The following information comes from an email we recently received from a small business (less than 10 employees) that is being hurt by GSP expiration. It explains how even successful businesses appear to be struggling, which in turn jeopardizes its ability to stay successful over the long run. It’s worth reading every word to understand the full range of problems facing small businesses, and how GSP expiration compounds them.
If you have similar stories that you want told (publicly or anonymously), drop us a line.
We supply food manufacturers with ingredients that they cannot get in the USA because there is not enough domestic supply. Contracts with our overseas suppliers usually cover 6-12 month delivery schedules. This insures that our customers, the US based food manufacturers, keep their costs under control. When the GSP failed to renew, we were already into new contracts with our suppliers and customers for the new seasons. Therefore, it was impossible for us to renegotiate our contracts to reflect the additional cost of duties.
Those duties have been expensed as costs of goods sold, which lowers our margins and our profit for the year. Each quarter, we are obligated to show our bank our financial statements. For the past 2 quarters, a huge portion of our profit has gone into the duties. In anticipation of our getting the duty back, we enter A/R to the US Treasury on our books to reflect the amount of duty that we hope to receive back if GSP renews retroactively.
To a banker, our financial reports look dismal. We showed a loss for the past two quarters, and receivable ageing of $75,000 between 90 and 236 days old. Our total outstanding duties paid to date are approximately $110,000. What this means for our bank, is that at some point they should write off the $75,000 as bad debt. As they get ready to renew our line of credit, they have to take into consideration the following:
- We show $110,000 less than we should in profit to date.
We haven’t bonused any of that money or put it back into our retained earnings.
- We have no idea IF or WHEN that money might be due to us because Congress can’t agree on anything, even a timetable.
- Lower assets in the corporation means less borrowing power.
- Lower personal assets in the form of take home pay for principles in the company translates to less personal assets pledged to the bank to guarantee the line of credit.
Take all of this into consideration with the overall picture of the economy –
- Falling stock market over the past few years = lower value on pensions and investments
- Falling values of homes = higher debt to equity ratio for personal assets
- Falling income = less savings and/or erosion of savings due to fixed expenses
- Higher cost of health insurance = higher deductibles and more expenses for employees
All of these things added up equal less borrowing power, which means we can’t possibly hope to do the same amount of business this year if we can’t borrow the same amount of money.
So the delay of GSP renewal has hurt us temporarily in terms of cash flow, but non-renewal could hurt us severely in the long term if our line of credit is cut. With no warning that these programs would not be renewed, Congress has really constricted the ability of any small business that relies on these programs to do business. Non-renewal of GSP is like pulling the rug out from under businesses that were just getting their footing back after the economic collapse. We have all had to deal with the banks cutting our lines of credit because THEY were forced to hold more capital, not because we were not operating within the parameters of our financial agreements. We have had to absorb increases in health care costs at the rate of 25% per year, and therefore have been forced to radically reduce our benefits by increasing our deductibles dramatically.
These changes force small businesses like ours to lay people off and cut salaries and benefits, which does nothing for the economy except put people like us into a non-spending mode.