Your community lender avoided the home mortgage problems of the big guys. They crow about it. But the alternative may be just as bad. If they get into financial distress on other assets they do have, your loan and livelihood is at risk. Does your CFO or accountant have a solid take on your lender? Are you prepared to consider a new relationship on your terms?
Small and mid-sized banks, those with assets less then $25 billion, have to a great extent been crowded out of the home mortgage meltdown. But not for trying. These banks were the natural home mortgage provider (taking over after the S&L meltdown of the 80's); they sat in their market, knowing the good neighborhoods and bad. The business became a big game however, where originators, many non-bankers, took over the lending portion, loosened credit standards resulting in a greatly expanded subprime home loan market. These mortgages were then sold to large administrators who managed and serviced the loans, but then packaged the assets to sell into mortgage linked investments. This new system drove out the smaller banks and forced them to seek other profitable assets.
For many banks this took the form of commercial construction and mortgage lending, as well as lending directly to home builders. These real estate assets are once removed from the direct mortgage problem the big guys have, but are now coming to roost. Signs are ominous according to the Comptroller of the Currency.
There are no hard and fast rules, but it is certainly time to examine your lender, and decide if their problems could cause them to pull the plug on your loan. Open up the dialog with those other lenders that knock on your door. Have your financial expert take a look before it's too late.
Thursday, February 28, 2008
Tuesday, February 26, 2008
Judgments - Lets Get Down to Brass Tacks
In Findings, John Tierney explores the human decision making process in the light of a new book titled "Predictably Irrational" by Dan Ariely. Tierney writes about a "leave behind your worst options" situation from ancient China:
This approach to making decisive decisions can help some stuck business owners. If we think about how a CEO makes financial decisions, it's about eliminating options to get the right one. We can apply this approach to the not-so-clear non-financial decisions.
As described by Tierney, rational subjects at MIT prove that we as humans hold on to options longer than we should. Why? Because it is painful to let go of an option, a possibility. But there are very real costs to hanging on in terms of lost focus and poor performance.
How should a business owner apply this theory. In finance theory, a rational numeric judgment is used to eliminate options. When funds are available, managers perform a Return on Investment ("ROI") analysis to eliminate poor options and determine the best one.
Return on Investment looks at the pluses and minuses of various options in monetary terms. If you have several options, you consider the expected net cash return for each to find the highest expected return. If project 1 is to purchase a new lathe with an expected ROI of 18%, project 2 is to expand the building with an ROI of 14%, and project 3 is to do nothing or invest the money at 8%, then projects 2 and 3 should be eliminated for project 1, the action with the highest return, and eliminate the others.
What about other decisions that are not subject to ROI analysis? What's the cost of firing someone versus keeping them on for awhile? What is the cost of hiring someone now or waiting until markets turn? What is the real cost of visiting your best client once a quarter versus once a month?
Many of these actions cannot be reduced to a monetary return, but you can eliminate options. If you are considering 5 good candidates for a position, think about the most important considerations and see if you can eliminate 2 and continue with the best 3. If you have limited funds and 5 businesses to support, consider whether all are strategic, if not sell the outliers. An easy rule of thumb is that strategic judgments should be made sooner rather than later. A good book on successful decision makers can be found here.
"Xiang Yu was a Chinese general in the third century B.C. who took his troops across the Yangtze River into enemy territory and performed an experiment in decision making. He crushed his troops’ cooking pots and burned their ships.He explained this was to focus them on moving forward — a motivational speech that was not appreciated by many of the soldiers watching their retreat option go up in flames. But General Xiang Yu would be vindicated, both on the battlefield and in the annals of social science research."
This approach to making decisive decisions can help some stuck business owners. If we think about how a CEO makes financial decisions, it's about eliminating options to get the right one. We can apply this approach to the not-so-clear non-financial decisions.
As described by Tierney, rational subjects at MIT prove that we as humans hold on to options longer than we should. Why? Because it is painful to let go of an option, a possibility. But there are very real costs to hanging on in terms of lost focus and poor performance.
How should a business owner apply this theory. In finance theory, a rational numeric judgment is used to eliminate options. When funds are available, managers perform a Return on Investment ("ROI") analysis to eliminate poor options and determine the best one.
Return on Investment looks at the pluses and minuses of various options in monetary terms. If you have several options, you consider the expected net cash return for each to find the highest expected return. If project 1 is to purchase a new lathe with an expected ROI of 18%, project 2 is to expand the building with an ROI of 14%, and project 3 is to do nothing or invest the money at 8%, then projects 2 and 3 should be eliminated for project 1, the action with the highest return, and eliminate the others.
What about other decisions that are not subject to ROI analysis? What's the cost of firing someone versus keeping them on for awhile? What is the cost of hiring someone now or waiting until markets turn? What is the real cost of visiting your best client once a quarter versus once a month?
Many of these actions cannot be reduced to a monetary return, but you can eliminate options. If you are considering 5 good candidates for a position, think about the most important considerations and see if you can eliminate 2 and continue with the best 3. If you have limited funds and 5 businesses to support, consider whether all are strategic, if not sell the outliers. An easy rule of thumb is that strategic judgments should be made sooner rather than later. A good book on successful decision makers can be found here.
Monday, February 25, 2008
Doing it All Online
Microsoft recently joined Yahoo in another battle for control. It has stepped up its online solutions platform for small business. Microsoft recently upgraded Office Live Small Business "OLSB" (poorly named, it has little to do with the MS Office product set) to give small businesses online solutions they can put up without needing outside technical help.
According to the National Federation of Independent Businesses, only 35% of small businesses have a website, half have a high speed connection, and only 57% use the internet for business purposes. Microsoft and Yahoo are trying to bridge this gap. Microsoft's OLSB provides the following:
This offering is a 2.0 version, much better than the original, and presumably it will keep getting better. Yahoo's services are similar, and I would be surprised if we don't see a few more entrants (Google, etc.).
If you've been waiting to go, market, or sell online, because of cost or complexity, these solutions make it much easier and cost efficient. The minimum hurdle has been lowered significantly.
According to the National Federation of Independent Businesses, only 35% of small businesses have a website, half have a high speed connection, and only 57% use the internet for business purposes. Microsoft and Yahoo are trying to bridge this gap. Microsoft's OLSB provides the following:
- A private domain website with 100 email accounts and 5G storage (free for the first year)
- A contact manager with Outlook synchronization
- A document manager for version control, sharing, and rights management.
- Online workspaces and a Project Manager solution.
- It even works with the Firefox browser (so even Mac users can apply)!!
This offering is a 2.0 version, much better than the original, and presumably it will keep getting better. Yahoo's services are similar, and I would be surprised if we don't see a few more entrants (Google, etc.).
If you've been waiting to go, market, or sell online, because of cost or complexity, these solutions make it much easier and cost efficient. The minimum hurdle has been lowered significantly.
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