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Cashflow Crisis Could Sink Small Businesses Even After the Economy Reopens

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A lot of people still seem to think the economy will fire right back up and things will snap right back to normal when the government-imposed coronavirus lockdowns end. I don’t believe we’re going back to normal for a number of reasons – primarily because things weren’t normal before coronavirus. The economy was a big, fat, ugly bubble. Coronavirus was a pin that popped the bubble.

But even if things were normal before the pandemic, the economy still wouldn’t just fire back up and restart on a dime.

The forced shut down put tremendous stress on businesses – particularly small businesses that operate on thin margins. Many of them were forced to take on more debt due to the pandemic and the ensuing lockdown. The federal program to help small businesses quickly ran out of money. And even once governments open things up again, many businesses will face a significant cash flow problem. That’s because most businesses run on credit.

As a small-business owner in Kentucky put it, we’re going to see a massive dead spot and lurch in the cashflow pipeline.

Except for cash transactions, there will likely be a 60 to 120-day dead spot in business revenue flow. And that’s on top of the shutdown induced revenue stoppage.”

We live in a credit-based economy. Most transactions are on at least 30-day payment terms. Depending on the number of transactions in a product’s supply chain, it could take months to refill the cash flow pipeline. Meanwhile, the business owner still has to make payroll and pay all of her reoccurring monthly bills such as rent and utilities.

That leaves two options. Either pile on even more debt to keep things limping along until the cash flow catches up or go out of business.

Unfortunately, for many businesses, going under will be the only option. The business world was already levered up to the hilt before coronavirus thanks to the incentives created by artificially low interest rates and an abundance of easy money  – thank you Federal Reserve.

“This is what people won’t understand,” that Kentucky small business owner said. “The restart will tax business resources as badly as the shutdown. People with no clue won’t understand why businesses start collapsing after the restart.”

Cash flow is a significant problem for small businesses even in the best of times. A 2015 article in Money explained that even a profitable and growing business can go bankrupt due to cash flow issues.

Your company might have a contract to deliver a gazillion widgets in December at a fantastically profitable price. But it’s July now, and in the meantime you need to buy the raw materials needed to produce those widgets and pay people to assemble them—and if you don’t have enough cash on hand to make it until December, well, let’s just say the holidays are going to be kind of bleak this year.”

According to data compiled by the research firm CB Insights, 29% of startups fail due to a cashflow crisis. Cash flow problems rank as the second-biggest cause of startup failures.

And now almost every business is, in effect, a startup.

This is just another reason why I’m not confident that the economy is going to snap back to normal. We’re looking at more business failures and more people losing jobs. That will mean even more Federal Reserve money printing and more inflation. And of course, more debt.

And that leads to even more questions that nobody is asking.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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