Over the last year I have tightened up credit at our company, General Steel, Inc., considerably. We no longer take checks from people we do not know without running it through a check verification system that takes 1.5% of the sale. Bad checks became too much of a problem. The new system has stopped nearly a dozen bad checks and easily paid for itself.

We no longer take large credit card charges over the phone from people we do not know. Credit card fraud has been an issue and at least one credit card company has proved unwilling to stand behind their verification.

Twice a month I scour my accounts receivable report and either reduce balances or close accounts. Customers with relatively small balances that cannot pay on time are closed. The costs of calling and writing to collect small balances grossly outweighs any profit from the sale. Larger balances ($1,000+) are quickly turned over to legal resources if they are past due and do not respond to our efforts. Even when successful the time and legal costs far outweigh any profit from the sale.

I have noticed that while we have closed dozens of accounts we are opening fewer new accounts, especially compared to a few years ago. And the accounts we are opening are almost all existing businesses. There are few startups, especially in the construction and metal industries.

The construction industry is still in a depression and will be for some time. Metal fabricators are faring better, but I still see many more shutting their doors than starting up.

This economy with the threat of onerous regulations and significantly higher pending tax increases is squelching startups. This is compounded by much tougher lending standards (some may call these standards normal and prudent) and lower home equity values that have reduced collateral value. Banks own enough homes with record defaults; they do not want to own any more.

Yet large publicly held companies have shown record profits. This climate of more regulations favors large businesses because they have the administrative overhead to comply with complex requirements. Larger businesses also have easier access to credit. In fact we are seeing large companies extending credit to their customers, who do not have such credit access, through generous payment terms. High unemployment has also kept wage costs in check.

Higher profits are also normal after a financial reckoning like we recently experienced. Costs were slashed fast and hard. When business started to recover most businesses found that due to their cost reduction that they were more profitable at a given level of business than they were years early.

Until we create a business climate that encourages the kind of entrepreneurial startups that we experienced in the 1980’s we will continue to stagnate as an economy and unemployment will remain high.

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From the Trenches 6.3.2011

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