Many, if not all, of your vendors offer you “terms”. That is, you order merchandise and they send you a bill. Without realizing, you have just created a temporary loan (this type of money is called “vendor financing” in the financial world). A good store can sell its merchandise to its customers before they have to pay their vendors, allowing them to carry far more inventory than they could otherwise afford, creating more jobs, and generating more wealth for the owners. Your customers benefit because they get to choose from a lot more merchandise than would otherwise be affordable for you to offer, so their experience living in your community is better. This is true for everything from dresses to suits, books to candles, furniture to television sets.
Even though you are debt-free, you still rely on these vendor terms. Chances are, your vendors have some borrowing or line of credit needs due to seasonal fluctuations in cash flow – think of a candy factory or department store that temporarily borrows large sums in the third quarter to begin building inventory for the holiday shopping season. If they received notice that they couldn’t access those sources of debt capital, there is a chance they would either go bankrupt, or more probable, need to scale back their operations substantially. At the very least, they would be unable to offer you terms. By making credit unavailable, you would have to come up with a lot more money and only pay cash, upfront, the moment you submitted your order and “carry” the capital costs (that is, have your money tied up unnecessarily in the process).
Not only is this going to lower the return on equity your small business generates, but you are going to have to pump a lot of extra cash into your store to keep it from shrinking or failing entirely. The easiest way to estimate the impact would be to look at the average accounts payable outstanding for the entire year; it serves as a very rough guide to the funds you’ll need to maintain your current level of business because as credit becomes scarce, it won’t be available as a source of financing. The problem is that most small business owners don’t have a lot of cash or liquidity outside of their firm – almost everything is tied up in the store!
Thus, you are faced with several options as a business owner. You can:
- Shrink the size of your inventory by ordering less goods, resulting in a reduction of the amount of merchandise on your shelves. Sales are going to as a result of your smaller selection. Your fixed expenses are largely going to stay the same, so your profits are going to be the first thing that suffer damage.
- Infuse capital into your business either by borrowing money – which either isn’t possible or prohibitively expensive during a credit crunch – or coming up with cash from your personal balance sheet or outside investors. If the economy slows down, you may have to scale back somewhat but the business won’t immediately shrink as it would if you couldn’t finance your own goods. Some great business owners that have built up large personal resources will use times such as these to invest in their companies and take market share from competitors. When the economy turns around, they end up much, much wealthier. These are the exceptions.
At the very least, if you are customer in a town such as this, you are going to have a less enjoyable shopping experience. This will generate less sales tax for the city and income tax for the State and Federal governments. If you are an employee, there is a chance you might lose your job. A large portion of Americans live paycheck to paycheck. You may fall behind on your rent or mortage, causing even more problems to ripple through the economy.
You can see how the problem begins to flood through the system, like water following a channel. At the same time you face these issues, your car dealer can’t afford the loans to carry the cars on the lot and is forced to layoff sales and support staff. Unable to afford anything but the necessities, they can’t shop at your store. In some cases, they may even find their credit cards cut off, causing them to lose all access to funds. Your business suffers as a result of hurting consumers.
For publicly traded corporations, stock prices are likely to fall. This causes losses to pension funds, 401k plans, IRA accounts, and some insurance products indexed to the equity markets. Teachers, firefighters, police offers, judges, lawyers, artists – anyone with exposure to these assets, which is virtually all Americans – finds themselves less affluent than they were, even if they didn’t owe a penny of debt.
That’s how the credit crisis hurts you. That’s why it matters.
