How the Global Economy Affects Your Business

Rieva Lesonsky

Contributing Writer, AllBusiness.com

I am a small business & entrepreneurship thought leader, advocate and journalist. My mission is to help people start and grow their own businesses, which I've been doing for over 30 years. My company, GrowBiz Media is a custom content creation company focusing on small business and entrepreneurship. We create content for small business websites and major marketers wanting to connect to entrepreneurs. We also own the small business blog, www.SmallBizDaily.com.

If you’ve ever been to Disneyland or Disney World, you know how infectious the song It’s a Small World can be. The tune, which celebrates how much we share around the world, reflects today’s global economy, and how what goes on thousands of miles from our shores affects most American small-business owners.

It’s no secret that money has been hard to come by these past few years. But now that the economy appears to be on the upswing, many entrepreneurs are hopeful banks will start lending again.

Unfortunately, that may not be the case, and yes, the global economy is at least partly to blame. Brandt Leahy, an analyst at Sageworks. which provides financial data and analysis about private businesses, believes the “deterioration of creditworthiness of the large-developed nations” has affected small businesses across the globe. “Governments have to pay more to borrow money,” Leahy explains, and banks everywhere have “tightened their lending policies, and become more select about who they’ll lend to.”

Tom Gazaway, the founder and CEO of Hawkeye Management. a company that connects entrepreneurs with suppliers of capital, believes “The world is a global marketplace and the financial world is a large Web that extends throughout almost every country and region.”

Ken Yancey, a former banker and the current CEO of SCORE. a nonprofit association helping Americans launch and scale small businesses, agrees, pointing out that as part of the world economy, “the U.S. holds the debt of other countries, and other countries hold our debt. The rise and fall of one nation’s economy affects the global economy.”

New Bank Regulations

Getting a loan might become harder for small businesses, says Gazaway when Basel III regulations kick in January 1. According to a report in The New York Times. these rules require banks to maintain a certain ratio of capital on hand “to protect themselves against potential losses.” Gazaway says, “Basel III is going to change the way banks look at risk, leverage and liquidity, and encourage a more responsible form of lending.” This should, he adds, have us “cheering for the success of the European Central Bank (ECB) because we will feel the ripple effect whether it’s good or bad.”

Adding to this global interdependence Leahy says is that “The dollar is still the reserve currency of the world, so monetary policy in the U.S. affects the world.”

Nearly everyone agrees the two big global hot spots to keep an eye on are the European debt crisis and the slowdown in China. Gazaway says, “All indications are that China’s growth is slowing down,” which Leahy notes has already negatively impacted other nations like Australia. In fact, he says, “China is a river of resources, and a slowdown there affects many developing and emerging nations.”

Does this mean the money lending pool will remain indefinitely dry? Not necessarily, says Yancey and Leahy, though they both point to alternative sources of funding. “The [lending] pendulum has swung so far in one direction,” Yancey says, “that unless you have perfect credit” a big bank is not likely to help you. The good news is the smaller banks were not as impacted as the big banks. It’s been ideal for them,” Yancey says, "since they can cherry-pick the best small businesses” to lend to.

Leahy agrees. “For 20 years banks were the go-to

place for small businesses that needed funding,” he explains, "but now there’s a void in the market. Small businesses need capital to run, so [they] need to go in a new direction.”

And once again it’s technology to the rescue. Leahy says for businesses that have no collateral to put up, or those that haven’t been in business long enough, new technologies, in the form of peer-to-peer lending networks and lending clubs can help fill the void. Yancey also suggests crowdfunding as a good alternative for businesses looking for capital. “It will be interesting,” he says, “to see how the government decides to regulate the crowdfunders .”

Exporting as an Option

Globalization also has an upside. Yancey suggests small businesses think about exporting, though he stresses, “You have to be concerned about the currency risk, and insurance and shipping costs.” Currently about 292,000 American businesses are involved in exporting, 286,000 of which are small. The Obama administration launched a National Export Initiative in 2010 focused on helping small businesses get involved in global trade. To help you navigate exporting Yancey suggests you get help from a SCORE mentor, “who has been there and understands the cultures and nuances” you’ll encounter.

Dario Gomez, the associate administrator of International Trade at the Small Business Administration. also thinks exporting is a great way for small businesses to become more economically diverse and robust. "Exporting,” he says, “increases a company’s chances of staying in business.”

Gomez points out that the trend “towards a global economy has helped build a strong middle class” in many nations around the world, making exporting an even greater economic opportunity for small businesses. And, he emphasizes, exporting is not just for product, food or retail businesses. “Service businesses, too, are in demand globally,” Gomez says particularly citing a need for “engineers in the developing nations, environmental companies (sanitary conditions are a problem needing solutions), and architectural businesses." "China,” he continues, “will be building over 100 airports in the next 15 years, leading to lots of opportunities” for American companies to offer their services.

The Strongest Global Markets

Citing the European debt crisis, Gomez suggests American entrepreneurs look beyond Europe which is projected to grow only 0.7 percent next year, compared to a global growth rate of 3.9 percent. He cites Latin American and the Caribbean as strong markets, with an expected 4.5 percent rate of growth, and calls out Peru as being particularly robust, with a projected 6 percent growth rate. The hottest opportunities for exporters are in Asia, where together the nations of China, India, Thailand, Indonesia, Vietnam and the Philippines are expected to grow by 7.5 percent in 2013.

Gomez says in this global economy “there’s a buyer out there for what you’re selling” citing an Illinois entrepreneur who’s successfully exporting waffle cones to Canada, and a demand in Taiwan for elk antlers from the mountain states.

Of course exporting takes money, but the money pool here is a little fuller for small businesses. Gomez says you can get help from the SBA, the U.S. Department of Commerce, and the Export-Import (Ex-Im) Bank. There are in fact loan guarantee programs for small businesses at the Ex-Im Bank and the SBA (Export Express ).

Yancey advises entrepreneurs to also think about “import displacement,” where American small businesses consider manufacturing here in the U.S. products that are currently being imported.

If the last several years of a terrible economy have you down, Yancey believes the proverbial bright light is shining at the end of the tunnel. “Entrepreneurs are resilient,” he says, “and we’ll figure it out. Small businesses have been successful during our worst moments. So much good has been developed in the heat of the breach.”

Read more insights from Rieva.

Photo: Thinkstock

Source: www.americanexpress.com

Category: Personal Finance

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