Small Business Employment Down

Both supply and demand are crashing in this bust, which we can see all around us. Surely in spite of all the news and what we see, we know there is still some demand, and there is still some supply. We are only off a few percent in most fields, and in the worse hit, say housing, we are off 50%, but there is still some supply and some demand. Here is an essential and key insight: supply is crashing faster than demand. We are experiencing shortages of what people will consume now.

There are houses selling now, but also vast developments not selling.

There are cars selling now, but acres of unsold cars backing up in the supply chain.

There are clothes selling now, but warehouses full of the unsaleable.

Food, gifts, housewares, medicine, computers, you name it, sales continue for some items, and other items go unwanted at any price (if it does not move at 75% off, it is time to donate it to charity, and seek a tax advantage.)

The unemployment claims have risen so dramatically that some states' computers have crashed processing the applications.

Mish Shedlock has the numbers, and as Rothschild said, the "time to invest is when blood is flowing in the streets."

IN this case the investment is in yourself, by starting your own business. Forget about unviable suppliers and competitors. Things are so bad, and getting worse, that even viable businesses are in trouble.

On the supply side, manufacturers are seeing dwindling orders and those orders they get may be coming from people who can no longer pay. A proposition that has a low minimum and prepayment (you take the risk) may get you first class attention. Of course you must be sure the supplier is solvent. This is where your savings, to start the company, is key. Negotiate a minimum order than you can afford to buy, and check out the references of the supplier.

On the competition side, the US Govt is breaking businesses left and right with its policy of bailing out the big failures, which is directly starving the small successes. As you already know, the official policy of the US Govt remains "get big or get out." You can do quite well resisting this policy, if you are aware of the policy. Simply adhere to self-financing and use the technique of frequency to turn enough deals to make your money.

Since FED policy is to starve small businesses of credit in 2009, many businesspeople are going straight into their retirements or savings to finance the business. Say a business needs a $100,000 line of credit which has been available at 8%. If the owner cashes in his $150,000 IRA, and takes the 30% tax hit plus the 10% early withdrawal penalty, he might net the $100,000 he needs for his line of credit, and now he is self-financing. The 8% he was paying the bank is now his to keep, although there are other tax ramifications in all of this. Given the damage done to stock portfolios in 2008, this option is limited. On the other hand, isn't it better to risk that money on yourself than invested in the extremely risky stock market?

Competition is critical to success. To enter the field now, you will be up against the smartest and most flexible, which means you will learn to do business much better and faster than otherwise. Lesser competitors are falling by the wayside. A key here again, is can your competitors can service what debt they assumed in the boom.

As to customers, they are falling left and right also. But the smart ones are standing. Again, examine their debt to judge creditworthiness. Smart ones will be cutting back, but there is still plenty of demand for the new and better.

Viable retailers are keen on the kind of products that sell to the customers that are still walking into the stores. For us at the small business level, nothing has changed. It is just getting easier.

Yes, the economy is shrinking, but it is also changing. Consumer preferences are changing. Those firms established or which changed to serve a boom economy are finding their wares of no interest in the bust, and the debt assumed forbids any change back.

What is going begging are products developed with the consumer in mind, the kind of hands-on, customer centric product development that I learned from the masters and any one of those you see thriving in business today can teach you.

With everyone saying "it is a terrible time to start a business," then starting a business is a classic contrarian play.

The people advising against starting a business now are imagining starting a business in the popular conception of the last 20 - 30 years. "Build a better mousetrap, get venture capital funding, go IPO, make millions in your exit strategy." I said that plan was crazy even when it worked sometimes during the boom. So of course all the more I say don't start that kind of business now.

During the boom supply expanded faster than demand. In Seattle and everywhere else granite counter top suppliers grew like weeds. So did airport expansions, wineries, sushi shops and starbucks. It is these boom businesses that are contracting quickly, and with them perfectly viable businesses caught in policy crunches.

The opportunity, as always but even more so today, is to work with the viable retailers to develop what people want right now.

The key strategy in starting a business today is EXACTLY what I have always laid out: start with the customer and integrate demand with design.

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