Financial Alert - The Environment Is Changing
Friday the stock market took a hit because investors are getting very nervous about the credit markets. As someone who has a business or is in the process of starting one this is very important to you. I can here you saying, how so. You have a relationship with a local lender or your franchiser handles the financial relationships. The flap in the credit industry is all about the sub-prime home mortgages and I don’t have anything to do with that. Wrong!!!!
It’s all about assessing risk. People that deal in the credit market have decided that they there may be more risk in their lending, read bonds, portfolio than they suspected. They see that the asset based bonds in the sub-prime market were riskier than they were told and now they are unsure about other things they have been told. They don’t know what they don’t know and this scares people who deal in bonds which is the basis for all lending.
When any group becomes scared in this way the least that they do is hesitate. With this group they stop trading bonds, issuing credit and attempt to re-assess the situation. If they just raise rates that will be fine. If the markets stop moving, and they have for certain derivatives, that is a bigger problem.
This can be very bad. It means that liquidity dries up. Promises made to you by the bank get pulled. The ability of your franchiser to raise money from the credit markets shrinks. The money you want for new equipment and operating space or just to carry your inventory costs is no longer available.
If you are not in a leverage situation you may be just fine. I don’t know many businesses that are not leveraged to some extent. If you’re leveraged heavily you could have a problem if your lender suddenly gets more conservative.
The Treasury and the Federal Reserve are expected to do something. Exactly what that is is difficult to tell. The situation is sort of tight. You know $78 a barrel oil, gigantic trade deficit, weak dollar. You didn’t think buying that flat screen TV would matter to your bank. Well, apparently it does.
What to do. Though I written a fairly grim picture here, remain calm, but keep a closer eye on your financial supporters. Call the people who have promised you financial support and have a chat. Take their temperature. Make sure the promises they made before are still good. I’m not saying that they can’t pull the rug from under you at a moments notice. (It happened to me and I saw them daily.) But, it’s better than running along thinking everything is all set when it isn’t. Call them next week, too.
On the international front, remember it’s really all one global market with many players. If the US credit market gets a cold the best anyone else can hope for is the sniffles. Many other markets will get pneumonia.
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derivatives » Blog Archive » normal section
Aug 6, 2007 at 9:27 am
[…] Friday the stock market took a hit because investors are getting very nervous about the credit markets. As someone who has a business or is in the process of starting one this is very important to you. I can here you saying, how so. You have a… …more […]
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