When it comes to economic news, Fortune 500 companies grab most of the headlines. But it's small businesses that make up the bulk of the American economy, which won't recover until they do. All the more ironic, then, that those enterprises tend to suffer the most in a credit crisis.
In the weeks and months following the economic collapse of late 2008, credit markets were frozen across the board. More recently, things have begun to loosen up, but only for large organizations. "They can certainly get their bonds issued and get back to having the same liquidity as before, and maybe even at better pricing," says Chris Vukas, head of marketing and technology with UPS Capital (http://capital.ups.com) in Atlanta.
It's a different story at the other end of the spectrum. "The smaller customer is still hurting," says Vukas. "Many large institutions have pulled back liquidity to them." Meaning it will take that much longer for real recovery to take hold.
When consumer demand does come back, manufacturers must be ready to feed the beast. In a lot of cases, they're still drawing down on inventories, a process that some economists believe will continue into next year and possibly 2011 as well. At some point, however, the manufacturing base has to be ready to step up production of new merchandise. That's when the lack of working capital, especially for smaller suppliers, will be felt the most. "The only option for suppliers is to finance it or find liquidity somewhere else, and that's going to be a challenge," says Vukas.
The willingness of a manufacturer to help its suppliers varies according to industry and individual company. Some will extend terms, reward early payment, take delivery of product early (even if that means beefing up inventories), or provide direct financing. Others prefer to stand firm, and let their supplier base take the consequences. Vukas says things are especially bad for smaller companies in the retail sector, where demand dropped suddenly and sellers were stuck with lots of unwanted product. In technology and healthcare, by contrast, there's still some need for goods in the marketplace. Buying in those areas "wasn't as discretionary as in retail," says Vukas. "They're faring OK and coming out of the recession."
Many suppliers are gone for good. Thousands of China-based businesses have closed their doors, unable to fund fixed infrastructure in the absence of consumer demand. At least some of the survivors have managed to forge stronger ties with original equipment manufacturers and other buyers - proving the importance of solid supply-chain partnerships.
Assuming the availability of working capital, Vukas believes the network of suppliers to the retail sector can rebound relatively quickly. High-tech, with its need for technical expertise, could take longer, but will manage to adjust. "I think we'll have warning that the market is coming back, and the marketplace will take care of making sure there are enough goods," he says. Aiding in the recovery of global supply chains will be the new breed of low-cost suppliers that are emerging in parts of Asia other than China.
Companies will need creative financing strategies to make it all work. UPS Capital focuses on the financing of finished goods in transit, serving the ultimate buyer with an emphasis on smaller entities. "There was a big void out there in terms of liquidity," says Vukas. "Smaller U.S. importers need help." The company also aids OEMS that are placing goods in developing countries with the help of financing from the Export-Import Bank of the United States (Eximbank). But it doesn't provide liquidity to OEMs in established sourcing locations such as China.
Even as recovery takes hold, companies will be feeling aftershocks from the recession. When times were good, manufacturers and suppliers increased their reliance on financing through open account, rather than bank letters of credit. Last fall, the use of that option fell off sharply, with U.S. importers forced to shoulder the financial burden. Vukas cites the case of one company that was offered 60-day terms; in the following week it had to come up with 30 percent of the financing up front and the remainder once the goods were produced in China. He believes many businesses will return to up-front payments or letters of credit in the months ahead. Others will have to rely on strong, brand-name manufacturers that are willing to finance components or even raw materials, in order to ensure a steady supply of product.
A number of smaller companies will continue to have a tough time getting access to capital. Vukas says banks and other financial-services providers aren't paying enough attention to "that catalyst that will get us out of the recession - the small-business entrepreneur. My fear is that we're not coming up with new and innovative product offerings to help out that community across the globe."
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