Business Cycles and Minority Business Development

“Business Cycles and Minority Business Strategy”

 

The National Bureau of Economic Research (www.nber.org) is the arbiter of U.S. business cycles: when they begin and when they end.  The recent volatility in global markets has led many, including this economist, to think about where we are in the current business cycle.  Because there is a lag in collecting and analyzing macroeconomic data on economic performance, the reality is, we do not know where we are right now, and we won’t know officially where we are now until about 3 months from now.  But right now, without question, investors and businesses of all sizes are beginning to wonder is the party over.  Although some might argue it was not much of a party to begin with, particularly if you are a minority business owner who even after six years of NBER official growth since the bottom of the last recession (June 2009), has only recently begun to fill the warm glow of increased customer orders.

The thing about economic recessions, is they always come at the wrong time. But they do come.

 

Since 1969, there have been 7 economic business cycles.  The recessions associated with these seven cycles were:

 

  1. December 1969- November 1970
  2. November 1973- March 1975
  3. January 1980 – July 1980
  4. July 1981- November 1982
  5. July 1990 – March 1991
  6. March 2000 – November 2001
  7. December 2007 – June 2009.

 

The most recent recession, AKA “The Great Recession” was the longest of these seven.  It is important to note that each of these recessions was different in length, and cause and effect.  But there were similarities and lessons from each of these experiences that minority entrepreneurs should learn from. 

 

One of the consequences of the last recession that we see today is the lengthening of payment terms.  Prior to the 2007-2009 recession, companies typically paid invoices in 30 days.  Now suppliers are reporting payment terms of 90 to 120 days.  What happened?  The Great Recession wrecked havoc in credit markets.  With major financial institutions like Bears Stern, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae and Freddie Mac and a total of 465 other banks and savings and loan institutions failing, credit markets seized up, making it all but impossible for many firms to borrow as they had prior to the Great Recession.  So as a result, corporations “borrowed” from their suppliers, including their minority suppliers by extending payment terms.  Unfortunately for suppliers, despite the return to more “normal” times, payment terms have not declined.  This is an example of the lasting effects of recessions.

 

MBEs need to also be aware that economic recessions do not have a proportionate impact on all suppliers.  In both absolute and relative terms, MBEs are likely to experience more damage than non-diverse suppliers for two reasons.  The first is that MBEs tend to be concentrated in non-core commodities and services.  During recessions, companies tend to circle-the-wagons and focus on what is core to their own survival.  This translates into non-core suppliers being the early victims of an economic downturn.  Secondly, MBE suppliers are hurt more during recessions because, hard times lead to increased competition. MBEs during downturns find themselves competing not only with other MBEs, but with other sometimes very large companies that do not want to experience reduced capacity utilization, and are willing to sacrifice profits for capacity utilization.  The increased competition from non-diverse suppliers results in lost business and reduced profits.

 

I am not one to cry the “sky is falling” or about to fall, but MBEs need to get ready for the next recession today.  The current expansion is 73 months old.  The average post-World War 2 expansion is 58 months.  That means by historical standards, this expansion is longer than most.  The chances are that the U.S. economy will be in recession within the next two to three years if not sooner.  So what should MBEs be doing today?

 

There are four things MBEs should start doing today:

 

  1. Secure a Line of Credit Now;
  2. Clean up your Receivables;
  3. Start identifying your competitors that might go out of business in the next recession; and
  4. Start negotiating with your suppliers.

 

Securing a Line of Credit Now

 

The thing about credit is – when you need it, you can’t get it.  Therefore you have to get it when you don’t need it.  MBEs should start talking to their banks today to line up lines of credit that will be handy when the economy slows and banks and other lenders start changing their lending guidelines.  What often kills small businesses during a recession is the lack of credit not the lack of profits. 

 

Clean Up Your Receivables

 

If you have money owed to you, collect it now.  When the economy goes into a recession, the companies that owe you money will have an even more difficult time paying you.  So, even if you have to provide some of your customers some incentives to pay you, it might make sense to do that. Of course it would be better if you did not have to discount your invoices, but it is better to have in your bank account than theirs.

 

Identify Competitors Who Might Go Out of Business

 

One of the acquisitions I did while at the GNEMSDC was done during the last recession.  I knew that a particular organization was going to have problems when the recession hit, so I began to monitor their performance.  You should be doing the same thing with your competitors.  Your competitors all have customers, some of whom you would probably like to have for yourself.  Now is the time to begin analyzing your market to see what companies would be good for you to acquire during the next recession.  Of course, in order to be the acquirer and the acquired, you need to have cash and resources on hand. This is all the more reason to talk to your bank today about your strategy.  Banks have been around a long time, they like entrepreneurs who come to them with plans to acquire commercial assets for dimes on the dollar. 

 

Renegotiate with Your Suppliers

 

At the right time, you should renegotiate your terms and conditions with your own suppliers. Many of them, like you would be willing to trade off profitability for financial stability.  Strong buyers are in the best position to make deals with their suppliers. But to be strong, again you have to have cash or access to cash.  The deals you can make during a recession can last into the next expansion, which will come as sure as day follows night.