Any Rate Will Do
Few small-business owners are complaining now that Alan Greenspan is slashing interest rates. The odd thing is that so few seemed to be complaining last year, when the Federal Reserve chief was raising rates to levels not seen in more than five years. What gives? Has Greenspan suddenly become irrelevant to the nation's entrepreneurs?
Not exactly. Instead it seems that borrowed money simply isn't as popular among small companies as it once was. Demand was already weak when rates began their ascent from a low of 8.9% in April, 1999, to 10.5% last December. Many bankers tried to ease the pain by keeping their profit margins slim and terms relatively generous. But demand stayed weak, thanks largely to strong cash flow brought on by a robust economy. Indeed, the Fed said in January that the number of banks reporting higher demand had plunged to a 10-year low.
It's no surprise to Roger Harris, president of Padgett Business Services USA, an accounting chain based in Athens, Ga. Entrepreneurs don't care about a change of one or two percentage points in rates, Harris says. What matters is whether they can get credit at all, and whether the economy will be strong enough to make the investment pay off.
That's far from a sure thing these days. David Potterton, who tracks small-business finance at Meridien Research in Newton, Mass., says the ill effects of the economic slump are just beginning to be felt and bankers are toughening their stance. When cash flow dries up in the second quarter, small companies will be forced to turn to bankers--and run smack into the new, tighter standards. His advice to would-be borrowers: "Get it arranged sooner rather than later," before the crunch comes, and start making cuts now to reduce the need for credit. Wait too long, and you may find that even Alan Greenspan can't help you after the bank window has shut.
By Rick Green