Folk economics: other people’s money

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.

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2 thoughts on “Folk economics: other people’s money

  1. We have a family business making woodturning lathes for hobby woodturners. Our prices are higher than our competition’s price and yet we are still seeing growth in sales even in the current economic slump. The market is very specialized and these are not impulse purchases. An average lathe is in the 7-8K range and the customer pays all shipping costs. Our average wait time is 12-14 weeks for a lathe. We are looking for another part time employee for 2009 putting our payroll to 4 employees.

    We havent used credit since our start up when we got a line of credit for start up costs and then paid it off as fast as we could. We have had only two price increases in 5 years as the price of steel went too high for us not to increase prices. We are contemplating a price decrease on a couple of our smaller products. Yet we are continue to show growth and profits. We even had to reinvest our surplus into the business before the end of the year on the advice of our tax guy to keep our tax liabliliies down.

    I put our continued growth down to a couple of factors. One is that the product has features that are essentially better than the competition, but not so much that it would justify the higher cost.

    Another is that our product is made from sources as locally as possible–our castings are done within 40 miles of the shop, our steel is purchased from a local vendor etc. The only non-American product we put into it is the motor which is made in Canada and that’s only because there isn’t an American maker with the same quality product. Our competition is all made off shore. Most of our customers see that as a plus. Plus we carry only enough inventory at one time to make 3 lathes, no matter what the price break is for buying more unless it’s on a widget that wont impact our books by purchasing out.

    But the Biggest edge we have is customer service. Since my husband designs and builds all our products personally, any potential customer can call and ask the actual guy who does the welding, does the assembly etc any question he or she may have. If you have any issues with the lathe after purchase you can call and ask him how to fix or overcome them. Or we will just replace the part that isnt working for you free of charge–for 10 years. If you need to know the max turn ratio or how this will work with fine fineal turning you can call and ask him. He’s even gone out and helped new turners set up and learn to use the lathe. We deliver within 100 miles free of charge. We have gotten a reputation for service amongst the woodturning community that beats any marketing tool we could have purchased on our own.

    I’m betting that in the slower economy folks are going to purchase less, but purchase better. And they will go for the customer service that the large manufacurer cant provide at least on large ticket items. And from our own experience, I totally agree with you that had the woman made better choices in growing her business she wouldnt be in the trap she’s in. I have no idea what 09 will bring for our business but my guess is that we will be able to ride this out if we are prudent in our business decisions and listen to our customers.

    And you can see the lathe at http://www.turnrobust.com. ;o)

    Deb

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