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The Roundup August 12

It’s not just you. That new SBA program to get banks to lend to small businesses? Yep, they ain’t lending to small business.

With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.

While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association. . . .

Under the program, known as America’s Recovery Capital, a business owner applies to a bank for a loan and, if approved, can use the proceeds to retire existing debt. The borrower pays no interest on the new loan.

Instead, the Small Business Administration pays the bank two percentage points over the prime rate. After a one-year deferral, the borrower repays the loan over five years. The agency will repay the lender in case of default.

(“Small-Business Stimulus Loans Slow to Trickle,” New York Times, August 12) It’s a pretty nice loan of you can get it. And it’s not like people aren’t trying. But the banks aren’t biting at this bait. But the program requires that the borrower show cash flow projections two years into the future that demonstrate they can repay the loan. And analyzing those projections takes a fair amount of labor on the bank’s part. Meanwhile, the banks are sending out credit card offers like the recession never happened. And it ain’t bloody hard figuring out why. I just received one today from Chase offering the incredible introductory offer of 29% variable APR on all purchases and transfers! At that kind of rate, who cares about future cash flows! They’ve got you over a barrel . . . and got the barrel you’re over over another barrel. So the banks, it seems, are turning to the second oldest profession: highway robbery.

Are we there yet?

US Federal Reserve policymakers said on Wednesday that “economic activity is levelling out” and gave no indication that they would step up emergency measures adopted to stimulate the flow of credit.

(“Fed holds steady on emergency measures,” Financial Times, August 12) What this means is that the Fed is no longer pushing down on the accelerator. They’re not exactly braking, but they aren’t pushing, either. While their official position is that the economy has “levelled off,” expect job losses, credit tightening, and lower demand to continue over the next couple months. When the Fed says “levelled off,” it means it looks like “leveling off” may come some time in the future. And remember: the difference between economists and the rest of us is that economists don’t know the answers better than we do.

Any business can be a recession-proof business.

After 25 years of encouraging entrepreneurs to buy into Great Clips Inc. franchises, they’ve built the Edina-based company into the nation’s biggest hair care brand, with more than 2,700 salons. Even a recession that has clipped profits at high-end beauty salons and put many independents out of business hasn’t hurt their stride. The chain has posted 17 quarters of same-store sales growth, including a 4 percent gain in the first quarter this year, according to Olsen. Salon revenues are expected to hit $750 million this year, and the company forecasts franchise fees to rise 6 percent, to $50.4 million. . . .

But six years ago, with Fantastic Sams, Supercuts, Sports Clips and others gaining ground, Great Clips embarked on a six-month study to figure out what consumers wanted and how salons were delivering. The company found salons used 33 measures to run their business. But, said Barton, only a couple really counted. Great Clips turned those into three goals. Market share and profits got back on track.

(“Clipping along ,” Minneapolis Star-Tribune, August 12) I was asked on a recent radio interview with Jim Buchanan of WICC AM 600 in Bridgeport, CT, what the “best industries for starting a business in a recession are.” I basically answered that any industry in which you offer real customer value and meet the needs customers have in a recession, such as security. Not necessarily saving money, but security, a sense of money well-spent. He kept pushing the question. Well, here’s a must-read article on exactly what I was talking about. Great Clips is going gangbusters in this recession when all its competition — all — is losing money. The whole idea of focusing on three key value propositions to the customer is no small part of that success. When you actually do the math for most profitable businesses, you’ll find that it’s only a few simple things that are bringing in the customers and the revenues.

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