes.
To understand the situation we’re facing, pretend it’s 2008 in the run up to the crash of Lehman Bros. Now, just as then, there’s some really, really risky securities underpinning the financial system. In this case they’re bonds issued by nations that either are bankrupt or are close enough as to not make any difference. Also, just like 2008, a lot of people have convinced themselves (and are trying to convince others) that there is no way these securities can go bust. Then it was because housing prices only ever went up, now it’s because nations don’t default.
Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner have repeatedly assured the public that U.S. banks have “minimal exposure” to Europe’s problems. (That alone should worry you.) They say this because U.S. banks don’t directly hold much European debt. That is true. What they aren’t saying, because they don’t know, is how much indirect risk the nation’s banks are holding. “There’s all kinds of exposure through collateral debt obligations and derivatives,” says Jeff Sica, president of SICA Wealth Management.
Credit default swaps and collateral debt obligations are insurance policies financial institutions sell to each other. They let banks say they technically aren’t responsible for debt they are still responsible for. They are what caused 2008 to get so ugly so fast and there is a very high chance they will do so again in the near future. When a nation defaults, its bonds become worthless. When that happens, banks start cashing in their insurance policies. Other banks quickly look for cash to pay off those policies and suddenly everyone is having a hard time finding cash.
This brings us to that one critical thing you need to do now: Make sure you have enough money to get through.
“Think of this as, ‘How much insurance do you want to buy?” says Ed Dempsey, founder and chief investment officer at Pension Partners, a portfolio management firm. One of the things that killed a lot of small businesses in 2008 was they suddenly didn’t have access to the revolving credit lines they needed for operations. Don’t let that happen to you.
First, make sure you have enough cash in your operating accounts. Don’t rely on just your credit line. Seriously consider borrowing money if you need to have cash. Dempsey suggests have a minimum of two weeks operating funds where you can get at it quickly. I'd suggest a bank or credit union cash account instead of a money market fund. Money funds all claim that they've reduced exposure to Europe, but who knows, really? Banks and credit unions not only pay more interest, they're backed by a federal guarantee. Money funds aren't.
Next, If you only have a single credit line, get a second one now. Once a crisis hits, it will be too late. Dempsey says make sure one of the credit lines is at a small, local bank or credit union that’s in good shape. To find out if it’s in good shape check its Texas ratio -- a measure of a bank's credit troubles. The higher the number, the more likely it is to fail. There are many online lists of the most recent ratios. You want a number as far below 100 as you can find.
Smaller, alternative lenders are now the mainstay of small business lending. According to The Biz2Credit Small Business Lending Index, credit unions approved 57 percent of small business funding requests last month, a small increase from October. Approvals by small banks increased to 47 percent in November, their highest rate this year and an increase from 46.3% in October. While large banks are also approving more requests, they hit the 10 percent mark in November, the first time since April that it has been that high. Approvals by large banks also rose, reaching 10 percent for the first time since April.
And let’s all hope I am being an alarmist and you can all laugh at me for writing this.