Forums: Discussions for entrepreneurs and small business.

This used to be one of those "what if" questions. Not anymore.

I`ve learned of a recent report from economist Peter Schiff that indicates that for the first time in decades, credit card companies cannot find debt buyers. You won`t hear this widely talked about on television. People do NOT want to hear this stuff.

For years credit card companies would extend credit to businesses and individuals, bundle them up and sell them off to investors, domestic and abroad. Places like China, Japan, Germany, etc.. A lot of this had to do with counting on a strong dollar.
 But,
  just recently, these credit card companies/banks have found nobody willing to take on this debt. 

Without buyers the card companies are left holding all of the risk and with the economy in trouble, these companies are faced with two choices-- tighten up, or shut it down.  Some of you may have already felt this.

We were worried about the  Mortgage bailout but that is just a small fraction of the bailout that would be required to cover credit debt. How much? Nobody seems to know the exact number, but it is in the hundreds of trillions of dollars! 
A global recession could cause the credit industry to grind to a halt and it`s highly unlikely that any bailout package could keep this from happening.

I believe that we will still have a modest level of credit but it won`t resemble anything that we have become accustom to over the last 25 years. I remember a time when my parents got by with two credit cards... a Shell gas card, and Sears Department Store. 
As I remember, those companies were so strict about issuing these cards that just having one of them indicated that you were likely to be a dependable payer....responsible/ worthy of credit. My, how times have changed.

Question:
How would you modify your current business or alter your your business plans if credit was to all but disappear?

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~Eric
JE Design Group, LLC
If all you do is what you`ve done, then all you`ll get is what you`ve got.
www.jedesigngroup.com

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Joe F. Clark
Senior Principal
Start-Up Smart, LLC. - the clever way to accelerate your business
jclark@startupsmart.net

I think you’re raising an excellent point, Eric.

Although I seriously doubt that credit in the United States is at risk to disappear, let’s keep in mind that there’re numerous, very powerful economies worldwide that don’t rely on credit to an extent the U.S. economy does, or should I say did?

For instance, European countries such as Germany or France have proven that their economies can prosper, although credit is not such a driving factor over there. For instance, it’s completely unheard of in both countries to finance everyday purchases such as furniture, electronics, or other household items. Moreover, if you have a German or French Visa Card, you’re likely required to pay off the entire balance at the end of the billing cycle or your purchasing privileges will be suspended. If you were to buy real estate, you’re likely required to put 30%-40% down, which significantly lowers the risk of default for both, the lender and the homebuyer. And did I mention that both countries have income tax rates in excess of 50%?

How do they do it?

Both nations have a deeply engrained philosophy of living on a cash & carry basis. With other words, they either save before making a significant purchase or they rely on positive cash flow that’s supported by their job and/or other sources of income. If you’re German you’re likely to finance or lease your car and have a mortgage. That’s about it.

I guess the point I’m trying to make is that credit in general is used much more responsibly in large parts of Europe, which (i) helps to make it available to consumers and small business owners, and (ii) significantly lowers the default rates for lenders. Would you believe that Germany doesn’t even have a personal credit rating? So for as long as you don’t have a history of defaulting on your financial obligations, credit will be extended to you. On the other hand, legal remedies such as personal bankruptcy emerged in Europe only about a decade ago and is used rather scarcely to seek protection from creditors. Other than that any judgments or defaults will be on your record for 30 years!

Given these aforementioned conditions, I think that less credit-driven economies are generally healthier, more robust, and less prone to financial turmoil. Frankly, I think that measures such as the stimulus package and flushing liquidity into the financial markets are similar to a “sugar high”. They reward greed, irresponsibility and stupidity and probably set us up for a similar crises in about 10-20 years from now. May be we should start with employing a little more common sense and ask ourselves: “(i) can we really afford”, or (ii) “do we really need the $4,800 monster plasma TV?”   





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Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com

Bootstrapping never went out of style.  Even when money was plentiful, respect went to the entrepreneurs who could take it a long way themselves.  It demonstrated a level of sophistication and ingenuity that most people just don`t possess.  And it that sophistication and ingenuity that sets a successful entrepreneur apart from the others.

The essence of bootstrapping is to surround yourself with others of like mind, business people who can help you locate low cost stuff that you need.  There are a number of very successful bootstrapping organizations in the US and, I suspect, throughout the world. 

Will the need for credit go way entirely?  Of course not.  But learning to think creatively is bound to enhance any business that even halfway tries.



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Best,
MaryAnn
Business Plan Master

A lack of credit will not have any effect on tech based start ups that require significant development time before they can sell their product. They never got credit anyway. What this will do is make entrepreneurs to better manage their cash. This will result in better businesses in the long term.


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