Lack of money, lack of confidence, lack of growth

Problems facing small and medium sized businesses


The highest burden for businesses recently has been the lack of money, to put it simply. Illiquidity is rising worldwide and more and more private sector businesses are unable to service their liabilities. Late payments are forcing many small businesses to invest less and lay off more. The inability to anticipate future income or payment for a good or service is rendering the businesses with apathy and a severe loss of confidence. No firm is comfortable enough to make credible plans of new investments and business growth in a complex array of uncertainty. And who could blame them? Consumers feel the same way. With the uncertainty of whether they will find or hold on to a job they postpone major spending decisions. Even in Christmas time, shopping sprees are lighter than before (although still big enough to satisfy the compulsory gift-giving demand). People are reluctant to put on more debt and take on more loans and often discouraged to do so by the banks and their existing debt burdens. The aggregate demand is crippled as the dynamics and the complexity of the economic system is constraining all of its actors the same way. More money thrown into the economy won’t do any good for anyone. It won’t make the people or businesses spend more as they rightfully fear the uncertain future. It won’t make the government better off either as they are increasing public sector growth and accumulating more debt and a higher deficit.

What is essentially needed is to make firms want to grow, expand and hire more. The consumer confidence will only return once the business confidence is restored, meaning that businesses will start hiring more people who will anticipate stable jobs and salaries which they can use to increase their consumption. Therefore it all begins from the business side. And since the businesses see lack of credit, low consumer confidence and cash flow problems (see the figure and table above) as substantial constraints to their business (notwithstanding regulatory compliments) the answer could be in cutting the cost to businesses and making them more flexible in their operations and more focused on maximizing the efficiency of their resources. Introducing subsidies and stimuli will only shift the resources from making profits on their regular market onto making favours on the political market in order to attract the subsidies. Cutting costs creates a completely different incentive – it gives the business an incentive to use its resources more efficiently and to transfer them into more production or more hiring.  

Cutting costs for business must come from lighter regulatory requirements, at least for small and medium sized businesses. They are the ‘drivers’ of economic growth and in a crisis they are likely to suffer the hardest burden since banks are holding back lending to risky borrowers. Small businesses fall in the risky category since they cannot claim the same prudence and creditworthiness as big corporations. They don’t have as nearly the same access to funding, especially in Europe. This only deepens their wows and further undermines their confidence and their ability to expand. Without money (in the form of higher sales or bank loans) these firms cannot expand. Giving them money via subsidy will increase their dependence on the government and will make them completely inefficient on the market. Once the funding stops, these companies will fail – the ultimate effect that happened in most poorly governed transitional economies.

The only possible solution is to open their horizons by reducing all unnecessary regulatory compliance and lower the employment taxes they need to pay. This will more than anything create an incentive to use their money more efficiently and divert it towards productive means. It will substantially reduce the burden of the crisis to the businesses and make them more flexible in coping with its adverse effects. It will give them an ability to plan their future with more certainty. It will strengthen their fiscal position and enable them to obtain more loans from banks whose demands they will be able to meet. The expected effect from the businesses is the same as what the Keynesists would expect to see from a fiscal stimulus, only this solution is much more realistic in an environment lacking in confidence and filled with uncertainty.

Perhaps the sovereign debt crisis will change the corporate culture in Europe and make its companies seek funding outside of traditional sources such as banks. Perhaps this will encourage them to develop a private bond market where they will be able to reach more funds. Just as long as the government doesn't try to guide them, the change in corporate culture might be an inevitable and necessary solution.