Factoring Blog - For Small Businesses

The Purchasing Managers’ Index is a good indicator how the economy is going and the long-term trend, month by month  on a regular and timely basis. Here is a quote from an old article (Why Greenspan Focuses on Business Buyers) from BusinessWeek that emphasizes the importance of following this indicator:

“The report that Greenspan loves to watch is called the Purchasing Managers’ Index (PMI). Based on data from 350 to 400 NAPM members working in manufacturing, it ”has a fairly robust track record of accurately predicting trends in the economy,” says economist Joseph Liro of consultants Stone & McCarthy Research Associates in Princeton, N.J. For instance, the PMI turned downward a year before the 1990-91 recession. It also signaled the factory slowdown in 1997 and 1998, when the Asian financial crisis cut into demand for U.S. exports.” (BusinessWeek, 06/05/00.)

If you learn how to analyze the figures you could be better prepared when the industry starts contracting. When buyers purchase less due to high inventory stock levels, it could be a signal of forthcoming problems with paying invoices by the supplier due to decreased sales.  The manufacturing sector is struggling with higher raw materials prices and a volatile commodity market. Please take note and read carefully the excerpt from ThomasNet Industrial Newsroom:

“While down, manufacturing has so far performed better during this slowdown than in previous contractions as demand from overseas continues to grow. In February 2001, a month before the last recession, the Institute’s index was 42.1.

Yet the price problem creates the greatest challenge. The ISM Prices Index registered 84.5 percent in April, showing manufacturers are paying higher prices on average when compared with March. This is the highest reading for the index since it registered 86 percent in May 2004, says the ISM.

Though last week, prices for commodities dropped slightly, the outlook calls for more increases. “Chile’s worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world’s biggest mines,” according to a Bloomberg News report.

Therefore, goods producers are caught between suppliers requiring more money and consumers who have less confidence in many businesses who continue to shed jobs as a catalyst for cost cutting. Depending on how much cash they have, there’s only a limited time before producers will stop subsidizing consumers who will only buy at the lowest price.

The manufacturing contraction results partially from events that started last year. “(ThomasNet.com, 05/06/08.)

So where are things today with the Purchasing Managers Index?  According to Forbes, the latest news shows another drop in June 2008, which is a contraction for the fifth straight month.

Some of the lucky few have already received a Federal Income Tax stimulus check.  The rest of us are still waiting … and waiting.

If you’re still waiting to receive your stimulus check and thinking about how to use it, why not see what other people are doing?

Over at the Bankaholic site, they’re running a poll to see how people are using their stimulus checks.  Choices range from putting it into a savings account, to donating to charity, to donating to your local lottery outlet, to paying for college tuition, and more.

Amazingly, 3% said they are going to spend it on lottery tickets.

Go take the survey!

It is important to have an eye on the risk of inflation, if you want to be safe when it comes to getting paid. If the prices for raw materials and basic stuff are going up and up, the producers have to adjust their prices accordingly.

Some providers are protecting their risks against rising commodity prices, by adding commodity surcharges.  Or they are reserving the right to increase prices with short notice in the event their costs have increased.

The Economist states that the “double-digit price rises are about to afflict two-thirds of the world’s population.” Here is an excerpt from the article, Inflation’s back.

Taken as a whole (and using official figures), the average world inflation rate has risen to 5.5%, its highest since 1999. The main cause has been the surge in the prices of food and oil, which briefly soared above $135 a barrel this week. But Mr Trichet’s concern is that higher headline rates could push up inflation expectations, leading to bigger pay demands, and so trigger a wage-price spiral, as in the 1970s. Central bankers’ mistake then was to hold monetary policy too loose, so that higher oil prices quickly fed into other prices. So it is worrying that global monetary policy is now at its loosest since the 1970s: the average world real interest rate is negative. (Economist, May 22, 2008.)

Does this apply to you?  Have you added commodity surcharges to your invoices? If that is the case, how are reactions from your customers?

It is interesting to see how alternative ways of getting financing are popping up on the market.

An article on the SFGate site explains that there are fewer SBA loans backed by the government available at the moment as well as pressure on regular banks — all giving fuel and opportunity for alternative financing.

It is a positive sign (even in the midst of a slow economy) that small businesses still find a way — they find ways of receiving money to finance the startup and expansion of their businesses. Here is an excerpt from the article:

These days, small business owners like Metzger have to be creative about getting the money to start and expand their companies. Many are turning to non-traditional sources, such as credit unions. Increasing numbers are going to online lending Web sites that cut out the traditional bank middleman and to factoring companies, which buy companies’ future revenues.

Factoring is enjoying a cyclical upturn that it often sees during economic downturns, while credit unions and online social lenders hope the uptick in their small-business lending volume survives even after banks’ lending returns to normal. …

The article makes some sweeping assumptions about factoring and assumes that all factors operate the same. However, even so, the basic point of the article is a good one: small business owners like you have more sources for getting funding for your business than the traditional SBA loan or bank loan.

Just because the Small Business Administration is giving fewer loans under their main loan program doesn’t mean funding is drying up across the board. (According to the online lending auction site Prosper.com, Small Business Administration gave out 17.6% fewer loans compared with the same period last year.)

If it’s a recession, it could be a short one. And we may avert a recession altogether.

Those are not my predictions. They are comments published in light of the most recent economic data from April, that is just now being reported.

For instance, this report published in the New York Times, quotes the chief economist of Eaton Vance:

United States retail sales weakened modestly in April, but outside the hard-pressed auto sector they were more resilient than many economists had forecast, a government report showed on Tuesday.

The report echoed recent data showing underlying economic durability, including fewer job losses in April than feared and a surprisingly strong pace of first-quarter productivity.

The Commerce Department said overall retail sales declined 0.2 percent, but if cars were excluded, sales rose 0.5 percent. Economists expected total sales to slip 0.1 percent, but had forecast a gain of just 0.2 percent excluding autos.

“I think it’s a report that tells you the economy is very weak, but if we are in a recession it’s going to be a real short one,” said Robert B. MacIntosh, chief economist at Eaton Vance in Boston.

And then there’s this report, from BusinessWeek, suggesting that recession may be avoided altogether:

Recession is still very much a matter of opinion, not a matter of fact. Some economists are even taking at least a half-step back from their previous beliefs that a downturn is all but inevitable. So far, most of the economic data outside of homebuilding and house prices have not met the recession forecasters’ downbeat expectations. Businesses are reining in their capital spending, but not dramatically. Employment losses have not matched the size of those in past recessions. And even consumer spending through April, at least outside of flagging auto sales, is holding up far better than expected.

So, are they right? I don’t know. But I do know that things don’t seem to feel as bad. I’m not sure how to describe it, other than the fact that what’s happening in the economy right now feels slow, but not dismal.

The Federal income tax rebate checks have started going out. According to President Bush:

“These rebates will deliver up to $600 per person, $1,200 per couple, and $300 per child,” Bush said in his weekly radio address.

About 7.7 million Americans received their rebate checks last week. More are on the way.

Here’s the schedule:

May 2-15: Taxpayers who receive their tax refunds – or make payments – through direct deposit will receive stimulus payments in their bank accounts.

May 16-July 11: The rest of the 130 million stimulus payments will be sent through the mail as checks. Check your card: Stimulus checks will be sent out in the order of the last two digits of the Social Security number used on a tax return. For joint filers, the first Social Security number listed will determine the timing of the couple’s rebate check.

So the question becomes: will the rebate checks help?

The economic news in the United States lately can best be described as confused. Some financial pundits and economists swear we are in a recession. Others say no way, Jose.

Unemployment actually fell in April a little bit. But inflation is up, with food and gas prices high.

My best estimate: the rebate checks won’t do much for individual situations. Of course, I won’t be turning mine down, however.

In some ways, we’ve had it pretty good in the economy for a long while in the U.S. Costs of some things, such as technology (computers especially) and telecommunications, actually came down in recent years. The cost of some consumer goods, including food, stayed steady for a long time.

But in 2008 so much has changed. As the economy has slowed down, we’ve been hit with rising food costs. Restaurant and hospitality businesses are being hit — especially the lower end outlets such as pizza parlors, where the profit margins were not huge to begin with. A 500% increase in the cost of flour really bites.

One recent article says the causes of the problems are many:

“Experts attribute food inflation, the highest in two decades, to a perfect storm of ugly circumstances: A sluggish economy. Record crude oil and gas prices. A robust demand for biofuels and a subsequent decline in corn inventories. Drought-reduced harvests. Commodities speculators. And the rising demand for food supplies in developing countries such as China and India.”

When food goes up, it hits us all in the pocketbook. Even if you are not in a restaurant business, in your personal life you and your employees can’t help but be affected.  We all have to eat.

So, is any relief in sight?  This CNN article suggests the worst may be behind us.  It suggests that the Federal Reserve may soon stop lowering rates (which actually tends to cause inflation due to a weak dollar — long story).  In other words, if the Fed stops lowering interest rates, it may stop inflation.  Lower inflation could be one of the best developments for consumers AND small businesses.

A lot of Americans are feeling the pinch at the gas pumps, in the grocery stores and in other retail outlets.

Fact is, we’ve been spoiled with cheap goods. But it looks the ride we’ve had with goods produced inexpensively in China is beginning to come to an end. The Voice of America reports that prices are going up in China, too:

“The world’s factory is giving notice: it can no longer provide the planet with cheap goods. Chinese manufacturers say higher production costs, tighter credit and a strengthening yuan are squeezing margins. Some industry experts and economists predict thousands of small factories could shut down this year and leave thousands of workers jobless - creating new problems for China.”

A recent article in Forbes by Michael Marks points out how we can look forward to ricing costs — and we should be careful what we wish for. For years now politicians have been decrying the ‘articifically low” pricing in China that led to the loss of manufacturing jobs.

“Many of these articles and speeches were aimed at getting our politicians and policymakers to force China and other developing countries to bring their costs into line with those in the U.S. so that we can create jobs at home. While the employment initiative is an admirable undertaking, the debate completely ignores the impact on the pricing of goods in American stores, and the impact that will have on inflation rates and standard of living in this country. (The debate also ignores the substantially positive impact on the economies of developing countries, but that’s for another day.)

Now we are about to find out why we should be careful what we wish for. Brace yourselves for a myriad of articles and speeches complaining about rising costs of products like steel, consumer electronics, and kitchenware, due to rising inflation and appreciating currencies in the developing countries.”

So look out for higher prices, in your personal life and also for raw materials and business supplies.

In the latest newsletter from Forbes.com, one article points out that the debt situation is shifting from home equity to Those Credit Cards. Here are some excerpts from Brian Shniderman’s article that should interest small business owners:

Small-business owners who frequently leverage personal assets to secure credit may find it increasingly difficult to tap into those lines as lenders freeze, reduce or altogether revoke home equity and other personal lines of credit. Before tapping into savings and then into their investments, we can expect this group to increasingly use existing personal and small business credit cards to address short-term cash flow needs. …

Small businesses, truly a major engine in our economy, are at risk in a scenario that features stagflation and a prolonged recovery. Sadly, many could shrink or go under entirely if it plays out that money remains tight. In some cases, even the business owners’ personal assets may have been tapped out. That could certainly cost our country jobs and innovation.

Have you as a small business owner, used your credit card in tough economic times?

In the same newsletter, David Malpass, chief economist for Bear Stearns, paints a more positive picture on a macro level, in his article, Credit Crisis Hits Home.

Funded by millions of U.S. taxpayers, the government will mail checks to millions of households hoping they’ll spend their rebates to lift the economy. Growth is ultimately driven by hard work, innovation and profit. But the first estimate of GDP comes from how much is spent; by that gauge Washington’s gesture is unusually timely.

Will you spend your tax rebate check on personal consumption or will you save it for the future? Or invest it in your business?

With all the scandals in the field of economics, it is positive to see a bank with sound ideas. Here is an excerpt from a statement by John A. Allison, Chairman and Chief Executive Officer of BB&T Corporation:

BB&T is a mission-driven organization with a clearly defined set of values. We encourage our employees to have a strong sense of purpose, a high level of self-esteem and the capacity to think clearly and logically.

We believe that competitive advantage is largely in the minds of our employees as represented by their capacity to turn rational ideas into action towards the accomplishment of our mission. (Our Philosophy, BBT.com)

Recently, the bank donated $2 million to the department of philosophy at the university of Texas. “The gift will be used to support research on Ayn Rand’s philosophy of “objectivism” for 10 years.”

It is an ongoing debate in academia regarding educational donations and if you the donor should include “attached strings” to the donations with stipulations on how you should use the money. Here is a quote from Craig Biddle’s article, Charlotte Observer Editorial Opposes Academic Freedom Regarding BB&T Grants.

Donating money without strings to universities is not noble; it is irrational and irresponsible. Nor does the attachment of strings to a donation in any way violate the autonomy of the recipient (be it a professor or department or university); he (or it) remains (and should remain) free to accept or reject the offer.

In sum, this is how educational donations should work: Professors and universities seeking funding for their courses should say—and be free to say—in effect, “Here is what we want to teach, and we will accept donations to teach it.” Likewise, businessmen and corporations who want to support higher education should say—and be free to say—in effect, “Here is what we would like to see taught, and we’re willing to donate money to those who are willing to teach it.” To argue against this approach is to argue against academic freedom and moral responsibility. (Capitalism Magazine, 03/31/08.)

What do you say?