Business Lawyer Says Credit Is the Key to an Upswing in the California Economy

Business Lawyer Says Giving Credit To Worthy Small Businesses Key To Economy

In a recent article in the LA Times author Alana Semuels notes that from 2001 to 2009, California ranked either first or second in the nation in creating businesses. But last year, the state plummeted to 50th as it lost 4,600 businesses, according to a study by Economic Modeling Specialists Inc. The article and the study conclude that California’s business creation plunged because of low employment.

That’s wrong. The article and study put the effect before the cause. California’s drop in business creation has resulted in lower employment.  As has the inability of existing businesses to expand.  The drop in business creation and the inability of existing businesses to grow is the result of something simple–no credit.

During the housing bubble banks and other lending institutions stumbled all over each other not only to make house loans but to loan to business people. Lending institutions extended large “lines of credit” to businesses throughout the state. Lines of credit were essentially signature loans. Like a credit card. The interest rates were fixed or variable but the credit was available. When the housing bubble burst and the mortgage crisis occurred the banks pulled all the money they could, off the table. And the business “lines of credit” were some of the first to go.  While it’s true many of the lines of credit were poor credit risks, there is no evidence that the majority were.  Businesses which had never missed a payment, never used all the credit available to them, and that were good risks, still lost their loans.   The banks behaved irrationally. The decision to make signature loans on mortgages was folly, but so was the decision to pull the lines of credit of most small businesses.

Successful businesses need investors willing to bet their money on the success of the business (which is generally the Silicon Valley business model) or else they need credit. It’s a rare business that reaches its full potential by using its monthly receivables to pay its bills. A business may be able to limp along in that manner, but it can not expand. It can not employ more people in hopes of selling more goods or services because it doesn’t have the cash. An important consideration for businesses is unexpected contingencies.

Sometimes the contingencies are opportunities–a restaurant in a strip mall is informed by the landlord that it has the opportunity to rent the adjacent space, receive the extra parking allotment and expand.  Normally he would use credit to pay for the expansion (and the business attorney’s services to put the deal together). Sometimes contingencies are negative–liability exposure for a consumer lawsuit, or the need for the business to hire a lawyer to file a lawsuit for breach of contract, trademark infringement or unfair competition.  Without credit businesses forgo the services of business lawyers and litigation attorneys because they can’t afford them.

California has the work force, the space, and the consumers to have a strong economy–but it needs small businesses because they employ the most workers, and small businesses need money. Something must be done to make more credit available to those business people whose credit history warrants it. Only then will this great state be able to fulfill its promise. 

The credit situation is bad, but there is money out there for some businesses.  If you own a small business or are considering starting one and are having trouble obtaining the working capital contact us for a free, no obligation consultation.

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