Greg Roach's Berkshires Blog
Monday, October 06, 2008
  Fried Chicken Little? I Hope So
If anybody is still wondering what the global credit crisis might look like at the local level, I came across a pretty stark prediction regarding restaurants in one of my trade magazines. It might also hold true for any business that is reliant on credit card transactions. This was written after last week's bailout failed on the first attempt, but now it seems that the bailout package may not have inspired the confidence nessessary to get banks lending to each other again. Is this in the near future?
For Your Customers-

1. At least 25% will have 1 or more of their personal credit cards revoked. Those with FICA scores under 600 will lose most of the cards in their wallets.

2. At least 25% will have credit limits on their existing cards lowered by up to 50%, and they will find that they have “maxed out” these cards without making additional purchases.

3. At least 25% will see the interest free repayment period on their cards shortened from 28 to 21 days. Penalties will be assessed daily for late payments.

4. At least 25% will see the interest rates on their outstanding credit balances raised to 22-25% APR.

5. Therefore the bulk of your customers will reduce their restaurant purchases by at least 25%.

For Your Business-

1. Banks will slow the deposit of credit card receipts from daily to "clearing" in 3, 5 or 7 days from date of deposit.

2. Banks will raise credit card process fees from 1.5% to 3%, 5% or even 7%.

3. Vendors will change their credit policies, shortening collection from 30 day cycles to 7 days for their best clients, and from 10 days to COD for everyone else.

4. Banks will cancel outstanding lines of credit to all but the most cash solvent businesses.

5. Payroll accounts will need to carry full expected balances up to 7 days in advance of disbursement.

Therefore all restaurants will need to switch from a credit-driven to a cash-driven business model. Call it the return of the “cigar box” accounting system. Cash is, after all, the life blood of a small business.
I doubt that this meltdown is in the cards, but neither does it seem implausible.

The moral of the story that this guy is telling; "Hoard your cash!"

The problem with that strategy is that it exacerbates the problems with little things like bank runs, etc...

It's gonna be a fun few weeks. Oy.
Haven't we all been saying for years that consumers must stop taking on more debt? Although forced upon the public in dramatic fashion, this scenario seems to be exactly what is best for the country in the long run.

Rough times are ahead regardless of the path choosen. I would at least like to see something good come of the despair headed our way.
Coworkers coming back from Europe are telling stories of US credit cards being refused. We're talking about Amex, Mastercard and Visa. If you're leaving the country, take cash.

Cap'n John
Oh f***! Not good.
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