IBJ.com
October 22, 2009
Scott Olson
Click HERE to view the article online
Small business lenders in Indianapolis are supporting a proposal announced by President Obama Wednesday that would increase the size of government-backed loans.
Small-business lenders in Indiana are supporting a proposal announced by President Obama that would increase the size of government-backed loans.
Under the plan announced Wednesday, loan amounts made through the U.S. Small Business Administration’s flagship 504 and 7(a) programs would increase to $5 million. Current maximums are $4 million for 504 loans and $2 million for 7(a) lending.
The initiative would be funded by the Troubled Asset Relief Program and would need to be approved by federal lawmakers.
“I think that increasing the caps on SBA lending is absolutely the way to go,” said Joe DeHaven, president and CEO of the Indiana Bankers Association. “It’s the correct way to spur small-business loans.”
The credit crunch has severely slowed lending activity, although most bankers contend that capital remains available to clients with a solid credit history. Still, the number of SBA-backed loans in Indiana dropped nearly 30 percent in fiscal 2009 from the previous year.
For the fiscal year ended Sept. 30, 1,035 loans totaling $266.8 million were made through the two SBA programs. That compares with 1,460 loans totaling $307 million in the previous fiscal year.
“We’re still cautious, but I think we are lending to credit-worthy borrowers,” said Scott Burns, vice president of SBA lending at the Indianapolis office of Pittsburgh-based PNC Financial Services Inc. “And you’ll see [lending] starting to step up over the next year.”
Burns thinks Indiana’s large manufacturing base could benefit most from the proposed increase, because a mid-size factory can’t purchase a lot of equipment with a $2 million loan.
The Washington, D.C.-based Independent Community Bankers of America issued a statement supporting the proposal, as did the National Association of Development Companies.
NADCO is the trade association for the nation’s certified development companies that make 504 loans. Jean Wojtowicz, director of the Indiana Statewide Certified Development Corp. in Indianapolis, is chairwoman of Virginia-based NADCO.
“Raising the ceiling on SBA 504 loans to $5 million is a big step toward bringing more job-creation money to Main Street,” Wojtowicz said.
504 loans typically are used to purchase land, buildings and equipment.
The SBA currently guarantees as much as 90 percent of loans it backs through approved financial institutions. The guarantee provides an incentive for banks to lend to small businesses that are more at risk of defaulting.
Thursday, October 22, 2009
Article/Book Review: Capitalist Liberation
Forbes.com
Book Review
Capitalist Liberation
Carl J. Schramm
10.19.09, 12:00 PM ET
Freedom, Inc. is a subversive book, in the best meaning of that oft-misused and misunderstood phrase. It comes in a non-threatening guise--advice to managers on how to get the most out of their employees--that partially masks its revolutionary theoretical teaching. For this book is really nothing less than a manifesto for "messy capitalism," for the unplanned, unpredictable dynamism that is the root strength of every successful company and economy in history, and that is also the one force that can pull the world out of the economic crisis of our time.
Brian Carney, a business writer and editorialist, and Isaac Getz, a business professor and psychologist, draw on deep wells of learning and dozens of interviews with leading business figures and frontline employees. Their thesis is simple: Companies that painstakingly regulate every minute of worker time and dictate worker tasks down to minute levels, suffer from low morale, lost productivity and, tragically, lost opportunities--many of which are never even imagined. Worse, strict regulation sends all the wrong signals to employees: that management does not trust them, that their jobs could easily be done by robots and that they have no ideas worth listening to.
By contrast, companies that leave their employees free to do their jobs, and that listen to what workers have to say, are more likely to thrive. So why don't more adopt this approach? The authors make an amusing comparison to dieting. How many of us know that we should not have that second cookie but eat it anyway? A deeper problem is the age-old human impulse to control. Once in control, people are loath to surrender any of their power, even if they can be shown that letting go would better serve their interests. Hence, in a few discouraging passages, Carney and Getz describe how managers of top-down companies come to study what goes on at "freedom-based" companies, only to return home and change … nothing.
The key theoretical insights of this book concern innovation--which should be the most urgent priority for business leaders and economists alike right now. Carney and Getz demolish two common myths: first, that innovation is always or mostly the product of some lone genius in a lab or garage; second, that innovation necessarily means some great new scientific or technological breakthrough.
On the contrary: The authors show, in example after example, how innovation rises as often from the factory floor as it emerges from the corner office or R&D lab. They visit a quintessentially "old economy" business--a foundry that makes brass parts for plumbing and for cars--in the most unlikely of places (France) that, by freeing its employees from oppressive regulation, allowed myriad ideas to take root and transform the company. The lesson: Every worker has the potential to be an innovator, if given the chance.
Similarly, they demonstrate how Bill Gore built a $2.5 billion company by finding new uses for a product--PTFE, or "Teflon"--that had been developed but underutilized by his previous employer, DuPont. Gore began by making insulator for electrical cables, but has since applied PTFE to such varied uses as waterproofing for sportswear ("Gore-Tex") and guitar strings (Gore today controls a third of that market).
The common element of the very different companies Carney and Getz discuss is culture. This is not to say that all of these firms have identical cultures, though there are certainly similarities. Rather, it is that all of them recognize the primacy of culture, and their CEOs see their chief task as setting and maintaining an open, inclusive and innovative culture.
The best examples are, in the authors' parlance, "why" companies and not "how" companies. That is, they place at the forefront of their thinking and energies the core reasons for their existence--Why is this company here? What is it here to do?--and let frontline workers take care of the means. The limits of the "how" approach should be readily apparent from the failures of GM and Chrysler, whose byzantine work rules strangled innovation and flexibility. But lest one conclude that the authors have an ax to grind against unions, they show through their account of the turnaround of Harley Davidson how a heavily unionized company in a heavily unionized industry became a paragon of "why" company flexibility.
This book should be a sobering read for policymakers and regulators, who tend to assume that they know more than they do, and that central control can accomplish more than diffuse, unplanned exertion. Convincing them to embrace, or at least not to fear, "messy capitalism" would be a splendid legacy for this readable, insightful volume.
Alas, one should not hope for too much. It would be enough if more "old economy" managers and budding entrepreneurs were shaken in their thinking. Business is still the source of all our wealth and most of our employment. For the world economy to climb out of the current trough, individual businesses need to thrive. This book teaches them how.
Book Review
Capitalist Liberation
Carl J. Schramm
10.19.09, 12:00 PM ET
Freedom, Inc. is a subversive book, in the best meaning of that oft-misused and misunderstood phrase. It comes in a non-threatening guise--advice to managers on how to get the most out of their employees--that partially masks its revolutionary theoretical teaching. For this book is really nothing less than a manifesto for "messy capitalism," for the unplanned, unpredictable dynamism that is the root strength of every successful company and economy in history, and that is also the one force that can pull the world out of the economic crisis of our time.
Brian Carney, a business writer and editorialist, and Isaac Getz, a business professor and psychologist, draw on deep wells of learning and dozens of interviews with leading business figures and frontline employees. Their thesis is simple: Companies that painstakingly regulate every minute of worker time and dictate worker tasks down to minute levels, suffer from low morale, lost productivity and, tragically, lost opportunities--many of which are never even imagined. Worse, strict regulation sends all the wrong signals to employees: that management does not trust them, that their jobs could easily be done by robots and that they have no ideas worth listening to.
By contrast, companies that leave their employees free to do their jobs, and that listen to what workers have to say, are more likely to thrive. So why don't more adopt this approach? The authors make an amusing comparison to dieting. How many of us know that we should not have that second cookie but eat it anyway? A deeper problem is the age-old human impulse to control. Once in control, people are loath to surrender any of their power, even if they can be shown that letting go would better serve their interests. Hence, in a few discouraging passages, Carney and Getz describe how managers of top-down companies come to study what goes on at "freedom-based" companies, only to return home and change … nothing.
The key theoretical insights of this book concern innovation--which should be the most urgent priority for business leaders and economists alike right now. Carney and Getz demolish two common myths: first, that innovation is always or mostly the product of some lone genius in a lab or garage; second, that innovation necessarily means some great new scientific or technological breakthrough.
On the contrary: The authors show, in example after example, how innovation rises as often from the factory floor as it emerges from the corner office or R&D lab. They visit a quintessentially "old economy" business--a foundry that makes brass parts for plumbing and for cars--in the most unlikely of places (France) that, by freeing its employees from oppressive regulation, allowed myriad ideas to take root and transform the company. The lesson: Every worker has the potential to be an innovator, if given the chance.
Similarly, they demonstrate how Bill Gore built a $2.5 billion company by finding new uses for a product--PTFE, or "Teflon"--that had been developed but underutilized by his previous employer, DuPont. Gore began by making insulator for electrical cables, but has since applied PTFE to such varied uses as waterproofing for sportswear ("Gore-Tex") and guitar strings (Gore today controls a third of that market).
The common element of the very different companies Carney and Getz discuss is culture. This is not to say that all of these firms have identical cultures, though there are certainly similarities. Rather, it is that all of them recognize the primacy of culture, and their CEOs see their chief task as setting and maintaining an open, inclusive and innovative culture.
The best examples are, in the authors' parlance, "why" companies and not "how" companies. That is, they place at the forefront of their thinking and energies the core reasons for their existence--Why is this company here? What is it here to do?--and let frontline workers take care of the means. The limits of the "how" approach should be readily apparent from the failures of GM and Chrysler, whose byzantine work rules strangled innovation and flexibility. But lest one conclude that the authors have an ax to grind against unions, they show through their account of the turnaround of Harley Davidson how a heavily unionized company in a heavily unionized industry became a paragon of "why" company flexibility.
This book should be a sobering read for policymakers and regulators, who tend to assume that they know more than they do, and that central control can accomplish more than diffuse, unplanned exertion. Convincing them to embrace, or at least not to fear, "messy capitalism" would be a splendid legacy for this readable, insightful volume.
Alas, one should not hope for too much. It would be enough if more "old economy" managers and budding entrepreneurs were shaken in their thinking. Business is still the source of all our wealth and most of our employment. For the world economy to climb out of the current trough, individual businesses need to thrive. This book teaches them how.
Monday, October 19, 2009
Red Wine?!
Red Wine Helps Kick-Start Good Digestion
Portuguese study finds the beverage triggers chemical reactions inside the stomach
Jacob Gaffney
Posted: October 14, 2009
Red wine not only goes well with a nice meal, it helps the stomach convert potentially harmful chemicals into less dangerous molecules before they're circulated in the body, according to a new study slated to be published in an upcoming journal of Toxicology. A team of Portuguese researchers found that specific polyphenols in red wine trigger the release of nitric oxide, a chemical that relaxes the stomach wall, helping to optimize digestion.
According to co-author Dr. João Laranjinha, an associate professor at the Center for Neurosciences and Cell Biology at the University of Coimbra, Portugal, the research bucks current theory. Since the 1990s, many researchers have believed that many of wine's observed health benefits are due to the antioxidative properties of polyphenols. Studies have found wine appears to counteract deleterious, oxidative injury to the body's molecules and cells, as with chronic, inflammatory conditions such as atherosclerosis, a condition in which fatty material collects along the walls of arteries.
Many of these studies suggest that people would need to consume impossibly large amounts of red wine in order to see any antioxidative benefit, because polyphenols are extensively metabolized during absorption in the intestines, said Laranjinha. Estimates range anywhere from a couple of bottles per day, to 10,000 per week.
But an earlier study by the same team and published in Free Radical Biology & Medicine in 2008 found that red wine's benefits may begin before it reaches the intestine. "We started to check for beneficial effects occurring before the absorption phase, that is in the stomach," said Laranjinha. "Overall, the observations of the current study suggest a new pathway for the health benefits of wine ethanol and polyphenols in humans, beyond antioxidant activity, via production of nitric oxide."
While in large doses nitric oxide is a pollutant, in smaller amounts it can dilate arteries, helping blood flow. It also has the ability to "relax" the walls of the stomach, allowing nutrients to pass more freely into the bloodstream. In the earlier study, Laranjinha and his team noted that red wine showed a higher level of another chemical, called ethyl nitrite, when compared to non-alcoholic beverages and brandy. Ethyl nitrite, they found, reacts with potentially harmful free radicals, called nitrites, by chemically converting the molecules into nitric oxide. (Nitrites are found in salty and processed meats and can react poorly in the body, forming carcinogens.)
For the current research, the Portuguese researchers used samples of various red-wine polyphenols, such as catechin, epicatechin and quercetin, which are also found abundantly in apples, berries and onions.
To test if these polyphenols reduce the levels of nitrites in the stomach, the scientists examined the combined effect on preserved rodent gastric strips and on a sample of synthetic stomach acid. After 60 minutes of being exposed to the polyphenols, the stomach strips relaxed and the acid showed high levels of ethyl nitrite.
Taking it one step further, they recruited six healthy volunteers to eat a serving of lettuce, which is known to produce nitrites in the stomach, then served them red wine. After 60 minutes the participants would regurgitate into airtight containers so the contents could be examined. The scientists also found high levels of nitric oxide in the stomach acid.
"Both major [components] of red wine, the polyphenols and the ethanol, may induce beneficial effects via production of nitric oxide," said Laranjinha. "Mechanistically, the polyphenols reduce the nitrites consumed in the diet into nitric oxide in the stomach, and the ethanol reacts with nitrite and derived species in the stomach yielding a new molecule, ethyl nitrite, that releases the nitric oxide."
Portuguese study finds the beverage triggers chemical reactions inside the stomach
Jacob Gaffney
Posted: October 14, 2009
Red wine not only goes well with a nice meal, it helps the stomach convert potentially harmful chemicals into less dangerous molecules before they're circulated in the body, according to a new study slated to be published in an upcoming journal of Toxicology. A team of Portuguese researchers found that specific polyphenols in red wine trigger the release of nitric oxide, a chemical that relaxes the stomach wall, helping to optimize digestion.
According to co-author Dr. João Laranjinha, an associate professor at the Center for Neurosciences and Cell Biology at the University of Coimbra, Portugal, the research bucks current theory. Since the 1990s, many researchers have believed that many of wine's observed health benefits are due to the antioxidative properties of polyphenols. Studies have found wine appears to counteract deleterious, oxidative injury to the body's molecules and cells, as with chronic, inflammatory conditions such as atherosclerosis, a condition in which fatty material collects along the walls of arteries.
Many of these studies suggest that people would need to consume impossibly large amounts of red wine in order to see any antioxidative benefit, because polyphenols are extensively metabolized during absorption in the intestines, said Laranjinha. Estimates range anywhere from a couple of bottles per day, to 10,000 per week.
But an earlier study by the same team and published in Free Radical Biology & Medicine in 2008 found that red wine's benefits may begin before it reaches the intestine. "We started to check for beneficial effects occurring before the absorption phase, that is in the stomach," said Laranjinha. "Overall, the observations of the current study suggest a new pathway for the health benefits of wine ethanol and polyphenols in humans, beyond antioxidant activity, via production of nitric oxide."
While in large doses nitric oxide is a pollutant, in smaller amounts it can dilate arteries, helping blood flow. It also has the ability to "relax" the walls of the stomach, allowing nutrients to pass more freely into the bloodstream. In the earlier study, Laranjinha and his team noted that red wine showed a higher level of another chemical, called ethyl nitrite, when compared to non-alcoholic beverages and brandy. Ethyl nitrite, they found, reacts with potentially harmful free radicals, called nitrites, by chemically converting the molecules into nitric oxide. (Nitrites are found in salty and processed meats and can react poorly in the body, forming carcinogens.)
For the current research, the Portuguese researchers used samples of various red-wine polyphenols, such as catechin, epicatechin and quercetin, which are also found abundantly in apples, berries and onions.
To test if these polyphenols reduce the levels of nitrites in the stomach, the scientists examined the combined effect on preserved rodent gastric strips and on a sample of synthetic stomach acid. After 60 minutes of being exposed to the polyphenols, the stomach strips relaxed and the acid showed high levels of ethyl nitrite.
Taking it one step further, they recruited six healthy volunteers to eat a serving of lettuce, which is known to produce nitrites in the stomach, then served them red wine. After 60 minutes the participants would regurgitate into airtight containers so the contents could be examined. The scientists also found high levels of nitric oxide in the stomach acid.
"Both major [components] of red wine, the polyphenols and the ethanol, may induce beneficial effects via production of nitric oxide," said Laranjinha. "Mechanistically, the polyphenols reduce the nitrites consumed in the diet into nitric oxide in the stomach, and the ethanol reacts with nitrite and derived species in the stomach yielding a new molecule, ethyl nitrite, that releases the nitric oxide."
Thursday, October 15, 2009
Article: Crafty Ways Restaurants Cut Costs
The Wall Street Journal - www.wsj.com
SMALL BUSINESS
OCTOBER 9, 2009
Crafty Ways Restaurants Cut Costs
By NEIL PARMAR
When it comes to dining out, Kevin Moll is the kind of frugal patron restaurant owners would love to see more of. The father of two from Denver always passes on the cream and sugar. He never pours a blob of ketchup next to his fries. Even better, after enjoying a plate of barbecued ribs, he usually prefers to wipe his saucy fingers with a cloth napkin, since the cleanup job would require at least three of the paper variety. And don't even get him started on carbonated beverages. This is a guy who prefers cola a little watered down.
With hard times still taking a bite out of restaurant profits, more Kevin Molls are turning up at their tables — not as patrons but as professional nitpickers. The 50-year-old CEO of National Restaurant Consultants is one of a burgeoning wave of efficiency experts who focus on restaurants, checking for unused half-and-half and testing the syrup level in fountain drinks. While no one tracks the number of these professionals in the restaurant field, the Labor Department says there are now some 678,000 efficiency gurus working to cut waste and maximize profits across a wide range of industries, double that from a decade ago. Moll and his food-service brethren do it by carefully pricing out a kitchen's every move — like making ranch dressing every three days instead of daily, which can shave prep time by 15 to 18 minutes. They help fine-tune recipes to economize on ingredients. (Taking olive oil out of the marinara sauce saved one chain $17,000 a year.) And they "engineer" menus to spotlight the highest-margin offerings. Forget soda; iced tea costs a restaurant as little as a nickel a glass.
The $566 billion restaurant industry is anxious to save as many shekels as it can — preferably without diners noticing a difference. Even with the uptick in some sectors of the economy, the dining-out industry is lagging, as it tends to do in bad times. According to surveys from the National Restaurant Association, 59 percent of the country's restaurant owners, on average, have reported a drop in same-store sales every month for the past year. Industry veterans like Lloyd Gordon, who has been consulting for the past 46 years, say times have never been tougher. Restaurant sales typically dropped 20 percent during past recessions, he says, but they've plunged as much as 50 percent in some parts of the country today. "A lot of restaurants are bleeding," says Dean Small of Synergy Restaurant Consultants in Laguna Niguel, Calif. "In some cases, they're hemorrhaging."
And so they turn to Moll and his ilk, whose secret sauce of savings tactics can be traced back decades. The modern-day efficiency movement, largely thought to have originated in Japanese car factories after World War II, took off on these shores after American giants like Motorola and General Electric began famously boosting profits with similar practices in the 1980s and '90s. Other industries took note—and a growing cadre of consultants followed. If you've traveled in the past few months, you've probably noticed their handiwork: disappearing mini shampoo bottles in the hotel bathroom, fewer complimentary magazines in the airline seat back. Such ideas might seem like small potatoes to some, but Moll and his team of experts have come up with enough tips and tricks to fill a 175-page bible on how to run a profitable eatery. For his clients, the often-tiny cuts add up, generating savings or revenue-boosting ideas that goose margins, on average, by 15 percent. "Operating a restaurant," reads one passage of the guide, "is a game of pennies."
Moll learned, when running his own bar and grill two decades ago, that managing an eatery is like navigating "a boat full of holes." And the trim, java-fueled consultant — running on four to five cups daily — is nothing if not a time-is-money, tight-ship kind of guy. He records any passing work inspiration ("note to self") on his cell phone, even while walking his dog. In his clutter-free office, the only papers visible are arranged in a compact stack, perfectly parallel to the edge of the desk. And while driving his pristine white Cadillac between tightly scheduled appointments, he admits that he's called the city's 311 hotline more than once to report street garbage that needs removal. Clearly, no detail is too small.
It's an attitude that comes in handy in his work, like when Moll and his firm recently helped launch Organixx, a casual, quick-service eatery in downtown Denver. To project an eco-friendly vibe, it features not only the requisite recycled napkins but also bamboo tabletops, a hardwood floor made from recycled furniture scraps, and compostable straws and utensils. (Deliveries are often made via skateboard.) Diners have more than two dozen menu items to choose from, but many end up ordering the Asian stir-fry salad, a mix of veggies, crunchy noodles and tofu, chicken or beef, drizzled with toasted-sesame vinaigrette. The most popular salad on the menu, it's also one of the most profitable. "It doesn't happen like that by accident," says Moll.
Remember the old home-buying adage "location, location, location"? Relying on studies that track "eye flow" across menu pages in elaborate arrow-filled diagrams, Moll counsels his clients to spotlight higher-margin items in prime menu real estate. The Asian stir-fry, with ingredients that cost as little as 24 percent of the menu price, holds pride of place at the top right corner, while the grilled salmon burger (cost of ingredients, $2.78; price, $9) is intentionally buried at left center, the menu equivalent of Siberia. "The menu drives everything," says Moll—from an eatery's decor to the length of time it takes to execute a single dish. In fact, some potential recipes at Organixx have been vetoed just because they couldn't be put together by a cook standing in a single spot, with all the ingredients within arm's reach.
Indeed, the biggest cost cutting usually happens behind the swinging doors. To help keep food costs within a healthy 24 to 35 percent of overall expenses, Moll brought in an on-site drill sergeant. Mary Putman, who paces the kitchen prep area, pokes at plates to make sure bread crusts are intact and salad mounds don't lean too far to one side. When red peppers triple in price, she buys more zucchini to sub into the stir-fry and salads. If a line cook takes more than six minutes to prepare an order, she points sternly at her watch. Most important, she makes sure they're measuring every ounce of food instead of just eyeballing ingredients. Constantly nagging them to "quit heaping the scoop," Putman says a big part of her job "is pulling food off the line."
Which may leave some diners, well, a little hungrier than others. While all of Organixx's sandwiches cost $9, some are a little less generously proportioned. Eyeing the egg salad? You'll get an eight-ounce scoop. But order the rock shrimp salad and your filling weighs only five. (The reason? Moll's firm suggests that each dish cost between 22 to 30 percent of what it ends up selling for—and eggs are cheaper than shrimp.) Erwin Chang, the owner of Organixx, acknowledges "it's a very delicate decision" to change the portions, but it's not hard to see his point of view as he describes the challenges of running a restaurant in this economic climate — especially when all those organic ingredients and other green touches come at a premium.
And hey, at least he's not holding back on the water. That's a strategy Moll recommended to another of his clients, Mici Handcrafted Italian, a cheerful, contemporary joint half a mile down the road from Organixx. Eager to expand to a second location, this family-owned pasta and pizza eatery hired National Restaurant Consultants to help shave operating costs. But Mici's owners were loath to change or cut back on menu items like its famed hand-rolled meatballs, so Moll had to turn to the eatery's beverage lineup to find savings.
In addition to tweaking Mici's wine list, Moll came up with a 10-point game plan for fountain drinks. Selling some 13,000 units a year, sodas still weren't delivering any profit, according to co-owner Michael Miceli — even though they typically cost the restaurant only a dime a glass. Some of the most effective moves Moll recommended include cutting out the middleman syrup supplier and offering only one size drink instead of three. Goodbye, costly cups.
But one tip comes with a spritz of controversy: Don't automatically serve patrons water, so they're more likely to order soda, beer or wine. Helen Rosner, who blogs about the restaurant industry at MenuPages.com, calls the practice "one of the craftiest I've heard of"—and says she's seeing more eateries do it. Victor Gielisse of Culinary Institute of America, on the other hand, calls it "the socially responsible thing to do given our environment today." For his part, Miceli simply says, "We ask them what they want to drink. If they want water, we give water." It certainly hasn't hurt the bottom line; implementing this and other tips from Moll's 32-page "operations analysis" has goosed revenue by 50 percent a week. In the world of kitchen cost cutting, that's more than a few pennies.
SMALL BUSINESS
OCTOBER 9, 2009
Crafty Ways Restaurants Cut Costs
By NEIL PARMAR
When it comes to dining out, Kevin Moll is the kind of frugal patron restaurant owners would love to see more of. The father of two from Denver always passes on the cream and sugar. He never pours a blob of ketchup next to his fries. Even better, after enjoying a plate of barbecued ribs, he usually prefers to wipe his saucy fingers with a cloth napkin, since the cleanup job would require at least three of the paper variety. And don't even get him started on carbonated beverages. This is a guy who prefers cola a little watered down.
With hard times still taking a bite out of restaurant profits, more Kevin Molls are turning up at their tables — not as patrons but as professional nitpickers. The 50-year-old CEO of National Restaurant Consultants is one of a burgeoning wave of efficiency experts who focus on restaurants, checking for unused half-and-half and testing the syrup level in fountain drinks. While no one tracks the number of these professionals in the restaurant field, the Labor Department says there are now some 678,000 efficiency gurus working to cut waste and maximize profits across a wide range of industries, double that from a decade ago. Moll and his food-service brethren do it by carefully pricing out a kitchen's every move — like making ranch dressing every three days instead of daily, which can shave prep time by 15 to 18 minutes. They help fine-tune recipes to economize on ingredients. (Taking olive oil out of the marinara sauce saved one chain $17,000 a year.) And they "engineer" menus to spotlight the highest-margin offerings. Forget soda; iced tea costs a restaurant as little as a nickel a glass.
The $566 billion restaurant industry is anxious to save as many shekels as it can — preferably without diners noticing a difference. Even with the uptick in some sectors of the economy, the dining-out industry is lagging, as it tends to do in bad times. According to surveys from the National Restaurant Association, 59 percent of the country's restaurant owners, on average, have reported a drop in same-store sales every month for the past year. Industry veterans like Lloyd Gordon, who has been consulting for the past 46 years, say times have never been tougher. Restaurant sales typically dropped 20 percent during past recessions, he says, but they've plunged as much as 50 percent in some parts of the country today. "A lot of restaurants are bleeding," says Dean Small of Synergy Restaurant Consultants in Laguna Niguel, Calif. "In some cases, they're hemorrhaging."
And so they turn to Moll and his ilk, whose secret sauce of savings tactics can be traced back decades. The modern-day efficiency movement, largely thought to have originated in Japanese car factories after World War II, took off on these shores after American giants like Motorola and General Electric began famously boosting profits with similar practices in the 1980s and '90s. Other industries took note—and a growing cadre of consultants followed. If you've traveled in the past few months, you've probably noticed their handiwork: disappearing mini shampoo bottles in the hotel bathroom, fewer complimentary magazines in the airline seat back. Such ideas might seem like small potatoes to some, but Moll and his team of experts have come up with enough tips and tricks to fill a 175-page bible on how to run a profitable eatery. For his clients, the often-tiny cuts add up, generating savings or revenue-boosting ideas that goose margins, on average, by 15 percent. "Operating a restaurant," reads one passage of the guide, "is a game of pennies."
Moll learned, when running his own bar and grill two decades ago, that managing an eatery is like navigating "a boat full of holes." And the trim, java-fueled consultant — running on four to five cups daily — is nothing if not a time-is-money, tight-ship kind of guy. He records any passing work inspiration ("note to self") on his cell phone, even while walking his dog. In his clutter-free office, the only papers visible are arranged in a compact stack, perfectly parallel to the edge of the desk. And while driving his pristine white Cadillac between tightly scheduled appointments, he admits that he's called the city's 311 hotline more than once to report street garbage that needs removal. Clearly, no detail is too small.
It's an attitude that comes in handy in his work, like when Moll and his firm recently helped launch Organixx, a casual, quick-service eatery in downtown Denver. To project an eco-friendly vibe, it features not only the requisite recycled napkins but also bamboo tabletops, a hardwood floor made from recycled furniture scraps, and compostable straws and utensils. (Deliveries are often made via skateboard.) Diners have more than two dozen menu items to choose from, but many end up ordering the Asian stir-fry salad, a mix of veggies, crunchy noodles and tofu, chicken or beef, drizzled with toasted-sesame vinaigrette. The most popular salad on the menu, it's also one of the most profitable. "It doesn't happen like that by accident," says Moll.
Remember the old home-buying adage "location, location, location"? Relying on studies that track "eye flow" across menu pages in elaborate arrow-filled diagrams, Moll counsels his clients to spotlight higher-margin items in prime menu real estate. The Asian stir-fry, with ingredients that cost as little as 24 percent of the menu price, holds pride of place at the top right corner, while the grilled salmon burger (cost of ingredients, $2.78; price, $9) is intentionally buried at left center, the menu equivalent of Siberia. "The menu drives everything," says Moll—from an eatery's decor to the length of time it takes to execute a single dish. In fact, some potential recipes at Organixx have been vetoed just because they couldn't be put together by a cook standing in a single spot, with all the ingredients within arm's reach.
Indeed, the biggest cost cutting usually happens behind the swinging doors. To help keep food costs within a healthy 24 to 35 percent of overall expenses, Moll brought in an on-site drill sergeant. Mary Putman, who paces the kitchen prep area, pokes at plates to make sure bread crusts are intact and salad mounds don't lean too far to one side. When red peppers triple in price, she buys more zucchini to sub into the stir-fry and salads. If a line cook takes more than six minutes to prepare an order, she points sternly at her watch. Most important, she makes sure they're measuring every ounce of food instead of just eyeballing ingredients. Constantly nagging them to "quit heaping the scoop," Putman says a big part of her job "is pulling food off the line."
Which may leave some diners, well, a little hungrier than others. While all of Organixx's sandwiches cost $9, some are a little less generously proportioned. Eyeing the egg salad? You'll get an eight-ounce scoop. But order the rock shrimp salad and your filling weighs only five. (The reason? Moll's firm suggests that each dish cost between 22 to 30 percent of what it ends up selling for—and eggs are cheaper than shrimp.) Erwin Chang, the owner of Organixx, acknowledges "it's a very delicate decision" to change the portions, but it's not hard to see his point of view as he describes the challenges of running a restaurant in this economic climate — especially when all those organic ingredients and other green touches come at a premium.
And hey, at least he's not holding back on the water. That's a strategy Moll recommended to another of his clients, Mici Handcrafted Italian, a cheerful, contemporary joint half a mile down the road from Organixx. Eager to expand to a second location, this family-owned pasta and pizza eatery hired National Restaurant Consultants to help shave operating costs. But Mici's owners were loath to change or cut back on menu items like its famed hand-rolled meatballs, so Moll had to turn to the eatery's beverage lineup to find savings.
In addition to tweaking Mici's wine list, Moll came up with a 10-point game plan for fountain drinks. Selling some 13,000 units a year, sodas still weren't delivering any profit, according to co-owner Michael Miceli — even though they typically cost the restaurant only a dime a glass. Some of the most effective moves Moll recommended include cutting out the middleman syrup supplier and offering only one size drink instead of three. Goodbye, costly cups.
But one tip comes with a spritz of controversy: Don't automatically serve patrons water, so they're more likely to order soda, beer or wine. Helen Rosner, who blogs about the restaurant industry at MenuPages.com, calls the practice "one of the craftiest I've heard of"—and says she's seeing more eateries do it. Victor Gielisse of Culinary Institute of America, on the other hand, calls it "the socially responsible thing to do given our environment today." For his part, Miceli simply says, "We ask them what they want to drink. If they want water, we give water." It certainly hasn't hurt the bottom line; implementing this and other tips from Moll's 32-page "operations analysis" has goosed revenue by 50 percent a week. In the world of kitchen cost cutting, that's more than a few pennies.
Monday, October 12, 2009
Article "Food Fight: Franchisees Caught in the Middle"
Food Fight: Franchisees Caught in the Middle
October 1, 2009
By Diana Ransom
IF YOU’VE BEEN to a fast food restaurant lately, you’ve probably seen some of the fallout of the downturn. You may have eaten some of it, too.
In an effort to convince consumers to open their wallets wider, franchisors are not only requiring franchisees to officiate (and pay for) new promotions, they’re also requiring them to serve new products, extend operating hours and hand over more of their profits.
“The whole restaurant industry is struggling,” says Bonnie Riggs, an analyst for the market research firm NPD Group, which tracks industry revenues. Although total sales at quick-service restaurants were flat during April, May and June, overall restaurant sales fell 1% over the same period a year ago — the first decline of that magnitude in more than three decades, according to NPD research.
To boost sales, franchisors are taking a scattershot approach. “Franchisors are trying to be everything to everyone right now,” Riggs says. Given that penny-pinching consumers are eating more meals at home, franchisors are pulling out all the stops to reel them back in. They are asking franchisees to pitch cut-rate sandwiches and burgers and dreaming up premium, often exotic menu items to lure consumers back.
Just ask Mike Wright, a McDonald’s franchisee in Shalimar, Fla. To make way for McDonald’s new McCafé espresso-based coffee drinks, which launched nationally in May, he was looking at paying upwards of $125,000 to remodel the interiors of each of his seven stores. The company eventually changed its tune – after substantial pushback from franchisees – but Wright and his fellow franchisees were still strongly encouraged to purchase the necessary coffee and frappucino-style drink equipment. “At $14,000 a pop, you’ve got to sell a lot of coffee to make it up,” Wright says.
In Southern markets, selling hot coffee isn’t easy, Wright says. “When you start selling Bubba a cappuccino, it’s like trying to sell grits to a New Yorker,” he says. “They forced everyone to put this in their stores regardless of profitability.”
McDonald’s is telling its franchisees to have faith in the new menu. “Despite the economy, we are still seeing consistent growth in both our premium and value offerings,” says Julie Pottebaum, a McDonald’s spokeswoman.
Although offering premium products could be an indication that franchisors think the recession is over, many of the nation’s franchisees are still struggling. And even though offering tantalizing new items and discounts can help prop up sales, those tactics don’t always translate to higher profits for franchisees.
“There is a big difference between traffic and bottom-line profitability,” says Darren Tristano, the executive vice president of Technomic, a food industry research firm in Chicago. “From a franchisee perspective, they are looking hard at their cost structure,” he says. Imagine the profit margin on a $1 double cheeseburger, he says. “There isn’t much.”
Meanwhile, franchisees are also coping with added overhead. Adding new menu items often includes taking on more inventory, equipment and maintenance charges, as well as training expenses.
Franchisees have always been tasked with meeting franchisor demands; it’s the mechanism by which chains offer standardized products and ensure quality control. However, fielding a rush of new demands amid slumping sales and rising materials costs – while paying employees a new, higher minimum wage – is proving to be much more challenging than many franchisees expected.
“We are in a retail business; we don’t have software that takes care of itself,” says Daniel B. Fitzpatrick, the chief executive of Quality Dining, which owns 116 Burger King (BKC) franchises in the Midwest. “We still have to clean the signs and take care of the grass. When real estate taxes go up, we pay it. When the minimum wages rise, we pay it,” Fitzpatrick says.
For years, Fitzpatrick and fellow Burger King franchisees regularly paid for these added costs by dipping into their portion of Burger King’s restaurant operating fund, which is funded in part by rebates that Coca-Cola (KO) and Dr. Pepper Snapple (DPS) contribute in return for being Burger King’s exclusive soda vendors. However, Burger King now plans to reallocate 20% to 40% of those rebates each year to bolster its advertising budget.
Faced with increasingly stiff competition among other quick service restaurants – a risk factor the company noted in its most recent 10k filing – Burger King plans to reallocate restaurant operating funds “for marketing and other promotional purposes in line with industry practice,” says Susan Robison, a BK spokeswoman.
The company says it expects to allocate $25 million in 2010 and increase the sum to almost $40 million in 2012. That’s roughly $5,000 to $6,000 a store each year. For Fitzpatrick, that amounts to a roughly $600,000 loss in the first year alone. “Times are tough; I don’t have $6,000 — much less $600,000 — to give up.”
October 1, 2009
By Diana Ransom
IF YOU’VE BEEN to a fast food restaurant lately, you’ve probably seen some of the fallout of the downturn. You may have eaten some of it, too.
In an effort to convince consumers to open their wallets wider, franchisors are not only requiring franchisees to officiate (and pay for) new promotions, they’re also requiring them to serve new products, extend operating hours and hand over more of their profits.
“The whole restaurant industry is struggling,” says Bonnie Riggs, an analyst for the market research firm NPD Group, which tracks industry revenues. Although total sales at quick-service restaurants were flat during April, May and June, overall restaurant sales fell 1% over the same period a year ago — the first decline of that magnitude in more than three decades, according to NPD research.
To boost sales, franchisors are taking a scattershot approach. “Franchisors are trying to be everything to everyone right now,” Riggs says. Given that penny-pinching consumers are eating more meals at home, franchisors are pulling out all the stops to reel them back in. They are asking franchisees to pitch cut-rate sandwiches and burgers and dreaming up premium, often exotic menu items to lure consumers back.
Just ask Mike Wright, a McDonald’s franchisee in Shalimar, Fla. To make way for McDonald’s new McCafé espresso-based coffee drinks, which launched nationally in May, he was looking at paying upwards of $125,000 to remodel the interiors of each of his seven stores. The company eventually changed its tune – after substantial pushback from franchisees – but Wright and his fellow franchisees were still strongly encouraged to purchase the necessary coffee and frappucino-style drink equipment. “At $14,000 a pop, you’ve got to sell a lot of coffee to make it up,” Wright says.
In Southern markets, selling hot coffee isn’t easy, Wright says. “When you start selling Bubba a cappuccino, it’s like trying to sell grits to a New Yorker,” he says. “They forced everyone to put this in their stores regardless of profitability.”
McDonald’s is telling its franchisees to have faith in the new menu. “Despite the economy, we are still seeing consistent growth in both our premium and value offerings,” says Julie Pottebaum, a McDonald’s spokeswoman.
Although offering premium products could be an indication that franchisors think the recession is over, many of the nation’s franchisees are still struggling. And even though offering tantalizing new items and discounts can help prop up sales, those tactics don’t always translate to higher profits for franchisees.
“There is a big difference between traffic and bottom-line profitability,” says Darren Tristano, the executive vice president of Technomic, a food industry research firm in Chicago. “From a franchisee perspective, they are looking hard at their cost structure,” he says. Imagine the profit margin on a $1 double cheeseburger, he says. “There isn’t much.”
Meanwhile, franchisees are also coping with added overhead. Adding new menu items often includes taking on more inventory, equipment and maintenance charges, as well as training expenses.
Franchisees have always been tasked with meeting franchisor demands; it’s the mechanism by which chains offer standardized products and ensure quality control. However, fielding a rush of new demands amid slumping sales and rising materials costs – while paying employees a new, higher minimum wage – is proving to be much more challenging than many franchisees expected.
“We are in a retail business; we don’t have software that takes care of itself,” says Daniel B. Fitzpatrick, the chief executive of Quality Dining, which owns 116 Burger King (BKC) franchises in the Midwest. “We still have to clean the signs and take care of the grass. When real estate taxes go up, we pay it. When the minimum wages rise, we pay it,” Fitzpatrick says.
For years, Fitzpatrick and fellow Burger King franchisees regularly paid for these added costs by dipping into their portion of Burger King’s restaurant operating fund, which is funded in part by rebates that Coca-Cola (KO) and Dr. Pepper Snapple (DPS) contribute in return for being Burger King’s exclusive soda vendors. However, Burger King now plans to reallocate 20% to 40% of those rebates each year to bolster its advertising budget.
Faced with increasingly stiff competition among other quick service restaurants – a risk factor the company noted in its most recent 10k filing – Burger King plans to reallocate restaurant operating funds “for marketing and other promotional purposes in line with industry practice,” says Susan Robison, a BK spokeswoman.
The company says it expects to allocate $25 million in 2010 and increase the sum to almost $40 million in 2012. That’s roughly $5,000 to $6,000 a store each year. For Fitzpatrick, that amounts to a roughly $600,000 loss in the first year alone. “Times are tough; I don’t have $6,000 — much less $600,000 — to give up.”
Thursday, October 8, 2009
How to Calculate Start-Up Costs
The Wall Street Journal - wsj.com
OCTOBER 5, 2009, 10:10 A.M. ET
How to Calculate Start-Up Costs
By COLLEEN DEBAISE
Adapted from the upcoming book THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press, Dec. 29, 2009).
Got a pen handy? To best estimate your start-up costs, you'll need to make a list— and the more detailed the better. A smart way to start is to brainstorm everything you'll need, from tangible goods (such as inventory, equipment and fixtures) to professional services (such as remodeling, advertising and legal work). Then, start calculating how much you'll need to pay for all those goods and services.
Some of the expenses incurred during the start-up phase will be one-time costs, such as the fee for printing up your brochures, creating your LLC or acquiring a permit, while others will be ongoing, such as rent, insurance or employees' salaries. In general, it's best to use a two-step process. First, come up with an estimate of one-time costs needed to get your doors open, and then develop an operating budget for the first six months or even the first year of the business. Check out the Better Business Bureau's sample worksheet here.
The categories listed below will aid you in completing your list of costs for opening and operating a small business:
Location. Think about how much you'll need to pay for rent, to make improvements to the space or for full-scale renovations.
Inventory. Figure out the cost of raw materials, plus any production costs, or the wholesale prices of products you'll be selling. Calculate shipping and packaging costs, sales commissions and other costs related to the sale of your product.
Equipment. Add up how much it costs to buy or lease computers, copiers, telephones, heavy-duty machinery or other fixtures.
Employees. Calculate salaries and wages, plus benefits you would offer, and don't forget payroll-related taxes, overtime pay and workers' compensation.
Marketing. Figure out how much you'll pay for new stationery, marketing materials, advertising campaigns, the sign above your door and meals or entertainment with clients.
Administrative and operational costs. Keep track of how much you'll need to pay for insurance (to protect against property damage, business interruption and floods) and office supplies. Don't forget utilities, a commonly overlooked expense, and other charges, such as phone and Internet service, cleaning and property maintenance.
Professional fees and permits. Add up how much you'll pay for your attorney, accountant or other advisor or consultant. Factor in what you'll need to pay for permits or licenses related to your business.
If you're still having trouble figuring out how much money you need, do research on other companies in your industry and region of the country. Talk to other business owners about how they figured out start-up costs— and ask specifically about expenses they forgot. The SBA offers free counseling through its Small Business Development Centers and its affiliate, SCORE. You can also seek advice from an accountant or attorney accustomed to dealing with small businesses.
When in doubt about your projections, you should always err on the side of overestimating your up-front investment cost and underestimating sales. Eric van Merkensteijn, a University of Pennsylvania business professor who left academia in the late 1990s to open a restaurant in Philadelphia, offers this advice: Figure out your start-up costs, then double that number. Then double it again. Only then will you have a realistic number, says the professor, who closed the business in 2004 and returned to campus.
OCTOBER 5, 2009, 10:10 A.M. ET
How to Calculate Start-Up Costs
By COLLEEN DEBAISE
Adapted from the upcoming book THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press, Dec. 29, 2009).
Got a pen handy? To best estimate your start-up costs, you'll need to make a list— and the more detailed the better. A smart way to start is to brainstorm everything you'll need, from tangible goods (such as inventory, equipment and fixtures) to professional services (such as remodeling, advertising and legal work). Then, start calculating how much you'll need to pay for all those goods and services.
Some of the expenses incurred during the start-up phase will be one-time costs, such as the fee for printing up your brochures, creating your LLC or acquiring a permit, while others will be ongoing, such as rent, insurance or employees' salaries. In general, it's best to use a two-step process. First, come up with an estimate of one-time costs needed to get your doors open, and then develop an operating budget for the first six months or even the first year of the business. Check out the Better Business Bureau's sample worksheet here.
The categories listed below will aid you in completing your list of costs for opening and operating a small business:
Location. Think about how much you'll need to pay for rent, to make improvements to the space or for full-scale renovations.
Inventory. Figure out the cost of raw materials, plus any production costs, or the wholesale prices of products you'll be selling. Calculate shipping and packaging costs, sales commissions and other costs related to the sale of your product.
Equipment. Add up how much it costs to buy or lease computers, copiers, telephones, heavy-duty machinery or other fixtures.
Employees. Calculate salaries and wages, plus benefits you would offer, and don't forget payroll-related taxes, overtime pay and workers' compensation.
Marketing. Figure out how much you'll pay for new stationery, marketing materials, advertising campaigns, the sign above your door and meals or entertainment with clients.
Administrative and operational costs. Keep track of how much you'll need to pay for insurance (to protect against property damage, business interruption and floods) and office supplies. Don't forget utilities, a commonly overlooked expense, and other charges, such as phone and Internet service, cleaning and property maintenance.
Professional fees and permits. Add up how much you'll pay for your attorney, accountant or other advisor or consultant. Factor in what you'll need to pay for permits or licenses related to your business.
If you're still having trouble figuring out how much money you need, do research on other companies in your industry and region of the country. Talk to other business owners about how they figured out start-up costs— and ask specifically about expenses they forgot. The SBA offers free counseling through its Small Business Development Centers and its affiliate, SCORE. You can also seek advice from an accountant or attorney accustomed to dealing with small businesses.
When in doubt about your projections, you should always err on the side of overestimating your up-front investment cost and underestimating sales. Eric van Merkensteijn, a University of Pennsylvania business professor who left academia in the late 1990s to open a restaurant in Philadelphia, offers this advice: Figure out your start-up costs, then double that number. Then double it again. Only then will you have a realistic number, says the professor, who closed the business in 2004 and returned to campus.
Tuesday, October 6, 2009
Sour Year for SBA Loans Ends With Uptick
Sour Year for SBA Loans Ends With Uptick
By EMILY MALTBY
The Small Business Administration ended its 2009 fiscal year on Wednesday, marking the close of a tumultuous year of lending initiatives to keep banks' doors open. Despite the efforts to revive the credit market, the SBA approved less than 45,000 loans, down 36% compared to last year and 56% from 2007.
The loan volume reflects all the small business loans approved by lenders that are guaranteed by the government under the SBA's flagship 7(a) lending program. In addition to the drop in number of loans that were approved to small businesses, the total dollar amount also fell drastically to $9.3 billion total, falling short of last year's total by about $3.4 billion.
Lending, however, appeared to rebound in the later part of the year, which the agency attributes to stimulus-related efforts. "We had a big finish to the fiscal year," says SBA spokesman Michael Stamler. "Dollar volume for the [7(a) loans] in September was the highest recorded since August 2007."
Broken down, the 2009 quarterly loan numbers (see interactive chart, at bottom) reveal the complete story of the year following September 2008, when Lehman Brothers filed for bankruptcy. The secondary market, where banks had typically sold their SBA loans to investors in order to initiate new loans, came to a standstill. According to the January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, about 70% of banks had tightened their standards on small business loans. As a result, the SBA backed 57% fewer loans in the first quarter of the year.
In February – six months into the fiscal year - the Recovery Act passed. The stimulus legislation dropped fees associated with the loans and raised the maximum guarantee on the loans to 90%, meaning that if the borrower defaulted, the government would reimburse the bank up to 90% of the loss.
Lending remained down in the third quarter of the year, the first full quarter following the stimulus. Top-tier lenders, including CIT and J.P. Morgan Chase, had reduced their small business lending considerably.
Small Business Loan Lenders On Way to Recovery?3:22Loans to small businesses came to a standstill after the collapse of Lehman Brothers last September, but due to some government stimulus programs a recovery was sparked in the latter part of the year. WSJ's Emily Maltby discusses with Kelsey Hubbard.
However, crediting the stimulus measures, the SBA reported that lending activity had started to pick up and that hundreds of lenders who hadn't made a 7(a) loan in months had jumped back into the game.
"We saw many more banks increasing their SBA loans," says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. "The stimulus provisions helped jump-start the interest in SBA lending."
Fast forward to the last quarter of the year, ended this week, where more than 15,000 loans totaling $3.3 billion were approved in the last three months - up 18% from the year prior and nearly hitting 2007's quarterly levels.
"The real turning point was the Recovery Act," says SBA spokesman Jonathan Swain. "When you look at the data since February, I think we can say that the Recovery Act hit the mark when it comes to SBA lending."
The lending volume boost in the second half of the year was also due to the revival of the secondary market, which was supported by a program called the Term Asset-Backed Securities Loan Facility, or TALF.
The TALF initiative, which kicked off in March, allowed secondary-market investors to take out loans from the government to start purchasing asset-backed securities, such as SBA loans. Although investors have taken only a small amount of money from TALF to buy SBA loans, the program restored confidence in the market, which has since recovered.
"The TALF program had a very small but positive effect on the secondary market," says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. "[The market] largely corrected itself and credit started flowing more."
Scott E. Harris Scott Harris and his wife, Becky, secured an SBA loan to launch their distilling company. The loan process took four months.
That means more SBA loans are available for new business to get off the ground and for existing businesses to grow. Take Scott Harris, for example, who owns Catoctin Creek Distilling Company LLC in Purcellville, Va. with his wife, Becky. On Wednesday, the last day of the fiscal year, they signed on the dotted line for a 7(a) loan that will help them start their spirits business.
"We started looking at the banks in June," says Mr. Harris, who credits the couple's ability to secure a loan to a solid business plan, robust credit score and a significant amount in personal savings invested in the the business. The four-month waiting game has been "exciting and terrifying," he says.
The couple procured the loan, which Mr. Harris says was for more than $100,000, with their local BB&T branch. The money will be split between startup purchases such as equipment, and working capital to grow the business.
Still, a jump in the year-over-year numbers doesn't necessarily mean the trend will continue on an upward trajectory. While conditions are better today, the July 2009 Senior Loan Officer Opinion Survey shows that 36% of banks reported tightening credit standards for small firms in the last three months. Only 2% reported standards easing somewhat.
Furthermore, many lenders who historically have been stalwarts in the SBA lending arena remain hesitant to make small business loans. CIT, the top lender in 2008, has fallen to number 13 and is still teetering on the brink of bankruptcy.
"Where we are today compared to February is encouraging but no one in the administration will say we should declare victory," says the SBA's Mr. Swain. "Going forward one of the things we are doing with real urgency is looking at what is needed in marketplace today in terms of access to capital. The main focus is what we can do to keep moving in a positive direction."
One measure that may help, says Mr. Merski, is pushing the end date for the stimulus programs. While the no-fee and 90% guarantee provisions are set to expire on September 30, 2010, the SBA estimates that funding is expected to run out by December, cutting the end date short. "[Lenders are] 100% behind extending the date as we're turning the corner," he says. "If they are pulled back in, we could have a dip in lending. I think that's going to be a huge factor as to whether this strong uptick in the final quarter of 2009 will continue."
By EMILY MALTBY
The Small Business Administration ended its 2009 fiscal year on Wednesday, marking the close of a tumultuous year of lending initiatives to keep banks' doors open. Despite the efforts to revive the credit market, the SBA approved less than 45,000 loans, down 36% compared to last year and 56% from 2007.
The loan volume reflects all the small business loans approved by lenders that are guaranteed by the government under the SBA's flagship 7(a) lending program. In addition to the drop in number of loans that were approved to small businesses, the total dollar amount also fell drastically to $9.3 billion total, falling short of last year's total by about $3.4 billion.
Lending, however, appeared to rebound in the later part of the year, which the agency attributes to stimulus-related efforts. "We had a big finish to the fiscal year," says SBA spokesman Michael Stamler. "Dollar volume for the [7(a) loans] in September was the highest recorded since August 2007."
Broken down, the 2009 quarterly loan numbers (see interactive chart, at bottom) reveal the complete story of the year following September 2008, when Lehman Brothers filed for bankruptcy. The secondary market, where banks had typically sold their SBA loans to investors in order to initiate new loans, came to a standstill. According to the January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices, about 70% of banks had tightened their standards on small business loans. As a result, the SBA backed 57% fewer loans in the first quarter of the year.
In February – six months into the fiscal year - the Recovery Act passed. The stimulus legislation dropped fees associated with the loans and raised the maximum guarantee on the loans to 90%, meaning that if the borrower defaulted, the government would reimburse the bank up to 90% of the loss.
Lending remained down in the third quarter of the year, the first full quarter following the stimulus. Top-tier lenders, including CIT and J.P. Morgan Chase, had reduced their small business lending considerably.
Small Business Loan Lenders On Way to Recovery?3:22Loans to small businesses came to a standstill after the collapse of Lehman Brothers last September, but due to some government stimulus programs a recovery was sparked in the latter part of the year. WSJ's Emily Maltby discusses with Kelsey Hubbard.
However, crediting the stimulus measures, the SBA reported that lending activity had started to pick up and that hundreds of lenders who hadn't made a 7(a) loan in months had jumped back into the game.
"We saw many more banks increasing their SBA loans," says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. "The stimulus provisions helped jump-start the interest in SBA lending."
Fast forward to the last quarter of the year, ended this week, where more than 15,000 loans totaling $3.3 billion were approved in the last three months - up 18% from the year prior and nearly hitting 2007's quarterly levels.
"The real turning point was the Recovery Act," says SBA spokesman Jonathan Swain. "When you look at the data since February, I think we can say that the Recovery Act hit the mark when it comes to SBA lending."
The lending volume boost in the second half of the year was also due to the revival of the secondary market, which was supported by a program called the Term Asset-Backed Securities Loan Facility, or TALF.
The TALF initiative, which kicked off in March, allowed secondary-market investors to take out loans from the government to start purchasing asset-backed securities, such as SBA loans. Although investors have taken only a small amount of money from TALF to buy SBA loans, the program restored confidence in the market, which has since recovered.
"The TALF program had a very small but positive effect on the secondary market," says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. "[The market] largely corrected itself and credit started flowing more."
Scott E. Harris Scott Harris and his wife, Becky, secured an SBA loan to launch their distilling company. The loan process took four months.
That means more SBA loans are available for new business to get off the ground and for existing businesses to grow. Take Scott Harris, for example, who owns Catoctin Creek Distilling Company LLC in Purcellville, Va. with his wife, Becky. On Wednesday, the last day of the fiscal year, they signed on the dotted line for a 7(a) loan that will help them start their spirits business.
"We started looking at the banks in June," says Mr. Harris, who credits the couple's ability to secure a loan to a solid business plan, robust credit score and a significant amount in personal savings invested in the the business. The four-month waiting game has been "exciting and terrifying," he says.
The couple procured the loan, which Mr. Harris says was for more than $100,000, with their local BB&T branch. The money will be split between startup purchases such as equipment, and working capital to grow the business.
Still, a jump in the year-over-year numbers doesn't necessarily mean the trend will continue on an upward trajectory. While conditions are better today, the July 2009 Senior Loan Officer Opinion Survey shows that 36% of banks reported tightening credit standards for small firms in the last three months. Only 2% reported standards easing somewhat.
Furthermore, many lenders who historically have been stalwarts in the SBA lending arena remain hesitant to make small business loans. CIT, the top lender in 2008, has fallen to number 13 and is still teetering on the brink of bankruptcy.
"Where we are today compared to February is encouraging but no one in the administration will say we should declare victory," says the SBA's Mr. Swain. "Going forward one of the things we are doing with real urgency is looking at what is needed in marketplace today in terms of access to capital. The main focus is what we can do to keep moving in a positive direction."
One measure that may help, says Mr. Merski, is pushing the end date for the stimulus programs. While the no-fee and 90% guarantee provisions are set to expire on September 30, 2010, the SBA estimates that funding is expected to run out by December, cutting the end date short. "[Lenders are] 100% behind extending the date as we're turning the corner," he says. "If they are pulled back in, we could have a dip in lending. I think that's going to be a huge factor as to whether this strong uptick in the final quarter of 2009 will continue."
Monday, October 5, 2009
Article: Recession Relapse??
Forbes.com
Digital Rules
Recession Relapse?
10.19.09, 12:00 AM ET
If our apparent third-quarter economic recovery proves weak and relapses into a second recession, the causes will be:
--Small businesses, constrained by lack of expansion capital and fearful of possible regulatory changes in health care, energy and union membership, sit on their hands and don't hire.
--Unemployment creeps above 10% and stubbornly stays there.
--Because small businesses can't or won't expand, commercial real estate values sink more than expected.
--Regional banks with lots of commercial real estate paper on their balance sheets fail by the hundreds.
In other words, a second leg of recession will occur if America's small-business sector doesn't expand. It's about the small-business economy, stupid.
Recoveries from recession in the U.S. are typically led by small businesses. We now have reached the inflection point--i.e., the recession is ending, but the recovery is embryonic--when small businesses historically jump to the lead and pull the American economy along. It is precisely at this time that small businesses ought to be emerging from their bunkers to lease or buy cheap commercial property as they start gearing up for growth. Six months from now unemployment should be back down to 8%--and headed toward 5%--and Americans should be toasting small businesses for creating four out of five new jobs.
Small-Business Recovery Is Lagging
But small businesses aren't hiring yet. We should be asking why not. Somebody high up in the Obama Administration must make the health of small business a top priority; otherwise the recovery will die, and unemployment will persist at 10%. If that happens the President can say good-bye to his large majorities in Congress 13 months from now.
Last month I gave a speech at an industry conference for restaurant owners and fast-food franchisees--typical American small-business owners. Recovery skeptics filled the room, even though some of the franchises represented, such as McDonald's, had weathered the recession fine and others, such as Panera Bread and Green Mountain Coffee, were growing impressively.
Their chief worries are those I described in the first paragraph. One is the difficulty of obtaining working capital. Restaurants need and use credit lines just to operate. Another is the set of cost concerns around President Obama's big plans for health care, energy and union labor. Another is the uncertainty of inflation and commodity prices that determine the cost of food production. Together, these worries are enough to dampen the spirits of small-business owners in the food-delivery industry. True, food delivery is just one industry, but it's a big one.
When the Blue State Obama Administration thinks of small business, it undoubtedly dreams of promising startups churning out solar panels for office buildings or turbine blades for windmills. If its dreams are serious, the Administration should get behind a crackling good idea proposed by entrepreneur Paul Graham. It's called the Founder Visa, and the idea is to make it easy for the world's entrepreneurs to come to the U.S. As Paul Kedrosky describes it on the Web site Growthology: "The particulars are still getting worked through, but it has to do with getting a modicum of [private] funding ($250,000) and approval from an independent board that this represents a real startup deal, not some back-room finagling for a visa, and that's it: You're in the country and you're off and running."
This is a heck of a good long-term idea, and let's hope the Obama Administration embraces it. But for the short and medium term, high-tech startups alone will never return America to 5% unemployment and defuse the commercial-property bomb. Most existing small businesses don't need assistance from the government. What they need is across-the-board relief on taxes. They need benign legislation (or no change) on health care, energy and unions. A wish list, in other words, that runs counter to everything the Obama Administration is currently trying to pass.
Small businesses have always infuriated some liberals. Sinclair Lewis was awarded the Nobel Prize in Literature for Babbitt--the story of a small-minded Realtor in the 1920s. The word "Babbittry" soon became synonymous with "philistine." Liberal writer Michael Lind argues on Salon.com for sacrificing small business at the altar of corporatism in order to pass Obamacare:
"The solution may be corporatism or corporate paternalism--by which I mean the mandatory universalization of private-employer benefits. If the politics of ethnic diversity makes movement in a universalist, social democratic direction impossible in the U.S., then the alternative might be to mandate that all employers provide certain benefits to all employees, with no exceptions. The costs of such unfunded mandates might drive some small businesses out of existence. But small-business owners are the most vocal opponents of wage and benefit reform in the U.S. The replacement of Scrooge & Marley by a smaller number of bigger private and public employers who treat Bob Cratchit and Tiny Tim better would not necessarily be a tragedy."
There you have it: small business as Scrooge! If Obama defender Lind represents the thinking of President Obama and congressional Democrats, then our small businesses are in for a long siege. Hunkered down, they will not expand, hire or defuse the commercial-property bomb. That's a formula for a second recession.
Digital Rules
Recession Relapse?
10.19.09, 12:00 AM ET
If our apparent third-quarter economic recovery proves weak and relapses into a second recession, the causes will be:
--Small businesses, constrained by lack of expansion capital and fearful of possible regulatory changes in health care, energy and union membership, sit on their hands and don't hire.
--Unemployment creeps above 10% and stubbornly stays there.
--Because small businesses can't or won't expand, commercial real estate values sink more than expected.
--Regional banks with lots of commercial real estate paper on their balance sheets fail by the hundreds.
In other words, a second leg of recession will occur if America's small-business sector doesn't expand. It's about the small-business economy, stupid.
Recoveries from recession in the U.S. are typically led by small businesses. We now have reached the inflection point--i.e., the recession is ending, but the recovery is embryonic--when small businesses historically jump to the lead and pull the American economy along. It is precisely at this time that small businesses ought to be emerging from their bunkers to lease or buy cheap commercial property as they start gearing up for growth. Six months from now unemployment should be back down to 8%--and headed toward 5%--and Americans should be toasting small businesses for creating four out of five new jobs.
Small-Business Recovery Is Lagging
But small businesses aren't hiring yet. We should be asking why not. Somebody high up in the Obama Administration must make the health of small business a top priority; otherwise the recovery will die, and unemployment will persist at 10%. If that happens the President can say good-bye to his large majorities in Congress 13 months from now.
Last month I gave a speech at an industry conference for restaurant owners and fast-food franchisees--typical American small-business owners. Recovery skeptics filled the room, even though some of the franchises represented, such as McDonald's, had weathered the recession fine and others, such as Panera Bread and Green Mountain Coffee, were growing impressively.
Their chief worries are those I described in the first paragraph. One is the difficulty of obtaining working capital. Restaurants need and use credit lines just to operate. Another is the set of cost concerns around President Obama's big plans for health care, energy and union labor. Another is the uncertainty of inflation and commodity prices that determine the cost of food production. Together, these worries are enough to dampen the spirits of small-business owners in the food-delivery industry. True, food delivery is just one industry, but it's a big one.
When the Blue State Obama Administration thinks of small business, it undoubtedly dreams of promising startups churning out solar panels for office buildings or turbine blades for windmills. If its dreams are serious, the Administration should get behind a crackling good idea proposed by entrepreneur Paul Graham. It's called the Founder Visa, and the idea is to make it easy for the world's entrepreneurs to come to the U.S. As Paul Kedrosky describes it on the Web site Growthology: "The particulars are still getting worked through, but it has to do with getting a modicum of [private] funding ($250,000) and approval from an independent board that this represents a real startup deal, not some back-room finagling for a visa, and that's it: You're in the country and you're off and running."
This is a heck of a good long-term idea, and let's hope the Obama Administration embraces it. But for the short and medium term, high-tech startups alone will never return America to 5% unemployment and defuse the commercial-property bomb. Most existing small businesses don't need assistance from the government. What they need is across-the-board relief on taxes. They need benign legislation (or no change) on health care, energy and unions. A wish list, in other words, that runs counter to everything the Obama Administration is currently trying to pass.
Small businesses have always infuriated some liberals. Sinclair Lewis was awarded the Nobel Prize in Literature for Babbitt--the story of a small-minded Realtor in the 1920s. The word "Babbittry" soon became synonymous with "philistine." Liberal writer Michael Lind argues on Salon.com for sacrificing small business at the altar of corporatism in order to pass Obamacare:
"The solution may be corporatism or corporate paternalism--by which I mean the mandatory universalization of private-employer benefits. If the politics of ethnic diversity makes movement in a universalist, social democratic direction impossible in the U.S., then the alternative might be to mandate that all employers provide certain benefits to all employees, with no exceptions. The costs of such unfunded mandates might drive some small businesses out of existence. But small-business owners are the most vocal opponents of wage and benefit reform in the U.S. The replacement of Scrooge & Marley by a smaller number of bigger private and public employers who treat Bob Cratchit and Tiny Tim better would not necessarily be a tragedy."
There you have it: small business as Scrooge! If Obama defender Lind represents the thinking of President Obama and congressional Democrats, then our small businesses are in for a long siege. Hunkered down, they will not expand, hire or defuse the commercial-property bomb. That's a formula for a second recession.
Thursday, October 1, 2009
SBA Announces Maximum Fixed Rate
SBA Announces Maximum Fixed Rate
by Ethan W. Smith, Esq.
September 30, 2009
Historically, SBA has been permitted to publish a maximum allowable fixed rate for its guaranteed loans in the Federal Register, see 13 CFR 120.213(a). However, up to this point, the Agency has not done so. Lenders have been reluctant to make fixed rate loans under the 7a program because they have been restricted to a maximum rate equal to the Prime Rate (or LIBOR Base Rate) plus the maximum rate spreads identified in 13 CFR 120.214 (d) and (e) and 13 CFR 120.215. Currently, this results in a maximum rate of approximately 6.00%, which is not a rate most lenders are willing (or able) to lock in at for a long-term loan.
Yesterday, the SBA published in the Federal Register, its guidelines for calculating fixed rates for long term 7a loans, effective October 1, 2009.
The new guidance establishes a calculation for a "Fixed Base Rate" which is equal to the LIBOR Base Rate plus the average of the 5-year and 10-year LIBOR SWAP Rate (each as established on the first calendar day of the month). The maximum allowable fixed rate for 7(a) loans (excluding SBA Express and Export Express) will be calculated using the Fixed Base Rate plus the same spreads available on variable rate 7a loans, typically between 2.25% and 2.75%. See 13 CFR 120.214 (d) and (e) and 13 CFR 120.215.
Accordingly, the maximum fixed rate for loans with a maturity greater than seven years would be 9.17% using the September, 2009 LIBOR Base Rate (3.26), plus the average 5 and 10 year LIBOR Swap Rates (3.16), plus the maximum spread (2.75).
"This is good news for lenders and borrowers" says Bob Stephan of Coastal Securities, "Borrowers want to take advantage of this low interest rate environment to lock in a fixed rate, but lenders need a rate higher than what was previously allowed, in order to make offering a fixed rate feasible." Additionally, Stephan says that lenders can sell the guaranteed portion of their fixed-rate loans for a premium in the 4 point range and can still retain a 1% servicing fee, thereby reducing their exposure to these fixed rate loans.
The new maximum fixed rate policy is effective for loans submitted on or after October 1, 2009.
by Ethan W. Smith, Esq.
September 30, 2009
Historically, SBA has been permitted to publish a maximum allowable fixed rate for its guaranteed loans in the Federal Register, see 13 CFR 120.213(a). However, up to this point, the Agency has not done so. Lenders have been reluctant to make fixed rate loans under the 7a program because they have been restricted to a maximum rate equal to the Prime Rate (or LIBOR Base Rate) plus the maximum rate spreads identified in 13 CFR 120.214 (d) and (e) and 13 CFR 120.215. Currently, this results in a maximum rate of approximately 6.00%, which is not a rate most lenders are willing (or able) to lock in at for a long-term loan.
Yesterday, the SBA published in the Federal Register, its guidelines for calculating fixed rates for long term 7a loans, effective October 1, 2009.
The new guidance establishes a calculation for a "Fixed Base Rate" which is equal to the LIBOR Base Rate plus the average of the 5-year and 10-year LIBOR SWAP Rate (each as established on the first calendar day of the month). The maximum allowable fixed rate for 7(a) loans (excluding SBA Express and Export Express) will be calculated using the Fixed Base Rate plus the same spreads available on variable rate 7a loans, typically between 2.25% and 2.75%. See 13 CFR 120.214 (d) and (e) and 13 CFR 120.215.
Accordingly, the maximum fixed rate for loans with a maturity greater than seven years would be 9.17% using the September, 2009 LIBOR Base Rate (3.26), plus the average 5 and 10 year LIBOR Swap Rates (3.16), plus the maximum spread (2.75).
"This is good news for lenders and borrowers" says Bob Stephan of Coastal Securities, "Borrowers want to take advantage of this low interest rate environment to lock in a fixed rate, but lenders need a rate higher than what was previously allowed, in order to make offering a fixed rate feasible." Additionally, Stephan says that lenders can sell the guaranteed portion of their fixed-rate loans for a premium in the 4 point range and can still retain a 1% servicing fee, thereby reducing their exposure to these fixed rate loans.
The new maximum fixed rate policy is effective for loans submitted on or after October 1, 2009.
Subscribe to:
Posts (Atom)
Son Isaac on Camel in Tangiers
