August 28, 2014

An Economy Based on Experience, Not Stuff

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Virginia Postrel writes in the New York Times that Americans are not buying as many tangible goods these days. Instead, we are spending a greater percentage of our money on activities:

As incomes go up, Americans spend a greater proportion on intangibles and relatively less on goods. One result is more new jobs in hotels, health clubs and hospitals, and fewer in factories.

In 1959, Americans spent about 40 percent of their incomes on services, compared with 58 percent in 2000. That figure understates the trend, because in many cases goods and services come bundled together.

She goes on to point out how the experience becomes more important than the goods delivered. When someone goes to a restaurant, they are looking for “memories, not fuel.”

The trend that she describes is showing its impact even in the small business marketplace.

As pointed out here on Small Business Trends a few days ago, service businesses are attractive startup candidates for entrepreneurs. Service businesses are relatively easy to get off the ground. On average, you don’t need to invest as much capital to start a service business as you do, say, a manufacturing or retail business. And naturally it is much easier to set up a low-cost virtual business model when you need little in the way of plant and equipment to run things day to day.

However, some parts of our economy have not kept up with this shift. They are still operating under the old paradigm of an economy based on goods. Take, for instance, banks.

Many small business lenders are still “asset-based” lenders. They base lending decisions largely on whether the small business has tangible assets that can be used as security for a loan.

The only thing is, the typical small service business has amazingly little in the way of hard assets. They rent office space and equipment, rather than owning it. Service businesses have no inventory to speak of. At most, they might be able to point to some free cash flows and a month or two’s accounts receivable, which while valuable, are hardly the motherlode of “kick the tires” assets that banks require as loan security.

And what about all that intangible goodwill (brand name, loyal customers) and intellectual property (systems, know-how) that make up most of a small service business’s value? Fuggedaboutit. Conservative banks won’t even try to place a value on these intangibles for loan purposes, even if they knew how.

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Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

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