Here’s an interesting fact: According to Labor Department statistics released on Wednesday, small businesses with fewer than 50 employees accounted for 61.8% of job losses in the U.S. in the fourth quarter of 2009. That’s according to a Wall Street Journal article, and the number is even more significant when you consider that those same small businesses employ only 29% of all workers.

The article goes on to say that small business hiring has continued to lag well into 2010, in part because small business financing is difficult to get. According to the article, this doesn’t mean small firms are not hiring, but merely that they’re firing even more. “There is a huge amount of churn in the small-business labor market,” said Zach Pandl, an analyst for Nomura Securities.

It appears from these numbers that – at least where employment is concerned – the recession has hit small businesses harder than it has hit large firms. But Barbara Kiviat of Time Magazine cautions that we shouldn’t read too much into the numbers. When you define small businesses as firms with 1-99 employees, the unemployment picture is similar to midsize and larger firms – and it’s bleak all-around. Her conclusion:

“While the 1990-91 recession was characterized by more pain at small firms, and large firms bore the brunt in the 2001 downturn, our most recent episode has ridden roughshod over firms of all sizes.”

Still, it’s clear that small businesses are struggling because of restricted access to capital, and they may not have the resources that large firms have to manage working capital. We often talk about small businesses being engines of economic growth, but that engine will remain stalled until they can increase their payrolls. Selling accounts receivable is one way they can do that. The Receivables Exchange lets them increase cash flow flexibly and affordably, so that they’ll be able to hire new employees and fuel growth.

If the growth of The Receivables Exchange is any indication, online receivables financing is fast becoming the working capital solution of choice for small and midsize businesses.

Today we announced that receivables trading volume on our market-based platform increased 300% this year, as of July 31st. We also announced that Sellers are driving down their cost of capital 30%, on average, by trading on the Exchange.

We’re very excited by this increase in trading volume, which shows that our innovative cash flow solution is helping companies access capital flexibly and affordably – at the pace of 21st century business. As Seller Joe Reini of Mason-Grey Corporation put it, “Every business will soon be using receivables financing as a regular working capital solution.”

Visit our “In the News” page to read more about this important milestone.

If scientists can solve such ancient riddles, it stands to reason that we can solve some more modern ones, too. The U.S. unemployment rate has been hovering at 9.5% for two months now, down from a high of over 10% at the end of 2009, and, adjusted for one-time restocking of inventories, Q2 GDP remains anemic. So, here’s the riddle: how do we create jobs when the demand simply isn’t there?

Giving more money to employers so they can pay more salaries is a good place to start. Some quick analysis provides evidence that monthly employment figures and business lending statistics are inextricably linked. Extending credit allows business to not only buy more goods (capital spending and working capital), but also pay salaries to new workers, who in turn spend their salaries on consumer products. Business credit begets both corporate spending and consumer spending. Spending drives GDP. It’s a less complicated chain of logic than the genetic work performed by the chicken and egg scientists, but perhaps more relevant.

If we agree that the above logic is reasonable, the place to start when tackling the job creation problem is by stoking credit, particularly to small and midsize businesses (SMBs). SMBs employ 52%[1] of the workers in the U.S., but they account for under 2% of the total issuance of credit. The dearth of small business credit is directly correlated to the poor employment picture. The past 24 months of data show a very strong correlation between the amount of SBA-backed 7(a) loans issued, and the rate of change in employment reported monthly by the Bureau of Labor Statistics. The below chart plots the two statistics against each other:

With a correlation coefficient of 66%, the relationship is not only practical, but visually and statistically[2] clear.

But the chicken-and-egg problem is that increasingly risk-averse banks will be reluctant to lend to small businesses that actually need capital to hire employees. We can solve this by providing incentives, but some of the more successful incentives we’ve devised are disappearing. At the end of June, a program started under TARP, which moved the SBA’s loan guarantee to 90% from 75%, expired. The effect on lending to small businesses was dramatic, and rippled through to employment. In the first four months of the year, net new SBA loans covered by the 90% guarantee, averaged $1.2 billion per month. In June and July following the expiration of the program, new SBA loans have been running just over $300 million, a 75% drop.

Legislation to renew the program is currently stalled in the Senate. Meanwhile the Fed continues to support the credit markets which remain open to only those companies large enough to access them. The Fed’s drive to keep rates as low as possible is actually creating a further drag on the ability for commercial banks to lend. One of the biggest obstacles for SBA lending is the lack of economic scale and profitability to the issuing bank. The loans are simply too small and time consuming to underwrite for the program to scratch the upper half of most banks’ priority lists. The Fed’s compression of the yield curve (the difference between short term rates and long term rates on Treasury notes) has made it difficult for commercial banks to create robust earnings from new lending. Net interest margins (the difference between what a bank earns on its loan portfolio, offset by the amount it cost the bank to borrow the money from depositors and other lenders) have been similarly compressed by the Fed’s actions. Tight margins mean less profit, and result in more costly lending programs being curtailed. The scalability and cost of issuing lots of SBA loans make the programs easy targets to cut.

Could the problem be solved in reverse order perhaps? A rise in employment could finally give SMBs the resources to go out and take on new projects, thus increasing the demand and subsequent issuance of SBA loans. Sounds reasonable except for one thorny reality: Employees generally like to be paid first, so the money has to be in the bank before the employment letters hit the mailboxes and ripple through to the statistics.

No, unfortunately the current state of SMB balance sheets does not afford them the ability to hire in the absence of credit –- unless they can manage cash flow more effectively. The Receivables Exchange is just one tool SMBs are using to continue growing when credit is tight. In fact, receivables trading volume on our platform has increased 300% YTD as of July 31, which means there’s a hunger for innovative ways to optimize cash flow and access growth capital. Companies are now lowering their cost of capital by 30%, on average, by selling receivables on the Exchange. SMBs may not solve this particular chicken-and-egg problem, but with innovative financing sources like The Receivables Exchange, perhaps they don’t have to.

Bill Siegel, CFA, is senior vice president and head of the Liquidity Desk at The Receivables Exchange, an accounts receivable financing tool. The Exchange is the the world's first online marketplace for real-time trading of accounts receivable. Find out how to trade accounts receivable.

We’ve all heard the saying from the Oracle: "Be fearful when others are greedy, and greedy when others are fearful." There certainly seems to be some truth to that. I’ve always been somewhat of a contrarian, and as such have seen a few cycles come and go over the last couple of decades, missing huge opportunities more than once.

Of course the instinctual reaction to the current economic environment is to compare it to something historical. The South Sea Bubble of 1720. The Panic of 1873. The Great Depression. This Fourth of July weekend, I decided to re-read Michael Lewis’ "Liars Poker," having just finished reading "Too Big to Fail" (twice). I had forgotten the rules of Liar’s Poker, the gambling game that was played by the Solomon bond traders back in the mid-1980s. As I was reading, it struck me that the inherent bluffing that went on during a game of Liar’s Poker is similar to what is going on in the broader markets (equities in particular) today. It seems to me that the so-called smart money knows that the equity markets are about to have a significant sell-off, but it also knows it has front row seats to the show. Some investors are confident that they can reach the exit before panic really sets in with the less-connected and less-informed. Now the contrarian in me would normally see this as an opportunity to plant the seeds of future growth, as everyone runs around fearful. But a few things I’ve observed recently tell me that this is probably not the case.

First of all, the commercial world has developed multiple personalities when it comes to the credit crisis. On one hand, you have large business associations saying that the decrease in lending is simply a matter of decreased demand. On the other, you have large financial institutions advertising that they are lending more than ever. And finally, you have the widespread belief that credit is still relatively frozen, particularly for small and midsize businesses (SMBs), coupled with the notion that we are living in a "new normal" era of credit availability, where access to credit will not return to pre-crisis levels anytime soon. Which one are you supposed to believe? Well if you watch the television commercials, credit is flowing just like the good old days. But if you sit at my desk every day, you realize that this simply cannot be true. At The Receivables Exchange, we speak to literally thousands of small and medium companies every week, most of them businesses in need of working capital for growth. And the story I hear from them is not one of efficient capital availability for SMBs. I hear the story of stringent covenants, personal guarantees, revolver balance minimums and prolonged underwriting processes –- often up to 90 days. Basically, a testament to the adage of "capital is available to all companies without a capital need."

All of this is troubling, because I do not understand how we can have a broad-based economic recovery without SMBs getting the working capital fuel they require to initiate and sustain growth. Traditionally we look to the public markets to give us long-run economic visibility, despite the fact that the majority of our GDP is generated by small and midsize businesses. When you look at large corporations, you see a fairly rosy picture. There is more cash on large corporate balance sheets probably than ever in the recorded history of business. Earnings forecasts are still predicting growth in various sectors. But if things are so rosy, why are so many corporations pushing out their receivable terms out from 30, 45, 60 and sometimes 90 days?

And then there is, of course, the sticky issue of unemployment, which is around 10 percent, artificially low because it doesn’t take into account the "under-employed," nor the fact that, on a trailing basis, it has been suppressed by immense census hiring, which is now coming to an end. If the economy is going to grow, someone has to explain to me where the demand is going to come from, because the unemployment figures tell a different story. What’s more, the stimulus is running out. We are running on fumes, and the well, while not dry exactly, just ain’t as deep as it used to be. So the general intuition is, let’s not push it too far, lest the golden goose stop providing.

And lastly, the baby boomers are about to be saddled with a 20 to 40% increase on their dividends and interest payments next year, no doubt a significant portion of their disposable income, and smack in the midst of their transformation from net savers to net spenders. This coming increase is being referred to as the "Tax Wall," and it could force the baby boomers to curb their spending.

So here’s what we have: tight credit for the SMB economic engine, a poor employment environment, shrinking stimulus-generated economic growth, and the promise of decreasing consumption from arguably the largest consumption engine of our economy – the baby boomers.  Normally I would look for an opportunity amidst the ongoing crisis, but I am suspending my contrarian tendencies. Sometimes when times are scary, it is smart to be scared.

Nic Perkin is co-founder and president of The Receivables Exchange, an accounts receivable financing tool. The Exchange is the world's first online marketplace for real-time trading of accounts receivable. Find out how to trade accounts receivable.

“TARP, zero interest rates, trillion-dollar budget deficits, you name it, we’ve thrown anything we can at the system. That has been successful to a limited extent at stopping the bleeding, but it has not really allowed the patient to get up off the table and resume a normal life again.” –- Steve Roach, Morgan Stanley’s Asia chairman, in an article in The New York Observer.

The end of the 2nd quarter proved that the rally in credit and the stock market has grown long in the tooth. GDP estimates have started to roll over, along with the majority of economic leading indicators. The folks at the Fed are staring at a control room with a limited number of levers left to pull. Inflection points such as this are underpinned by a shift from a risky environment to one plagued by uncertainty.  Risk can be priced, while uncertainty breeds paralysis. One year ago, we made the positive shift out of uncertainty as TARP and government stimulus pulled us out of the credit crisis. Now, 12 months later, we have gained stability, but only just enough to survey the damage. The Fed’s only monetary weapon now is further quantitative easing via open market asset purchases. This is akin to more infusions of plasma, not a cure.

Loans outstanding to small businesses continue to drop as well, falling 6% in the past three quarters. The lack of new lending during a period of time when the Fed was flooding the market with liquidity suggests structural balance sheet problems that low rates will not solve. Additionally, a recent stimulus provision expired, moving the SBA guarantee down from 90% to 75%. The result was new SBA loan origination collapsing in June. Origination under the program fell to $647 million, from $1.9 billion in May. The collapse suggests that the 15-point difference in the SBA guarantee crossed the marginal level of acceptable loan-to-value (LTV) ratios that banks could feasibly offer. The drop in coverage offered by the SBA probably pushed LTVs under 50%, which is a tough number to swallow for businesses looking for credit.

The LTV issue highlights another problem with the SBA program: In the current environment, small businesses are looking for short-term working capital finance. If the business does not already own real estate that can be used as collateral, or intend to use the proceeds to buy real property, the offers are not on the table. Lines of credit for working capital are few and far between.  When the SMB space is looking for oranges, the banks are, in effect, offering sour apples. This is a major structural problem that has the Fed vexed, wondering how to solve it.

Our continued growth shows that there is a high degree of demand for flexible working capital finance. While our rates are higher than the annualized rates offered under SBA, Sellers are seeing very competitive rates compared to other traditional sources of financing, and the attractiveness of having a 24/7 liquid capital market available to provide credit makes our solution a valuable one. And, I would argue, the Exchange is the only place where SMBs can more or less rely on their cost of capital decreasing significantly over time, often over as little as four to six months.

Bill Siegel, CFA, is senior vice president and head of the Liquidity Desk at The Receivables Exchange, an accounts receivable financing tool. The Exchange is the the world's first online marketplace for real-time trading of accounts receivable. Find out how to trade accounts receivable.

The credit crunch affecting small businesses is getting the attention of major government leaders, including Federal Reserve Chairman Ben Bernanke.  Bernanke spoke at a Fed-sponsored conference this morning and said that increasing credit to small business is “crucial” to economic recovery, according to a Reuters article.

At the conference, Bernanke said that the Federal Reserve “takes very seriously” complaints from bankers that regulators are preventing them from making good loans. However, he added that lower demand, less availability of credit, and “the weaker financial position of many businesses” after the recession have kept banks from lending.  He mentioned the declining value of real estate and other potential collateral as a reason banks are holding back.

We wrote about Bernanke’s remarks at a similar conference last month.  His remarks today are another clear call for alternative forms of financing that will allow small businesses to thrive during the credit crunch. Small businesses that sell on The Receivables Exchange can leverage their high-quality receivables, and secure capital without putting traditional assets like equipment and real estate up as collateral.  In contrast to banks’ shrinking credit lines and tightening lending standards, institutional investors are flocking to The Receivables Exchange to purchase receivables, and small business Sellers are getting the capital they need to grow.

The new financial reform bill is supposed to prevent another credit crisis, but will there be unintended consequences for small business? Yes, quite a few, says an article today on Forbes.com, and many of them are bad:

• An increase in the capital gains tax will discourage investors from taking an equity stake in small businesses.
• Increased regulation will keep large banks from investing in hedge funds and private equity firms, keeping those funds out of the hands of small businesses.
• More robust consumer protection laws will reduce the revenue banks collect from fees and penalties and shrink the small business lending pie.
• An amendment to decrease debit processing fees won't affect what small businesses pay because the credit card companies' outsourced suppliers likely won't pass on rate reductions to the businesses they service.
• And finally, the new bill doesn't roll back the 1999 Graham-Leach-Blierly Act, which allowed large banks to swallow community banks, which generally have less-rigid lending standards.
  

The details of the financial regulation bill are still being ironed out, but whatever the final law looks like, it will likely affect credit markets across a broad spectrum, from individual consumer credit to small business lending. Among the new provisions in the law is a new consumer protection agency that will likely tamp down on certain mortgage and credit card practices. The law will also require large banks to hold a certain amount of capital at all times. An article today on CNNMoney.com says the looming passage of the bill has already persuaded banks large and small to restrict lending, out of fear of new regulation. The article states that lending activity will likely decrease even more when the bill is passed, and the abysmal commercial real estate market isn't likely to help matters.

All this translates to uncertainty for small business owners, who may be putting off important investments in their companies because they can't satisfy increasingly strict bank requirements -- that, or all this bad news has convinced them they can't get a loan. Small businesses will likely have an even more difficult time managing cash flow unless they diversify their sources of capital and look for innovative financial alternatives, such as receivables financing.

Tom Harnish has an article on cash flow in American Express OPEN Forum, where he imagines a machine that would glow green or red according to a small business's working capital position, and discusses steps business can take to "speed up cash coming in and slow down cash going out." Harnish writes:

Having more cash coming in is obviously good, but what's perhaps not so obvious is that money owed to you -- which is nice to have on the books -- isn't as nice to have as money in the bank. If you can find a way to start it coming in faster, it's the same as opening the spigot.

Sounds familiar. Harnish goes on to recommend some strategies for improving cash flow:

How fast cash comes in can be improved by reducing the trade terms extended to customers, billing promptly, or requiring progress payments and deposits, reducing and preventing bad debts, making deposits quicker, and even raising new money.

Some of these are good practice for any business, namely billing and depositing money promptly, but some carry consequences that can actually hurt a small business. Cash flow is vital to growth, but where would a business be without its customers? Reducing extended payment terms or requiring progress payments can jeopardize valuable customer relationships. Furthermore, raising new money in the current credit climate is difficult and can come at a high cost. Are these really the only cash flow solutions available to small businesses?

Well, no. There's The Receivables Exchange. By allowing small businesses to sell receivables in a competitive marketplace, the Exchange gives them access to a flexible, affordable source of capital, and allows them to preserve their customer relationships. It's an ideal solution for growing businesses who want to increase their cash flow.

Emily Maltby of the Wall Street Journal has a great article about the credit crunch, its various causes, and its effect on small business financing. It's a very good summary of what's happened to our economy in the past two and a half years with respect to tightening credit standards, and it asks some provocative questions: Are banks to blame for the precipitous drop in lending to small businesses, or are fewer small businesses even applying for loans for fear of getting turned down? Is the government sending mixed messages to banks, urging them to make prudent loans, but also to increase lending to small businesses?

Whatever the answers to these questions, the article makes clear that the credit crunch has been especially challenging to small businesses. It offers the example of Julio Valencia, who's seeking a $500,000 credit line for his growing aircraft maintenance business, but has been turned down by four different banks in the past eight months. Even though Mr. Valencia's business is sound and poised for growth, he cannot meet banks' increasingly stringent requirements, so he's unable to get the capital he needs to grow. This growth can mean anything from buying new equipment or hiring employees, and Mr. Valencia's business is one of thousands without the capital needed to expand. The ripple effect on the larger economy is easy to imagine. As the article states, until small businesses get the financing they need, "the promise of full recovery may continue to be out of reach."

Thousands of small business owners across the nation are experiencing the same challenges as Mr. Valencia. They simply don't have the collateral that will satisfy banks' tight lending standards, and they cannot grow without access to credit. Their predicament underscores the need for alternative financial sources. The Receivables Exchange allows them to leverage their invoices -- essentially the credit ratings of their customers -- to procure funding flexibly and affordably.