I’ve written a lot lately about many of the changes in the capital markets and many of the ways these changes have impacted the ability of small and medium sized businesses to locate and secure financing.
The hard part of these recession driven changes to the market is that there isn’t going to be a near term return to the market conditions we’ve basically gotten used to over the last two plus decades.
Let’s face it, the capital markets have not seen anything like this since the end of the second world war.
A large percentage of the capital markets were driven and built up over time by the long run health of the overall economy. Yes, there have been some significant bumps in the road over the last thirty or so years, but nothing as game changing as what we’re seeing right now.
Large parts of the market have disappeared all together as record numbers of bank and commercial financing company failures lead the headlines on an almost daily basis.
When the economy gets back to steady monthly growth, the crater in the market we now see isn’t going to fill up anytime soon.
This tells us that the go forward business financing market is going to take on a very different look for some time to come and it may take decades to get back to anything close to what has been in place in recent memory.
The biggest benefit to business owners with the old status quo was that there were numerous sources of capital all trying to carve out their own unique place in a market that seemed to be growing without end. Similar to the residential market, the commercial sub prime market exploded as companies raced to get their share of the market demand for more capital.
But when the economy slowed down, and highly leveraged companies started crashing all over the place, starting a domino effect like nothing we’ve ever seen and are still experiencing, collapsing the capital market structure that was created over several decades.
And while government bailouts have helped stabilize the money supply to some extent, its hard to know if the main beneficiaries are actually going to make structural changes to their practices or continue on overheating the economy once things get back on track, getting us all set up for another recession in the not too distant future.
Bottom line to all this is that things are going to be different from now on and may be significantly different for decades to come when it comes to locating and securing business capital that your going to be able to cash flow.
Business owners have been spoiled by the funding choices available to them, causing them to practice what I would call less that optimal business finance practices. In fact, in many cases, there is no business finance strategy at all.
The reality is that when you borrow money or take on an investor, the money belongs to someone else and they are going to want it back. The building up of debt over time without a plan to pay it down is good in theory from a weighted cost of capital point of view, but in reality sudden changes in the fortunes of your lender or investor can turn your business upside down in a hurry with no solution in sight.
Business owners need to get back to contingency planning, having some amount of capital buffer to weather financial market storms, and managing their balance sheets so that debt levels are kept in check.
The days of fast and loose money are gone for now and I’m not sure if and when they’ll be back.