Community Economic Development Fund

Articles and podcasts to help plan and operate your enterprise.

How to compete against Amazon

There has been so much hand-wringing over the difficulties caused to Main Street retailers by the rise of Amazon, but the reality remains that there's still plenty of angles on which to compete.


First let's examine the giant, which is not just one big opponent, but thousands of little soldiers in the Amazon army. In the latest survey I've read, 58% of the sales were handled by third party sellers. Uh, that would be other small merchants. Some have storefronts, some don't.


How are they competing? Price. But they don't all have the same price. The lowest net cost floats to the top of the list and "wins the box" as the lingo goes. A Main Street business might need to stay out of this fight.


Perhaps convenience? If you need something now, there's no beating the opportunity to drive down the road and get it. (Gee, I hope the store keeps it in stock.) Even two-day Prime or next day might not be good enough sometimes.


What about selection? The great river seems to offer nearly every SKU in the world. And thanks to decisions by national retailers to seek efficiencies that resulted in the streamlining of their merchandise mix and the homogenization of their stores, a lot of items one used to find around town are nowhere to be seen anymore. RIP Radio Shack.


This leads to one of two areas where a local retailer can still shine. One is experience. If shopping at your store creates an unmatched thrill, a shot of joy, excitement, discovery, pleasant feelings and that increasingly rare human connection, then that will beat rummaging through endless pages making guesses about the quality or utility of the online offerings. This might involve making an investment in wide selection. Or it might be the physical shopping environment (which is what national retailers do because they feel they can't afford selection). Or, more likely it might require finding the right people for the staff and adopting the right policies.


The other factor that can lead to a winning hand for a Main Street retailer is trust. This article gives a helpful discussion of the way this round can be won or lost. Note the study that gives small business a statistical edge over large operations in trust. But Amazon is right on top of this fight by being willing to guarantee the satisfaction and performance of all of their third party sellers. Just don't bother trying to get anyone from Amazon Customer Service on the phone.



Networking might be the wrong approach

Networking is an an oversimplified concept that to some people means shaking a lot of hands, exchanging a lot of business cards and meeting more friendly faces for banal chat at an event. Networking is promoted as the ticket to sales success for growing a B2B enterprise and is widely misunderstood as a hunting ground for prospects. Not so.


Sean Moore, former president of the Midstate Chamber of Commerce did a nice job in this episode of the CEDF podcast, Small Business As Usual, explaining the realities of networking and right approach to the craft.


And this article goes further, philosophically, in exploring whether simply meeting people should be the objective. The author, an attorney and college professor, thinks instead it should be serving. His explanation creates one of those light bulb moments where one might realize that much of what one has been chasing after, perhaps for years, was really a waste. That explains why you might have a stack of business cards of people who won't call you back. And yes, it's true the best, most productive, most long-lasting relationships are related to serving others.




When business credit scores start to matter

Character and past performance matters a lot in the world of lending as every business owner knows. Lenders can only rely so much on personal interviews and evaluation of self-reported background information to judge character, so a personal credit score becomes a proxy. Most banks have hard cut-off points on personal credit scores for small business applicants. CEDF, since it is not subjected to the same kinds of state and federal regulation as banks are, has more latitude to judge a low personal credit score in light of the totality of the applicant's circumstances.


A new business is unlikely to have any kind of business credit score, just like a young person may have an insufficient credit history to generate a favorable personal credit score. CEDF, recognizing this reality in many of our applicants, relies instead on personal credit scores. And in the early years of a business, practically speaking, this may be all that matters in seeking financing.


Dun & Bradstreet, historically, was the primary source of business credit scoring. But as the financial technology (fintech) revolution has marched on, D&B has more competition. FICO Small Business Scoring Service now serves numerous banks and the SBA uses this credit reporting product for pre-qualification of 7A loan applicants. (SBA 7A loans are typically originated by banks.) Experian is another D&B competitor with a similar business score product. And the other two credit bureaus, Trans Union and Equifax also offer delinquency prediction models.


One might see that as a business grows substantially and its operations begin to dwarf the size and importance of a founder's personal assets, a business credit score becomes more important for suppliers, lenders and insurance companies. Factors such as payment history, age of credit history, debt levels and usage, company size and industry risk factors are included in some calculations but like in the personal credit scoring market, there are lots of different scoring models provided by D&B, FICO and the others. And, not surprisingly, personal credit history of the business owners is also included.


But be aware that business credit scores may contain errors, as this Wall Street Journal article explained back in 2013, and because it is harder for businesses to obtain a look a their scores (there's no FTC Free Annual Credit Report for businesses), these corrections may be hard to make. The Fair Credit Reporting Act does not cover businesses. A lender who uses business credit scoring information (as opposed to personal scoring) does not have an obligation to inform you if you are denied based on that score.


What do you do? If your business is small and new, chill out and pay more attention to your personal credit score and do your best to improve it. As your enterprise grows, be known a solid corporate citizen that pays its bills on time and controls its use of debt. Develop good relationships with banks and respond to the financial benchmarks they use, which are widely understood. Keep aware of changes in the credit reporting industry and how they impact businesses of your size.


Finally, be aware that some fintech companies on the internet that offer a peak at your business credit score are primarily in the business of brokering loans. And their offerings include what CEDF considers the "easy internet lenders" that don't offer traditional amortizing loans. The effective interest rates of these lenders can get very high and devastating for a struggling small business. It's still buyer beware on the internet.

-- Frederick Welk
CEDF Business Advisor


Small Business As Usual 19-7, why borrowing got hard

       Jim Bzdyra

Small business owners might wonder what happened to the world where they could dial their banker on the phone and arrange for a loan in a snap. As CEDF celebrates its 25th anniversary, President and CEO Jim Bzdyra looks back over the changes that impacted commercial banking.



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