The Wall Street Journal continues to do much of the best ground-level reporting on the shifting trends in U.S. economic activity. Embedded in an article on how the current crisis is crushing small businesses is a brief description of the life and imminent death of one small business, one that exemplifies the modern credit-fueled approach.
Susan Knapp once sold yellow-pages ads to small businesses, meeting people who had turned their dreams into companies. It inspired her in the late 1990s to turn her love of making pear jelly into a side business. For years, she had collected pears from a Northern California farm, whipped up batches of jelly and passed it out at holiday time. In 2003, she quit her job and became a full-time entrepreneur, using credit cards, personal savings and an equity line against her home to get going.
By 2007, her company, A Perfect Pear, was reporting $700,000 in sales. She says she is sitting on $100,000 in orders from specialty stores and grocers who want to buy her jellies and salad dressings. On the company’s Web site, many items are on back order.
And yet Ms. Knapp can’t fill those orders: She doesn’t have the money to buy the 300 cases of vinegar and 200 cases of olive oil she needs to make the products, and she hasn’t been able to find funding.
Ms. Knapp, 56, says she has gone from making six figures to not taking an income. For the first time, she and her husband, a self-employed chiropractor, are without health insurance. In the past year-and-a-half she has nearly drained her $190,000 retirement account to pay for operations and two-part time employees.
Her biggest mistake, she says now, was not securing a line of credit before she actually needed it. Though real estate in Napa Valley, where she lives and works, is still strong, her bank won’t consider expanding her home-equity line, she says.
These days, she spends time calling "angel" groups — investors who specialize in fledgling companies — searching for funding. Some have told her they have too much money tied to real estate or the stock market; others are focused on tech. She placed ads on two peer-lending sites but has only gotten a few questionable propositions, including an "investor" who asked for a $67,000 payment before he’d turn over any financing. She uses credit cards regularly, but one of her issuers recently changed a no-limit card to a $1,200 ceiling.
Without capital, she had trouble filling orders for Christmas — her busiest time. Customers were calling her small commercial kitchen directly, she says, asking why they couldn’t order products. She explained that "we’ve run into a challenge economically."
She has applied for a $300,000 loan from the SBA, and is pinning hopes on that. "I’m a really, really positive person," she says. "I’ve got pictures of hundred-dollar bills all around my desk, for the power of positive thinking." If the loan doesn’t come through, she says, A Perfect Pear may have to close temporarily.
For all the positive thinking, Ms. Knapp hesitates when asked if she’d do it all again. "The last thing I want to do is stomp on someone’s dream," she says. But knowing how hard it’s likely to be, "I hate to see businesses trying to start right now."
In a world without business credit, your ability to grow a business is limited by your ability to generate and reinvest profits; make a little pear jelly and dressing, sell it, use the profits to buy enough ingredients to make more jelly and dressing on the next round, and so on. But when using business credit, you are selling things you don’t own, needing to sell them in time to pay the people who do own them, hoping to skim some money for yourself in the process.
There is no denying that you can do greater amounts of business sooner if you aren’t required to use your own money to create your product. Entire business strategies are built on this premise; Amazon CEO Jeff Bezos summed it up as “Get Big Fast.” But the game only works as long as it works, as Susan Knapp found out. If she had taken it slower, making only as much product as she could personally afford to produce, she would have been able to supply at least some of those customers who were calling her kitchen. And, if the market for pear jelly and salad dressing suddenly evaporated, she would at worst be stuck with the latest round of inventory.