Business October 2010

The Bright Side

Some small businesses are struggling to get credit, but that’s the least of their problems. Those that survive the recession will be stronger for it and lead the economy’s recovery.
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Jonathan Hanson

In Afghanistan and Iraq, U.S. troops often use ultra-high-tech cameras whose images enable them, at a safe distance, to identify their targets, develop a plan of attack, and, everyone hopes, avoid civilian casualties. Those images are projected on a screen, the better for the entire team to view them. That screen is held steady on a wire stand, which allows for hands-free operation. And that stand is manufactured by Marlin Steel Wire Products.

The Marlin factory sits on Baltimore’s outskirts, in a vast brick building that houses a dozen or so companies, from manufacturers to shipping and storage. In fact, Marlin’s public face is so unobtrusive that I would never have found it without the exact address.

But behind that blank brick wall is an array of robots, stamping machines, and other equipment marvelous enough to swell the heart of any red-blooded fan of the industrial revolution. On the day I visited, workers in shorts and goggles on one side of the floor were spot-welding baskets to hold components for Honeywell. On the other side, machines were doing work all by themselves. I watched, somewhat awestruck, as one machine put a series of complicated crimps in a piece of wire that was then grabbed by a robot, which rotated the wire, put it back in the machine for a final crimp, and then deposited it onto a rack of identical wire parts—brackets, as it turned out, for telecom cabinets. That day they were going to Singapore, but they could have been going to any of the 29 countries and counting to which Marlin now exports.

These days, a lot of people are anxiously watching operations like this. But they’re not watching for enjoyment; they’re watching for signs of health, the way old people sometimes compulsively check their blood pressure. Small businesses have become a bellwether for the condition of the American economy. Indeed, to hear politicians talk, small business is—pick your favorite cliché—the lifeblood, the backbone, the thunderously beating heart of the American economy.

Like most clichés, these have some truth. America could truly not survive without operations like Marlin Steel Wire Products. Among other things, they produce specialized parts like that stand, in small production runs that would be uneconomical on the scale of an airplane or automobile plant. Even mighty industrial machines cannot survive without tiny cogs.

Small firms also churn out jobs. Companies with fewer than 500 workers employ roughly half of all American workers, and according to the Census Bureau, more than 70 percent of net new jobs between 1993 and 2006 were created in firms that had fewer than 20 employees at the start of the survey period. But small businesses, which are well down the supply chain, also often find themselves under the greatest pressure from corporate cost-cutting—on the tail end of a particularly vicious game of Crack the Whip. That’s why small businesses are also disproportionately where jobs are lost, an effect that downturns greatly magnify.

To add to their woes in the current recession, bank financing seems to have dried up. A survey in April 2010 by the Atlanta branch of the Federal Reserve found that in the previous three months, 40 percent of small-firm applications for credit had been denied, and many of those who were offered credit either got less than they requested, or refused it because of unattractive terms. It’s a problem severe enough to have attracted the attention not only of the Obama administration, but also of the Federal Reserve itself, which convened a high-profile conference this July on “Addressing the Financing Needs of Small Businesses.”

This combination of factors has triggered the policy-wonk equivalent of the chicken-and-egg debate: which came first, terrible business, or terrible credit? And what can, or should, the government do to help?

Small businesses are clearly hurting: in a survey done in May by the National Federation of Independent Business, less than 10 percent of respondents thought conditions were healthy. The survey also showed that sales and profits had just about recovered to where they were at the very bottom of the 2001 recession.

Bankers say they’d like to lend small businesses more money, but creditworthy firms aren’t seeking loans, while too many would-be borrowers need the cash just to stay afloat. (The latter group recalls a bitter adage, popular during the Great Depression: “A banker is someone who lends you an umbrella, then asks for it back as soon as the rain starts.”) As Federal Reserve Governor Elizabeth Duke noted during the July conference, “Bankers are predisposed to lending, because without lending there can be no profit.” Sheer meanness isn’t a very likely explanation of the credit crunch.

As Duke went on to say, of course, the banks are having a few credit troubles of their own. Small-business lending often rests on relationships, and unfortunately, the banking partners of some businesses now have balance sheets impaired by portfolios of bad loans on things like residential and commercial real estate. Others may be worried about concentrating their lending in too few sectors, and may need to diversify by lending less to old customers, perhaps, and more to new ones.

But the problems on the business side are greater still: collapsing collateral values, poor cash flow, and even the personal finance troubles of the owners. Many a successful entrepreneur got his or her seed capital from Visa and MasterCard, and even more-established proprietors tend to have their personal finances heavily entangled with their businesses. A modest dip in sales may leave an owner with a viable business, but an unviable mortgage. The resulting hit to the credit score is hard to explain to already anxious bankers.

We seem to worry more about credit for small businesses than do the firms themselves. The NFIB survey includes questions on finance, and while the results are certainly dismal, with assessments of credit conditions hovering near record lows, just 3 percent of those surveyed report that credit conditions are their largest problem. “What businesses need,” the authors rather tartly conclude, “are customers.”

If a simple shortage of bank capital were a major problem for all small businesses, Drew Greenblatt, the owner of Marlin, might not have had so many high-tech machines to show me. Several of the machines were purchased, and financed, in the past two years. Greenblatt, looking slightly incongruous in a blazer and chinos but clearly in his element, lovingly described the history of each piece of equipment. Three of the machines were of recession-era provenance, including one he managed to buy at a fire-sale price in December 2008, financed 100 percent with a loan from M&T Bank. Another, financed by Wells Fargo, had a space waiting for it and was due to be installed within a few weeks. You expect to see these sorts of devices on a Boeing assembly line, or on the factory floor at GM—in fact, one of them was purchased from a now closed GM plant. Seeing them efficiently stamping out parts on a yeoman scale is more surprising.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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