Monday, June 29, 2009
Thursday, June 25, 2009
Six Tips for Names That Stand Out
Six Tips for Names That Stand Out
(click title to view original article online)
By DIANA RANSOM, SMSMALLBIZ.COM
Posted: 2009-06-19 12:01:08
Many casual wine drinkers know that Champagne comes from Chardonnay or Pinot Noir grapes and that Chianti hails from Italy's Tuscan countryside. But even the world's most educated sommeliers may have a tough time pinpointing the origins of Cheap Red Wine, Pancake and The California Wine Party. The vineyards and distributors responsible for these obscure brands are trying to change that by showcasing their attention-grabbing labels on store shelves.
At Click Wine Group, the Seattle-based owner and importer of such wines as Fat bastard, Clean Slate and 2 Up, easily pronounced names and consumer-friendly packaging are prized traits. "We start with the consumer and work backwards," says Peter Click, the company's founder. "This has been an intimidating product category for them... We make our brands very simple and easy to communicate," he says.
Click is among many vintners aiming to keep their brands clear and unpretentious, says Josh McFadden, a partner at Proof Wine Marketing, a wine-branding firm in San Luis Obispo, Calif., that has helped launch 20 new brands of wine in the last year. While it's important to produce quality wines that consumers can trust, coming up with an enticing product name has taken on a much more vital role in today's crowded marketplace, says McFadden. "It's all about standing out right now."
Just as the wine business makes the case for devising clever monikers, any company looking to reel in new customers or clients can benefit from a few brainstorming sessions before settling on a product or company name. Here are six tips for picking names that stand out:
Avoid odd-ball words
Kooky company or product names like Google and Amazon's Kindle can grab attention. However, most businesses that try this strategy end up picking zany, nonsensical names and spending substantial time and money explaining what the company or the product does, says Brenda Bence, founder of Brand Development Associates, a personal and corporate branding consultancy in Chicago. Instead, small businesses, which tend to have fewer resources than bigger firms, should stick to common concepts, she says. "This way, business owners can spend more time working for customers rather than working to explain things," says Bence.
Use business or product descriptors
Names should correspond to what a product or company does, says McFadden. For instance, after consulting with a winery owner who samples assorted vines from outside vineyards to create new wines, McFadden and his partner Elly Hartshorn suggested the wine maker adopt the name Field Recordings Winery. "We wanted to answer the question: Why would someone buy this wine?" says Hartshorn. "Someone would buy this wine because [the wine maker] is the insider. He has hand-selected vines and made connections that few others can mimic," she says.
Veer away from limiting language
Naming a company or a product after what it does will cut down on having to explain more later, but businesses should be wary of pinning themselves into too narrow a niche, says Bence. For instance, a company that caters mainly to other businesses, but not solely to them, is limiting itself by inserting "B2B," which stands for business-to-business, in its name, she says. "This is only a good idea if you're really, really sure that your company is going to focus solely on businesses," she says.
Mind your audience
To select a company or product name that resonates with specific consumers, cater to their values, says Hartshorn. To determine what those values are, home in on the small details of their subcultures, she says. "Making labels that hit [potential customers] subtly -- as though they were an inside joke -- can often capture people’s attention," she says.
Match price points
Your company or product name should also correlate to the price points you're aiming at, says Paige Arnof-Fenn, founder of Mavens & Moguls, a marketing consulting firm in Cambridge, Mass. Higher-priced items often bear more sophisticated names and packaging, while less-costly items tend to be more playful and lighthearted, she says.
Be memorable
"Even at higher price points, however, don't be afraid to be different," says McFadden. Naming products or companies so that no one gets offended is outdated, he says. Arnof-Fenn calls names that follow this practice "boring wall paper." She adds, "In this day and age, customers have to be able to remember it and spell it to break through the clutter."
(click title to view original article online)
By DIANA RANSOM, SMSMALLBIZ.COM
Posted: 2009-06-19 12:01:08
Many casual wine drinkers know that Champagne comes from Chardonnay or Pinot Noir grapes and that Chianti hails from Italy's Tuscan countryside. But even the world's most educated sommeliers may have a tough time pinpointing the origins of Cheap Red Wine, Pancake and The California Wine Party. The vineyards and distributors responsible for these obscure brands are trying to change that by showcasing their attention-grabbing labels on store shelves.
At Click Wine Group, the Seattle-based owner and importer of such wines as Fat bastard, Clean Slate and 2 Up, easily pronounced names and consumer-friendly packaging are prized traits. "We start with the consumer and work backwards," says Peter Click, the company's founder. "This has been an intimidating product category for them... We make our brands very simple and easy to communicate," he says.
Click is among many vintners aiming to keep their brands clear and unpretentious, says Josh McFadden, a partner at Proof Wine Marketing, a wine-branding firm in San Luis Obispo, Calif., that has helped launch 20 new brands of wine in the last year. While it's important to produce quality wines that consumers can trust, coming up with an enticing product name has taken on a much more vital role in today's crowded marketplace, says McFadden. "It's all about standing out right now."
Just as the wine business makes the case for devising clever monikers, any company looking to reel in new customers or clients can benefit from a few brainstorming sessions before settling on a product or company name. Here are six tips for picking names that stand out:
Avoid odd-ball words
Kooky company or product names like Google and Amazon's Kindle can grab attention. However, most businesses that try this strategy end up picking zany, nonsensical names and spending substantial time and money explaining what the company or the product does, says Brenda Bence, founder of Brand Development Associates, a personal and corporate branding consultancy in Chicago. Instead, small businesses, which tend to have fewer resources than bigger firms, should stick to common concepts, she says. "This way, business owners can spend more time working for customers rather than working to explain things," says Bence.
Use business or product descriptors
Names should correspond to what a product or company does, says McFadden. For instance, after consulting with a winery owner who samples assorted vines from outside vineyards to create new wines, McFadden and his partner Elly Hartshorn suggested the wine maker adopt the name Field Recordings Winery. "We wanted to answer the question: Why would someone buy this wine?" says Hartshorn. "Someone would buy this wine because [the wine maker] is the insider. He has hand-selected vines and made connections that few others can mimic," she says.
Veer away from limiting language
Naming a company or a product after what it does will cut down on having to explain more later, but businesses should be wary of pinning themselves into too narrow a niche, says Bence. For instance, a company that caters mainly to other businesses, but not solely to them, is limiting itself by inserting "B2B," which stands for business-to-business, in its name, she says. "This is only a good idea if you're really, really sure that your company is going to focus solely on businesses," she says.
Mind your audience
To select a company or product name that resonates with specific consumers, cater to their values, says Hartshorn. To determine what those values are, home in on the small details of their subcultures, she says. "Making labels that hit [potential customers] subtly -- as though they were an inside joke -- can often capture people’s attention," she says.
Match price points
Your company or product name should also correlate to the price points you're aiming at, says Paige Arnof-Fenn, founder of Mavens & Moguls, a marketing consulting firm in Cambridge, Mass. Higher-priced items often bear more sophisticated names and packaging, while less-costly items tend to be more playful and lighthearted, she says.
Be memorable
"Even at higher price points, however, don't be afraid to be different," says McFadden. Naming products or companies so that no one gets offended is outdated, he says. Arnof-Fenn calls names that follow this practice "boring wall paper." She adds, "In this day and age, customers have to be able to remember it and spell it to break through the clutter."
Wednesday, June 24, 2009
Suggested Reading: Stone's Fall
Stone's Fall
A novel by Iain Pears
An Instance of the Fingerpost, Stone's Fall weaves a story of love and high finance into the fabric of a page-turning thriller. A novel to stand alongside Atonement and The Remains of the Day.
A panoramic novel with a riveting mystery at its heart, Stone's Fall is a quest, a love story, and a tale of murder - richly satisfying and completely engaging on many levels. It centres on the career of a very wealthy financier and the mysterious circumstances of his death, cast against the backdrop of WWI and Europe's first great age of espionage, the evolution of high-stakes international finance and the beginning of the twentieth century's arms race. Stone's Fall is a major return to the thriller form that first launched Iain Pears onto bestseller lists around the world and that earned him acclaim as a mesmerizing storyteller.
Monday, June 22, 2009
Siam Square
Click HERE to check out information on Siam Square.
It's a real gem! Located in Fountain Square (downtown Indy)...may have the best thai food in Indy! Give it a try!
It's a real gem! Located in Fountain Square (downtown Indy)...may have the best thai food in Indy! Give it a try!
Thursday, June 18, 2009
SBA Lenders Pick Up Steam
Small Business Lender Sentiment Survey On Lending and Employment
June 2009
More lenders lending again thanks to secondary market improvements!
The SBA is hiring more lending people than all banks combined.
This months’s survey provides promising news. More banks are lending again and the SBA is reporting significant improvement in the number and dollar volume of loan approvals. Almost all SBA districts are reporting sharp increases in loan activity in April and May. The PLP Approval Office is hiring credit staff as quickly as they can find them. This encouraging sign shows a strong commitment by the SBA to a continued quick turn on PLP approvals.
While more loans are being approved, credit remains as tight as it has been all year. However, the number of small business applications continue to rise. Those interviewed for this survey reported high loan applications. And it appears the customer is more willing than ever to meet the lender’s loan requirements to get approval. This includes additional capital injections and providing more collateral as requested. In addition, there is very little argument over the pricing of the loan.
Many lenders have reported that the biggest issue they are facing is real estate appraisals that continue to come in lower than required. This is particular true in hard hit states like Florida, Nevada and California. And apparently, sellers are more willing than ever to negotiate to make the deal work.
The industry is showing signs of improvement but, it appears that this economic recovery is going to be protracted. With growing delinquencies in commercial real estate loans, credit managers are not likely to loosen up approval parameters in the foreseeable future.
Click HERE to view the rest of the article.
Wednesday, June 17, 2009
Entrepreneur's Journal: Building a business that Buffett would buy
Entrepreneur's Journal: Building a business that Buffett would buy
Posted Jun 14th 2009 12:00PM by Tom Taulli
While in an airport bookstore recently, this title caught me eye: How to Build a Business Warren Buffett Would Buy: The R.C. Willey Story.
How could I resist? I bought a copy and read the whole thing on my flight (OK, the book is only 192 pages).
The author of the book, Jeff Benedict, tracks the entrepreneurial career of Bill Child, who transformed a furniture business -- R.C. Willey -- into a retailing giant (he came on board the company in the mid 1950s when his father-in-law died).
It's certainly an inspirational story. I also think it's instructive in today's times when entrepreneurs need lots of inspiration. Keep in mind that when Child took over R.C. Willey, the company was in shambles. The debt was suffocating, customers weren't paying their bills, and it looked like the only alternative was liquidation.
Well, failure wasn't an option for Child. Rather, he focused on key business fundamentals that would eventually catch the attention of Warren Buffett, who bought the company in 1995 for a cool $175 million.
So, what are some of the lessons? As should be expected, they are old-school approaches (hey, that's made Buffett a billionaire, right?).
Let's take a look:
Debt can be a bad thing: Child spent years finding ways to pay down debt. It meant lowering costs, improving customer service, and thinking hard about making new investments.
Thus, by having a conservative balance sheet, Child was able to deal with recessions and competitive threats. He was also able to capitalize on new opportunities, such as building a large distribution center (which was key to R.C. Willey's growth).
Honesty: According to Child, "Nothing sinks a reputation faster than dishonesty. It takes years to build a reputation, but it can be destroyed in one day over one misdeed."
Especially in today's world -- with the pervasiveness of the Internet -- a bad policy can be deadly. However, by being honest, there will be trust with customers, suppliers, and partners. Such relationships are critical for any sustainable business.
Details: Retail is an incredibly tough business. As Buffett once said, "In retail, you need to be good every day." Actually, I think this applies to any business.
Now, this does not mean you need to hit a home run every day. Instead, it's about having little victories. Over time, they can really add up.
As for Child, he did hire capable people. But he was intensely engaged in the day-to-day activities. There was little he did not know about the business, even as it became a billion-dollar operation.
Value proposition: What do you offer customers that your competition does not? It's a tough question, but it's something you need to think about. If there is no good answer, then you need to make some big changes.
Says Child: "Offer customers true value on quality products. A low price on a cheap piece of furniture is not value."
Tom Taulli is the author of various books, including The Complete M&A Handbook, and the founder of BizEquity, a free online business valuation tool for small businesses. You can reach him at his personal blog.
Posted Jun 14th 2009 12:00PM by Tom Taulli
While in an airport bookstore recently, this title caught me eye: How to Build a Business Warren Buffett Would Buy: The R.C. Willey Story.
How could I resist? I bought a copy and read the whole thing on my flight (OK, the book is only 192 pages).
The author of the book, Jeff Benedict, tracks the entrepreneurial career of Bill Child, who transformed a furniture business -- R.C. Willey -- into a retailing giant (he came on board the company in the mid 1950s when his father-in-law died).
It's certainly an inspirational story. I also think it's instructive in today's times when entrepreneurs need lots of inspiration. Keep in mind that when Child took over R.C. Willey, the company was in shambles. The debt was suffocating, customers weren't paying their bills, and it looked like the only alternative was liquidation.
Well, failure wasn't an option for Child. Rather, he focused on key business fundamentals that would eventually catch the attention of Warren Buffett, who bought the company in 1995 for a cool $175 million.
So, what are some of the lessons? As should be expected, they are old-school approaches (hey, that's made Buffett a billionaire, right?).
Let's take a look:
Debt can be a bad thing: Child spent years finding ways to pay down debt. It meant lowering costs, improving customer service, and thinking hard about making new investments.
Thus, by having a conservative balance sheet, Child was able to deal with recessions and competitive threats. He was also able to capitalize on new opportunities, such as building a large distribution center (which was key to R.C. Willey's growth).
Honesty: According to Child, "Nothing sinks a reputation faster than dishonesty. It takes years to build a reputation, but it can be destroyed in one day over one misdeed."
Especially in today's world -- with the pervasiveness of the Internet -- a bad policy can be deadly. However, by being honest, there will be trust with customers, suppliers, and partners. Such relationships are critical for any sustainable business.
Details: Retail is an incredibly tough business. As Buffett once said, "In retail, you need to be good every day." Actually, I think this applies to any business.
Now, this does not mean you need to hit a home run every day. Instead, it's about having little victories. Over time, they can really add up.
As for Child, he did hire capable people. But he was intensely engaged in the day-to-day activities. There was little he did not know about the business, even as it became a billion-dollar operation.
Value proposition: What do you offer customers that your competition does not? It's a tough question, but it's something you need to think about. If there is no good answer, then you need to make some big changes.
Says Child: "Offer customers true value on quality products. A low price on a cheap piece of furniture is not value."
Tom Taulli is the author of various books, including The Complete M&A Handbook, and the founder of BizEquity, a free online business valuation tool for small businesses. You can reach him at his personal blog.
Tuesday, June 16, 2009
SBA Numbers
SBA numbers
Declining loans? Whose de-fault is it?
By Jonathan Maze
As published in: Franchise Times - April 2009
Amid all the concerns about the decline in SBA lending is one relatively simple explanation that gets little attention: skyrocketing default rates.
The default rate on SBA-backed loans given to franchisees has more than quadrupled since 2004, according to information prepared by the Coleman Report, a newsletter out of California that tracks the SBA lending market. In 2004, the default rate for franchisees was 3.1 percent. By 2008 it was 13.4 percent.
Meanwhile, 2 percent of franchisees receiving SBA loans failed and liquidated last year, an increase of two-thirds over the year before and more than six times the rate of failures as in 2004.
Both figures reflect an overall increase in loan defaults in the SBA program, in which businesses had an 11.9-percent default rate last year, up from 2.4 percent in 2004.
The higher default rates may help explain a 57-percent decrease in SBA-backed loans in the last three quarters of 2008 and a general decline over the past couple of years. That decrease has generated deep concern among lenders and small business advocates as well as government officials who view small business creation as a key to any economic improvement.
In February, Congress passed an economic stimulus package with provisions designed to increase SBA lending. The stimulus package reduced fees and increased the government guarantee on 7(a) loans to 90 percent, and it enables the agency to lend to dealers who sell loans on the secondary market - which many believe would stimulate lending.
The higher default rates on SBA loans in recent years are a likely symptom of the decline in the nation's economy. But many of the defaults predate the serious economic downturn. That suggests the numbers may reflect one of the causes of the recession: banks' loosening lending standards in a period of historically low interest rates.
Darrell Johnson, CEO of the franchise information firm FRANdata, said that while the number of loans in default is near 12 percent, the dollar amount defaulted is much lower, less than 5 percent. In other words, the loans more likely to go into default were for lower dollar amounts.
Companies with higher default rates among their franchisees typically require smaller loan amounts. The 10 companies listed on the Coleman Report with the worst default rates - ranging from 55 percent to 86 percent - had an average SBA loan amount of $173,060. By contrast, the companies with the 10 best default rates - or the 10 companies with the most loans and no defaults - had an average loan of $742,594.
Lenders commonly performed less due diligence on smaller loans, because the amount of paperwork required for an SBA loan is the same whether it's $50,000 or $500,000. So banks didn't take as deep a look at borrowers of loans for less than $150,000 - the peak amount in the agency's now-defunct "low documentation" program that required less paperwork. "The smaller size loans were getting less bank scrutiny, that's the issue," Johnson said. "With less bank scrutiny, they were defaulting at a higher rate."
"In a rising economy, it's still problematic," he added, "but it is accentuated because of the down economy, when defaults would be up, anyway."
Johnson attributed much of the reduction in SBA lending to a reduction in bankers making smaller loans because of the default rate and the departure of some large lenders that had specialized in low documentation loans. Indeed, the most significant reports of lending problems have come from franchises that have a lower initial investment cost.
Johnson doesn't think the lending environment will change anytime soon. Lenders are making fewer, more conservative loans and given the cost are likely to focus on bigger amounts. Banks "are being overly conservative now," he said. "And that over-conservatism is being applied to a greater extent to smaller loans."
That franchisees had a 1.5-percent higher default rate isn't entirely a surprise - Johnson himself authored a report more than a year ago with a similar finding. He believes it's rooted in the fact that many franchises require smaller loans and are therefore more likely to default.
And Bob Coleman, publisher of the Coleman Report, stressed that not too much should be read into the difference. He said that the majority of franchise loans are in the 7(a) program, which has a higher default rate than the 504 program, which is tied to property. The default rates include numbers for both programs.
Fixing the problem?
The higher rate of defaults has not gotten past the SBA, which in attempting to solve the problem announced in early February that lenders should restrict the value of "goodwill" in a loan to 50 percent of the total amount and no more than $250,000.
The SBA's decision led to an outcry among brokers and lenders who said the restriction would bring loans for business acquisitions to a virtual standstill. "Moving goodwill to 250 does not help us in any way, shape or form," said Steve Mariani, founder of North Carolina-based Diamond Financial. "All the people on employment lines who would like to get a loan to buy a franchise or a business, you're stopping them from getting that business. It's just been an absolute mess the last couple of weeks."
That outcry did cause the SBA to back off a little by the end of the month. The agency said any loans exceeding the goodwill cap could be submitted to its central processing office for the next six months. That didn't pacify critics of the plan, who say that at the very least sending the applications to central processing would delay loans and generate more paperwork. And a definitive goodwill cap is still possible.
Goodwill is the value tied to a business above its physical assets, or the premium associated with buying an established business, rather than starting one from scratch. Many established businesses on the market have some sort of goodwill value attached to them, especially service-oriented companies that have less equipment and buildings.
Franchises likewise have a certain amount of goodwill value, such as the brand name and the territory rights, said Steve Mize, managing partner at Gulf Coast Financial Valuations, a business valuation firm.
The SBA contends they're also the riskiest. In a memo to SBA employees in February, Grady Hedgespeth, director of the agency's office of financial assistance, said that many lenders don't finance goodwill on conventional loans, and that neither should an SBA backed loan.
Mize disagreed, and he noted that the number of service-oriented businesses with higher amounts of goodwill value is increasing. "The less risky deals are the deals with simple business models and higher amounts of goodwill and good customer diversification and good management," he said. "The riskiest are high capital businesses with higher capital expenditure requirements and high working capital requirements."
Mize said that 76 percent of the loans made for business acquisitions last year would not qualify under the new cap. It's uncertain how many SBA loans are for business acquisitions, but Mize said those sales nevertheless represent an important piece of any economic improvement.
Sales at businesses tend to stagnate in the years when the owner is closer to retirement, he said. If the business can be sold, then it would bring in a young, energetic owner who could bring in new ideas and generate sales and employment. Restricting goodwill would keep those owners from selling. "By limiting financing on goodwill, they're limiting the value on the most valuable assets that the business can own," Mize said.
Declining loans? Whose de-fault is it?
By Jonathan Maze
As published in: Franchise Times - April 2009
Amid all the concerns about the decline in SBA lending is one relatively simple explanation that gets little attention: skyrocketing default rates.
The default rate on SBA-backed loans given to franchisees has more than quadrupled since 2004, according to information prepared by the Coleman Report, a newsletter out of California that tracks the SBA lending market. In 2004, the default rate for franchisees was 3.1 percent. By 2008 it was 13.4 percent.
Meanwhile, 2 percent of franchisees receiving SBA loans failed and liquidated last year, an increase of two-thirds over the year before and more than six times the rate of failures as in 2004.
Both figures reflect an overall increase in loan defaults in the SBA program, in which businesses had an 11.9-percent default rate last year, up from 2.4 percent in 2004.
The higher default rates may help explain a 57-percent decrease in SBA-backed loans in the last three quarters of 2008 and a general decline over the past couple of years. That decrease has generated deep concern among lenders and small business advocates as well as government officials who view small business creation as a key to any economic improvement.
In February, Congress passed an economic stimulus package with provisions designed to increase SBA lending. The stimulus package reduced fees and increased the government guarantee on 7(a) loans to 90 percent, and it enables the agency to lend to dealers who sell loans on the secondary market - which many believe would stimulate lending.
The higher default rates on SBA loans in recent years are a likely symptom of the decline in the nation's economy. But many of the defaults predate the serious economic downturn. That suggests the numbers may reflect one of the causes of the recession: banks' loosening lending standards in a period of historically low interest rates.
Darrell Johnson, CEO of the franchise information firm FRANdata, said that while the number of loans in default is near 12 percent, the dollar amount defaulted is much lower, less than 5 percent. In other words, the loans more likely to go into default were for lower dollar amounts.
Companies with higher default rates among their franchisees typically require smaller loan amounts. The 10 companies listed on the Coleman Report with the worst default rates - ranging from 55 percent to 86 percent - had an average SBA loan amount of $173,060. By contrast, the companies with the 10 best default rates - or the 10 companies with the most loans and no defaults - had an average loan of $742,594.
Lenders commonly performed less due diligence on smaller loans, because the amount of paperwork required for an SBA loan is the same whether it's $50,000 or $500,000. So banks didn't take as deep a look at borrowers of loans for less than $150,000 - the peak amount in the agency's now-defunct "low documentation" program that required less paperwork. "The smaller size loans were getting less bank scrutiny, that's the issue," Johnson said. "With less bank scrutiny, they were defaulting at a higher rate."
"In a rising economy, it's still problematic," he added, "but it is accentuated because of the down economy, when defaults would be up, anyway."
Johnson attributed much of the reduction in SBA lending to a reduction in bankers making smaller loans because of the default rate and the departure of some large lenders that had specialized in low documentation loans. Indeed, the most significant reports of lending problems have come from franchises that have a lower initial investment cost.
Johnson doesn't think the lending environment will change anytime soon. Lenders are making fewer, more conservative loans and given the cost are likely to focus on bigger amounts. Banks "are being overly conservative now," he said. "And that over-conservatism is being applied to a greater extent to smaller loans."
That franchisees had a 1.5-percent higher default rate isn't entirely a surprise - Johnson himself authored a report more than a year ago with a similar finding. He believes it's rooted in the fact that many franchises require smaller loans and are therefore more likely to default.
And Bob Coleman, publisher of the Coleman Report, stressed that not too much should be read into the difference. He said that the majority of franchise loans are in the 7(a) program, which has a higher default rate than the 504 program, which is tied to property. The default rates include numbers for both programs.
Fixing the problem?
The higher rate of defaults has not gotten past the SBA, which in attempting to solve the problem announced in early February that lenders should restrict the value of "goodwill" in a loan to 50 percent of the total amount and no more than $250,000.
The SBA's decision led to an outcry among brokers and lenders who said the restriction would bring loans for business acquisitions to a virtual standstill. "Moving goodwill to 250 does not help us in any way, shape or form," said Steve Mariani, founder of North Carolina-based Diamond Financial. "All the people on employment lines who would like to get a loan to buy a franchise or a business, you're stopping them from getting that business. It's just been an absolute mess the last couple of weeks."
That outcry did cause the SBA to back off a little by the end of the month. The agency said any loans exceeding the goodwill cap could be submitted to its central processing office for the next six months. That didn't pacify critics of the plan, who say that at the very least sending the applications to central processing would delay loans and generate more paperwork. And a definitive goodwill cap is still possible.
Goodwill is the value tied to a business above its physical assets, or the premium associated with buying an established business, rather than starting one from scratch. Many established businesses on the market have some sort of goodwill value attached to them, especially service-oriented companies that have less equipment and buildings.
Franchises likewise have a certain amount of goodwill value, such as the brand name and the territory rights, said Steve Mize, managing partner at Gulf Coast Financial Valuations, a business valuation firm.
The SBA contends they're also the riskiest. In a memo to SBA employees in February, Grady Hedgespeth, director of the agency's office of financial assistance, said that many lenders don't finance goodwill on conventional loans, and that neither should an SBA backed loan.
Mize disagreed, and he noted that the number of service-oriented businesses with higher amounts of goodwill value is increasing. "The less risky deals are the deals with simple business models and higher amounts of goodwill and good customer diversification and good management," he said. "The riskiest are high capital businesses with higher capital expenditure requirements and high working capital requirements."
Mize said that 76 percent of the loans made for business acquisitions last year would not qualify under the new cap. It's uncertain how many SBA loans are for business acquisitions, but Mize said those sales nevertheless represent an important piece of any economic improvement.
Sales at businesses tend to stagnate in the years when the owner is closer to retirement, he said. If the business can be sold, then it would bring in a young, energetic owner who could bring in new ideas and generate sales and employment. Restricting goodwill would keep those owners from selling. "By limiting financing on goodwill, they're limiting the value on the most valuable assets that the business can own," Mize said.
Monday, June 15, 2009
SBA fails in recent change related to goodwill value
SBA fails in recent change related to goodwill value
By Edward L. Fixen
On Feb. 12, the Small Business Administration released revised standard operating procedures known as SBA SOP 50 10 5(A) that unnecessarily precludes the healthiest and most profitable businesses from being able to secure SBA business acquisition loans up to their appraised value. The revisions included a seemingly harmless change to its lending procedures and policies regarding a cap and restriction on small business acquisition lending related to the value of "goodwill." However, this seemingly minor change demonstrates a surprising lack of understanding of fundamental business valuation and economic principles that undermines the very purpose for which the SBA was established.
In a letter dated Feb. 27 and co-authored by Nydia M. Velazquez, New York representative and chairwoman of the House Committee on Small Business, and Sam Graves, Missouri representative and ranking member of the House Committee on Small Business, concerns regarding the "goodwill" restriction were submitted to SBA Acting Administrator Darryl Hairston requesting that the new policy regarding "goodwill" be rescinded based on its arbitrary nature and damage to our nation's small businesses.
At the heart of the issue is the arbitrary restriction that would limit SBA loans for goodwill in a small business acquisition to $250,000 or less. This restriction may seem insignificant, but if you are a small-business owner, aspiring entrepreneur, considering buying a small business, ready to retire and sell your business, an SBA lender, or just a member of the small-business community, then this minor regulatory revision affects you. More specifically, it limits the availability of SBA small business acquisition loans to the more deserving and better-performing businesses at a time when it is needed more than ever.
This is certainly not consistent with the SBA's stated mission to "aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation." Yet, as noted in the Velazquez/Graves letter cited above, more than 70 percent of the evaluations ordered for SBA small business acquisition loans involved companies that had more than $250,000 in goodwill and will be adversely affected by this new policy.
Why would limiting a loan on goodwill to $250,000 be bad business and economic policy? Quite simply, the higher the goodwill value of a business, the healthier and more profitable the business. In its simplest form, the value of a business consists of the market value of tangible assets plus its goodwill value (or intangible asset value). Tangible assets are items owned by a business such as equipment, inventory, furnishings, accounts receivables, etc., that you can see and touch. Goodwill is that portion of business value that cannot be allocated to tangible assets. Goodwill is generally considered to represent the intangible value in a business derived from strong sales and earnings, having a customer base, having ongoing operations and business systems in place, reputation, brand value, trade names, trademarks, patents, etc. Goodwill is a positive indicator of the strength and health of a business, not a negative factor as the SBA policy implies.
As an example, if a business is appraised by a certified business appraiser at a value of $2 million and has $1 million of appraised tangible assets such as equipment, inventory, accounts receivables, etc., then its goodwill value is $1 million (i.e., $2 million business value less $1 million tangible asset value). Any qualified business appraiser will acknowledge that the more profitable, less risky and healthy a business, the higher its goodwill value will be when compared with a similar but less profitable, more risky and weaker business.
In the example just given, the business worth $2 million with $1 million in goodwill value could only qualify for a loan of $1.25 million because the $250,000 goodwill limitation would arbitrarily prohibit lending on the balance of the company's $750,000 of appraised goodwill value. Yet a business in the same industry with the same tangible assets but less income and a total appraised value of $1.25 million (i.e., goodwill value of only $250,000) could qualify for the same loan amount even though it is a riskier, less profitable and weaker business.
Professional practices such as legal, dental, medical, accounting, engineering, etc., that have very little in the way of tangible assets in relationship to their overall business value would certainly be adversely affected by the arbitrary goodwill restriction. But even very profitable retail, manufacturing and wholesale/distribution businesses with substantial tangible assets are unnecessarily hurt by the arbitrary restriction. Fortunately, SBA lenders evaluate all aspects of a business before making a loan, but this analysis does show that their ability to make loans based on merit rather than arbitrary policy and criteria is severely restricted.
There is a simple solution to this situation. The SBA also added a revision to require all business acquisition loans worth more than $350,000 to have a business appraisal performed by a person accredited by a recognized business appraisal organization. There should be no argument that it makes sense to ensure that SBA loans are provided to qualified and deserving businesses. However, this otherwise positive improvement will often be rendered a moot exercise and expense since the arbitrary goodwill restriction will trump even the professional opinion of a certified business appraiser who deems a business to have goodwill value of more than $250,000. The SBA should rescind this arbitrary goodwill restriction immediately and instead let the new practice of requiring a professional business appraisal on larger loans do the job for which it was intended, validate good loans to good businesses.
More importantly, elimination of the SBA's goodwill restriction policy will help our country's small businesses, which many consider to be the economic engine of our economy.
Edward L. Fixen is president of BusinessQuest, a business appraisal, exit planning and business brokerage firm based in Rancho Cucamonga. He can be reached at ed@BusinessQuestBrokers.com.
By Edward L. Fixen
On Feb. 12, the Small Business Administration released revised standard operating procedures known as SBA SOP 50 10 5(A) that unnecessarily precludes the healthiest and most profitable businesses from being able to secure SBA business acquisition loans up to their appraised value. The revisions included a seemingly harmless change to its lending procedures and policies regarding a cap and restriction on small business acquisition lending related to the value of "goodwill." However, this seemingly minor change demonstrates a surprising lack of understanding of fundamental business valuation and economic principles that undermines the very purpose for which the SBA was established.
In a letter dated Feb. 27 and co-authored by Nydia M. Velazquez, New York representative and chairwoman of the House Committee on Small Business, and Sam Graves, Missouri representative and ranking member of the House Committee on Small Business, concerns regarding the "goodwill" restriction were submitted to SBA Acting Administrator Darryl Hairston requesting that the new policy regarding "goodwill" be rescinded based on its arbitrary nature and damage to our nation's small businesses.
At the heart of the issue is the arbitrary restriction that would limit SBA loans for goodwill in a small business acquisition to $250,000 or less. This restriction may seem insignificant, but if you are a small-business owner, aspiring entrepreneur, considering buying a small business, ready to retire and sell your business, an SBA lender, or just a member of the small-business community, then this minor regulatory revision affects you. More specifically, it limits the availability of SBA small business acquisition loans to the more deserving and better-performing businesses at a time when it is needed more than ever.
This is certainly not consistent with the SBA's stated mission to "aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation." Yet, as noted in the Velazquez/Graves letter cited above, more than 70 percent of the evaluations ordered for SBA small business acquisition loans involved companies that had more than $250,000 in goodwill and will be adversely affected by this new policy.
Why would limiting a loan on goodwill to $250,000 be bad business and economic policy? Quite simply, the higher the goodwill value of a business, the healthier and more profitable the business. In its simplest form, the value of a business consists of the market value of tangible assets plus its goodwill value (or intangible asset value). Tangible assets are items owned by a business such as equipment, inventory, furnishings, accounts receivables, etc., that you can see and touch. Goodwill is that portion of business value that cannot be allocated to tangible assets. Goodwill is generally considered to represent the intangible value in a business derived from strong sales and earnings, having a customer base, having ongoing operations and business systems in place, reputation, brand value, trade names, trademarks, patents, etc. Goodwill is a positive indicator of the strength and health of a business, not a negative factor as the SBA policy implies.
As an example, if a business is appraised by a certified business appraiser at a value of $2 million and has $1 million of appraised tangible assets such as equipment, inventory, accounts receivables, etc., then its goodwill value is $1 million (i.e., $2 million business value less $1 million tangible asset value). Any qualified business appraiser will acknowledge that the more profitable, less risky and healthy a business, the higher its goodwill value will be when compared with a similar but less profitable, more risky and weaker business.
In the example just given, the business worth $2 million with $1 million in goodwill value could only qualify for a loan of $1.25 million because the $250,000 goodwill limitation would arbitrarily prohibit lending on the balance of the company's $750,000 of appraised goodwill value. Yet a business in the same industry with the same tangible assets but less income and a total appraised value of $1.25 million (i.e., goodwill value of only $250,000) could qualify for the same loan amount even though it is a riskier, less profitable and weaker business.
Professional practices such as legal, dental, medical, accounting, engineering, etc., that have very little in the way of tangible assets in relationship to their overall business value would certainly be adversely affected by the arbitrary goodwill restriction. But even very profitable retail, manufacturing and wholesale/distribution businesses with substantial tangible assets are unnecessarily hurt by the arbitrary restriction. Fortunately, SBA lenders evaluate all aspects of a business before making a loan, but this analysis does show that their ability to make loans based on merit rather than arbitrary policy and criteria is severely restricted.
There is a simple solution to this situation. The SBA also added a revision to require all business acquisition loans worth more than $350,000 to have a business appraisal performed by a person accredited by a recognized business appraisal organization. There should be no argument that it makes sense to ensure that SBA loans are provided to qualified and deserving businesses. However, this otherwise positive improvement will often be rendered a moot exercise and expense since the arbitrary goodwill restriction will trump even the professional opinion of a certified business appraiser who deems a business to have goodwill value of more than $250,000. The SBA should rescind this arbitrary goodwill restriction immediately and instead let the new practice of requiring a professional business appraisal on larger loans do the job for which it was intended, validate good loans to good businesses.
More importantly, elimination of the SBA's goodwill restriction policy will help our country's small businesses, which many consider to be the economic engine of our economy.
Edward L. Fixen is president of BusinessQuest, a business appraisal, exit planning and business brokerage firm based in Rancho Cucamonga. He can be reached at ed@BusinessQuestBrokers.com.
Thursday, June 11, 2009
Small Business Administration: Patriot Express
Lender ParticipationA lender may be eligible to participate in Patriot Express if it currently participates with SBA and meets certain performance standards. There are no minimum SBA loan volume requirements to begin making Patriot Express loans. A non-SBA lender that makes a reasonable number of commercial loans of $50,000 or less may be eligible to participate, but must apply for SBA loan authority. Loans made under this program generally follow SBA’s standards for Size, Use of Proceeds, Type of Business and Availability of Funds. Differences unique to Patriot Express are noted below. Contact your SBA district office for more information.
Wednesday, June 10, 2009
Book: Selling Your Business for Dummies
Feel free to check out the book: "Selling Your Business for Dummies" by Barbara Findlay Schenck.
Foreword by John Davies, CEO of Sunbelt Business Brokers.
In Recession Specials, Small Firms Revise Pricing
In Recession Specials, Small Firms Revise Pricing
Discounts and Lower-End Offerings Help Lure Cash-Strapped Customers; Vans Complement Limo Service's Town Cars
By DANA MATTIOLI
Some small businesses are overhauling their pricing strategies amid the recession and finding new growth through lower-end offerings and discounts.
Towerstream Corp., a company that delivers high-speed Internet access to businesses, last year began finding it harder to gain and keep clients for an eight-megabit-per-second offering that then cost $999 a month.
In January, the company introduced a midrange product offering five-megabits-per-second for $500 a month, a price Chief Executive Jeff Thompson says he thought would be more palatable to cash-strapped customers. Although the average ticket item's price decreased as a result, the company had a record quarter for installations and revenue increased 64% in the first quarter from a year earlier. Towerstream, based in Middletown, R.I., this week lowered the price of its $999 plan to $899.
Lone Star Limousine, a transportation company based in Palo Alto, Calif., introduced lower-priced options in response to the economy. As companies cut back on spending, Lone Star noticed less-frequent limousine use. That, coupled with executives wary of the image they were sending by traveling in flashy limousines, prompted co-owner Jen Jaciw to take a different approach.
A year and a half ago the company added a van to its fleet of limousines, town cars and high-end sport-utility vehicles. The van, which was less ostentatious, cost less to rent and allowed the company to expand its client base. Ms. Jaciw says as the economy worsened, wedding parties and companies started choosing the van over limos. In March 2009 Lone Star bought another van to keep up with demand. "We established ourselves as a high-end luxury option, but it seemed like the right thing to do so we had a more economical option to offer," she says.
To supplement corporate accounts under pressure, Ms. Jaciw sought partnerships with different kinds of clients. She reached out to hotels, wineries, wedding venues and other businesses that might want to charter the vans. The efforts are paying off. Lone Star's gross is up $20,000 over the first quarter last year and the company hopes to gross $1 million by year end.
Other small businesses have found success by identifying rising costs customers were facing and trying to alleviate the burden. Facing flat sales as consumers delayed automotive repairs, Mike Cook, owner of Mr. Transmission of Marietta, Ga., considered offering incentives. Knowing that justifying a major repair in the wake of an economic downturn was becoming harder, Mr. Cook began offering food and gasoline vouchers to customers who had transmission overhauls, which account for 90% of his business.
In December he began working with a partner to offer $500 gasoline certificates with a transmission overhaul, which generally costs between $1,800 and $5,000. In January, he extended the program so the vouchers could be used for food as well. Customers get $25 a month on a Visa cash card for 20 months, which can go toward purchases at retailers such as Costco, BP and Shell.
"I think it makes it easier for them to go ahead and make that repair because they'll get some help with other expenses," Mr. Cook says. Although he declines to disclose how much the vouchers cost him, he says the fee is nominal. Mr. Transmission has recorded a 60% increase in sales so far this year compared with the year-earlier period, and Mr. Cook says the voucher program is partly the reason.
CouponCabin.com, a Chicago-based company that provides discount codes for online shopping, has seen its Web traffic rise amid the recession, with a 300% increase in visitors to the site during the fourth quarter from a year earlier.
For the six years since CouponCabin launched it had been focused primarily on soft goods such as clothing and home goods. But in November 2008, President Scott Kluth started to notice a surge of interest in grocery coupons, after years of declining consumer activity around them in the market. On April 15, the company launched a grocery-coupon section where visitors could print coupons to use at their local supermarkets. CouponCabin nets a few cents per print from each item's manufacturer.
"As long as people have to eat, adding groceries to the site was another way for visitors to save money," Mr. Kluth says. The section has become a hit with visitors and even attracted a new demographic of older users. When the section was introduced it had 14,000 coupons printed in two weeks, with more than 100,000 prints in May. Recently, a technology glitch caused grocery coupons to be temporarily unavailable, and Mr. Kluth says the angry comments from visitors made it clear that they value the addition. He plans to expand the section.
Write to Dana Mattioli at dana.mattioli@wsj.com
Printed in The Wall Street Journal, page B5
Discounts and Lower-End Offerings Help Lure Cash-Strapped Customers; Vans Complement Limo Service's Town Cars
By DANA MATTIOLI
Some small businesses are overhauling their pricing strategies amid the recession and finding new growth through lower-end offerings and discounts.
Towerstream Corp., a company that delivers high-speed Internet access to businesses, last year began finding it harder to gain and keep clients for an eight-megabit-per-second offering that then cost $999 a month.
In January, the company introduced a midrange product offering five-megabits-per-second for $500 a month, a price Chief Executive Jeff Thompson says he thought would be more palatable to cash-strapped customers. Although the average ticket item's price decreased as a result, the company had a record quarter for installations and revenue increased 64% in the first quarter from a year earlier. Towerstream, based in Middletown, R.I., this week lowered the price of its $999 plan to $899.
Lone Star Limousine, a transportation company based in Palo Alto, Calif., introduced lower-priced options in response to the economy. As companies cut back on spending, Lone Star noticed less-frequent limousine use. That, coupled with executives wary of the image they were sending by traveling in flashy limousines, prompted co-owner Jen Jaciw to take a different approach.
A year and a half ago the company added a van to its fleet of limousines, town cars and high-end sport-utility vehicles. The van, which was less ostentatious, cost less to rent and allowed the company to expand its client base. Ms. Jaciw says as the economy worsened, wedding parties and companies started choosing the van over limos. In March 2009 Lone Star bought another van to keep up with demand. "We established ourselves as a high-end luxury option, but it seemed like the right thing to do so we had a more economical option to offer," she says.
To supplement corporate accounts under pressure, Ms. Jaciw sought partnerships with different kinds of clients. She reached out to hotels, wineries, wedding venues and other businesses that might want to charter the vans. The efforts are paying off. Lone Star's gross is up $20,000 over the first quarter last year and the company hopes to gross $1 million by year end.
Other small businesses have found success by identifying rising costs customers were facing and trying to alleviate the burden. Facing flat sales as consumers delayed automotive repairs, Mike Cook, owner of Mr. Transmission of Marietta, Ga., considered offering incentives. Knowing that justifying a major repair in the wake of an economic downturn was becoming harder, Mr. Cook began offering food and gasoline vouchers to customers who had transmission overhauls, which account for 90% of his business.
In December he began working with a partner to offer $500 gasoline certificates with a transmission overhaul, which generally costs between $1,800 and $5,000. In January, he extended the program so the vouchers could be used for food as well. Customers get $25 a month on a Visa cash card for 20 months, which can go toward purchases at retailers such as Costco, BP and Shell.
"I think it makes it easier for them to go ahead and make that repair because they'll get some help with other expenses," Mr. Cook says. Although he declines to disclose how much the vouchers cost him, he says the fee is nominal. Mr. Transmission has recorded a 60% increase in sales so far this year compared with the year-earlier period, and Mr. Cook says the voucher program is partly the reason.
CouponCabin.com, a Chicago-based company that provides discount codes for online shopping, has seen its Web traffic rise amid the recession, with a 300% increase in visitors to the site during the fourth quarter from a year earlier.
For the six years since CouponCabin launched it had been focused primarily on soft goods such as clothing and home goods. But in November 2008, President Scott Kluth started to notice a surge of interest in grocery coupons, after years of declining consumer activity around them in the market. On April 15, the company launched a grocery-coupon section where visitors could print coupons to use at their local supermarkets. CouponCabin nets a few cents per print from each item's manufacturer.
"As long as people have to eat, adding groceries to the site was another way for visitors to save money," Mr. Kluth says. The section has become a hit with visitors and even attracted a new demographic of older users. When the section was introduced it had 14,000 coupons printed in two weeks, with more than 100,000 prints in May. Recently, a technology glitch caused grocery coupons to be temporarily unavailable, and Mr. Kluth says the angry comments from visitors made it clear that they value the addition. He plans to expand the section.
Write to Dana Mattioli at dana.mattioli@wsj.com
Printed in The Wall Street Journal, page B5
Tuesday, June 9, 2009
Food Truck Nation
Wall Street Journal - wsj.com
JUNE 5, 2009
Food Truck Nation
Locally sourced lamb. Grilled sweetbreads with sherry. A growing fleet of vehicles around the country is serving high-end, gourmet fare—and changing the lunchtime landscape.
By KATY MCLAUGHLIN
A new generation of lunch trucks is hitting the streets. They serve high-end fare such as grass-fed beef hamburgers, escargot and crème brûlée. As they rove cities like Austin, New York, San Francisco and Los Angeles, they alert customers to their locations using Twitter and Facebook. Their owners include highly trained chefs and well-known restaurateurs.
Joshua Henderson, 36, trained as a chef at the Culinary Institute of America and cooked at the Avalon Hotel in Beverly Hills. Today, he owns two lunch trucks that drive the streets of Seattle. Each truck serves about 200 lunches every day, and Mr. Henderson says he grossed about $400,000 last year, his first year in business, with only one truck in operation. The only problem: “We go up against the stigma. We’re trying to prove we’re on a different level than a lunch truck,” he says.
Lunch trucks once represented the nadir of culinary achievement, conjuring up images of withered hot dogs and hygienically-challenged kebabs. Today, even some chefs from Michelin-starred eateries are migrating into a sector of the food business that seems particularly well suited for a financial downturn. For would-be restaurateurs, launching a culinary truck requires far less start-up capital than a brick-and-mortar restaurant. At a time when consumers are cutting back on restaurant spending, a food truck serving inexpensive lunches and snacks can be an easier sell to diners.
The new breed of lunch truck is aggressively gourmet, tech-savvy and politically correct. The Green Truck, which sells “sustainably harvested” fish tacos, roams the streets of Los Angeles in vehicles fueled by vegetable oil. The Dessert Truck in New York is owned by a former Le Cirque pastry sous chef who donates proceeds from desserts such as a pavlova with red fruit gelée to charity. In the San Francisco Bay area, the RoliRoti rotisserie truck serves free-range chicken, heritage pork and local lamb, prepared by owner Thomas Odermatt, a Swiss former organic farming student whose business card reads “Rotisseur.”
...Click HERE to view the rest of the article...
JUNE 5, 2009
Food Truck Nation
Locally sourced lamb. Grilled sweetbreads with sherry. A growing fleet of vehicles around the country is serving high-end, gourmet fare—and changing the lunchtime landscape.
By KATY MCLAUGHLIN
A new generation of lunch trucks is hitting the streets. They serve high-end fare such as grass-fed beef hamburgers, escargot and crème brûlée. As they rove cities like Austin, New York, San Francisco and Los Angeles, they alert customers to their locations using Twitter and Facebook. Their owners include highly trained chefs and well-known restaurateurs.
Joshua Henderson, 36, trained as a chef at the Culinary Institute of America and cooked at the Avalon Hotel in Beverly Hills. Today, he owns two lunch trucks that drive the streets of Seattle. Each truck serves about 200 lunches every day, and Mr. Henderson says he grossed about $400,000 last year, his first year in business, with only one truck in operation. The only problem: “We go up against the stigma. We’re trying to prove we’re on a different level than a lunch truck,” he says.
Lunch trucks once represented the nadir of culinary achievement, conjuring up images of withered hot dogs and hygienically-challenged kebabs. Today, even some chefs from Michelin-starred eateries are migrating into a sector of the food business that seems particularly well suited for a financial downturn. For would-be restaurateurs, launching a culinary truck requires far less start-up capital than a brick-and-mortar restaurant. At a time when consumers are cutting back on restaurant spending, a food truck serving inexpensive lunches and snacks can be an easier sell to diners.
The new breed of lunch truck is aggressively gourmet, tech-savvy and politically correct. The Green Truck, which sells “sustainably harvested” fish tacos, roams the streets of Los Angeles in vehicles fueled by vegetable oil. The Dessert Truck in New York is owned by a former Le Cirque pastry sous chef who donates proceeds from desserts such as a pavlova with red fruit gelée to charity. In the San Francisco Bay area, the RoliRoti rotisserie truck serves free-range chicken, heritage pork and local lamb, prepared by owner Thomas Odermatt, a Swiss former organic farming student whose business card reads “Rotisseur.”
...Click HERE to view the rest of the article...
Monday, June 8, 2009
Bond-Market Rout Lifts Mortgage Cost
ALL BUSINESS: Bond-market rout lifts mortgage cost
Jun 6, 8:39 AM (ET)
By RACHEL BECK
NEW YORK (AP) - The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.
But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.
That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford.
To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.
Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.
"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."
Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.
So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?
One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.
The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year - more than four times last year's all-time high.
"The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit."
Fed Chairman Ben Bernanke acknowledged Wednesday in congressional testimony that large budget deficits could threaten financial stability by eventually eroding investor confidence and endangering the economy's prospects for long-term health.
"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.
That kind of talk is meant to calm bond investors' nerves. It also shows the quandary faced by Bernanke and other federal officials. They need to hold down interest rates through massive government spending at the same time they have to deal with worries over how that spending could damage the economy over the long term.
After Fed policymakers this spring said they would buy billions of dollars of government debt and more than $1 trillion of mortgage securities, 30-year fixed mortgage rates fell to 4.78 percent in April, the lowest since Freddie Mac started surveying rates in 1971.
Sales of new and existing homes began to trend higher. Mortgage refinancings also jumped, allowing borrowers to lock in lower rates. Fee income from this activity helped lift profits at many battered banks and gave consumers more disposable income to spend, which helped lift their confidence about the economy's prospects. All that was good for the nation's businesses.
But now, surging mortgage rates are threatening to undermine all that. Seventy percent of refinancing activity could be knocked out as rates close in on 5.5 percent, according to Mark Hanson, a managing director at the independent research firm Field Check Group of Menlo Park, Calif.
That's because homeowners wouldn't get much of a benefit if a refinancing only reduces monthly payments a tiny bit while they are stuck paying closing costs that typically run about 2 percent of the loan amount.
Also, many homeowners who wanted to refinance didn't lock in the super-low rates in April when the refi boom took off. "Half the deals in the pipeline are dead," Hanson said. "People were applying to refinance to improve their situation, but now they are seeing it won't be much improved."
All this means that even though mortgage rates are still low by historical standards, many of the trends that seem to be pointing to economic recovery in recent months could be undone fast.
---
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
Jun 6, 8:39 AM (ET)
By RACHEL BECK
NEW YORK (AP) - The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.
But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.
That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford.
To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.
Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.
"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."
Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.
So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?
One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.
The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year - more than four times last year's all-time high.
"The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit."
Fed Chairman Ben Bernanke acknowledged Wednesday in congressional testimony that large budget deficits could threaten financial stability by eventually eroding investor confidence and endangering the economy's prospects for long-term health.
"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.
That kind of talk is meant to calm bond investors' nerves. It also shows the quandary faced by Bernanke and other federal officials. They need to hold down interest rates through massive government spending at the same time they have to deal with worries over how that spending could damage the economy over the long term.
After Fed policymakers this spring said they would buy billions of dollars of government debt and more than $1 trillion of mortgage securities, 30-year fixed mortgage rates fell to 4.78 percent in April, the lowest since Freddie Mac started surveying rates in 1971.
Sales of new and existing homes began to trend higher. Mortgage refinancings also jumped, allowing borrowers to lock in lower rates. Fee income from this activity helped lift profits at many battered banks and gave consumers more disposable income to spend, which helped lift their confidence about the economy's prospects. All that was good for the nation's businesses.
But now, surging mortgage rates are threatening to undermine all that. Seventy percent of refinancing activity could be knocked out as rates close in on 5.5 percent, according to Mark Hanson, a managing director at the independent research firm Field Check Group of Menlo Park, Calif.
That's because homeowners wouldn't get much of a benefit if a refinancing only reduces monthly payments a tiny bit while they are stuck paying closing costs that typically run about 2 percent of the loan amount.
Also, many homeowners who wanted to refinance didn't lock in the super-low rates in April when the refi boom took off. "Half the deals in the pipeline are dead," Hanson said. "People were applying to refinance to improve their situation, but now they are seeing it won't be much improved."
All this means that even though mortgage rates are still low by historical standards, many of the trends that seem to be pointing to economic recovery in recent months could be undone fast.
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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
Wednesday, June 3, 2009
SBA Launches New 100-Percent Guarantee ARC Loan Program to Help Struggling Businesses
News Release
PRESS OFFICE
Release Date: May 18, 2009
Contact: David J. Hall (202) 205-6697
Release Number: 09-30
Internet Address: http://www.sba.gov/news
WASHINGTON – Small businesses suffering financial hardship as a result of the slow economy may be eligible to receive temporary relief to keep their doors open and get their cash flow back on track through to a new loan program announced today by SBA Administrator Karen G. Mills.
Beginning on June 15, SBA will start guaranteeing America’s Recovery Capital (ARC) loans. ARC loans are deferred-payment loans of up to $35,000 available to established, viable, for-profit small businesses that need short-term help to make their principal and interest payments on existing qualifying debt. ARC loans are interest-free to the borrower, 100 percent guaranteed by the SBA, and have no SBA fees associated with them.
“These ARC loans can provide the critical capital and support many small businesses need to make it through these tough economic times,” said Administrator Mills. “Together with other provisions of the Recovery Act, ARC loans will free up capital and put more money in the hands of small business owners when they need it the most. This will help viable small businesses continue to grow and thrive and create new jobs in communities across the country.”
As part of the Recovery Act, the ARC program was created as a no-interest, deferred payment loan to help small businesses that have a history of good performance, but as a result of the tough economy, are struggling to make debt payments.
ARC loans will be disbursed within a period of up to six months and will provide funds to be used for payments of principal and interest for existing, qualifying small business debt including mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payable to vendors, suppliers and utilities. Repayment will not begin until 12 months after the final disbursement. Borrowers don’t have to pay interest on ARC loans. After the 12-month deferral period, borrowers will pay back the loan principal over a period of five years.
ARC loans will be made by commercial lenders, not SBA directly. For more information on ARC loans, visit www.sba.gov
You can receive all of the SBA’s News Releases via email. To subscribe, visit http://web.sba.gov/list and select “Press Office.
# # #
PRESS OFFICE
Release Date: May 18, 2009
Contact: David J. Hall (202) 205-6697
Release Number: 09-30
Internet Address: http://www.sba.gov/news
SBA Launches New 100-Percent Guarantee ARC Loan Program to Help
Struggling Businesses
Beginning on June 15, SBA will start guaranteeing America’s Recovery Capital (ARC) loans. ARC loans are deferred-payment loans of up to $35,000 available to established, viable, for-profit small businesses that need short-term help to make their principal and interest payments on existing qualifying debt. ARC loans are interest-free to the borrower, 100 percent guaranteed by the SBA, and have no SBA fees associated with them.
“These ARC loans can provide the critical capital and support many small businesses need to make it through these tough economic times,” said Administrator Mills. “Together with other provisions of the Recovery Act, ARC loans will free up capital and put more money in the hands of small business owners when they need it the most. This will help viable small businesses continue to grow and thrive and create new jobs in communities across the country.”
As part of the Recovery Act, the ARC program was created as a no-interest, deferred payment loan to help small businesses that have a history of good performance, but as a result of the tough economy, are struggling to make debt payments.
ARC loans will be disbursed within a period of up to six months and will provide funds to be used for payments of principal and interest for existing, qualifying small business debt including mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payable to vendors, suppliers and utilities. Repayment will not begin until 12 months after the final disbursement. Borrowers don’t have to pay interest on ARC loans. After the 12-month deferral period, borrowers will pay back the loan principal over a period of five years.
ARC loans will be made by commercial lenders, not SBA directly. For more information on ARC loans, visit www.sba.gov
You can receive all of the SBA’s News Releases via email. To subscribe, visit http://web.sba.gov/list and select “Press Office.
# # #
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