Today, June 1^st, 2009, is an historic date. It is the day that General Motors entered bankruptcy. There are a lot of wide-eyes and crestfallen faces in Detroit and Washington today, as if this is some kind of surprise, a financial Pearl Harbor if you will. It isn’t, this assault has been going on for a long time, and if you want to know who sank GM’s battleships, you need look no further than the GM corporate boardroom and the UAW. Because of weak leadership and short-sightedness, GM executives have been systematically running the company into the ground for years now and the unions have been right there adding ballast and force to the effort, demanding more and more, sucking the competitive life out of the company. Now, here we are. One of the parties to the company’s demise—the unions—will now split ownership with the only entity actually less competent to make sound financial and industrial decisions for the good of the company, the federal government.

GM Bankruptcy and Small Business

That is the bleak landscape upon which a very large number of small businesses will have to make a living, and many of these will have to follow GM up the bankruptcy court steps, which will be a major blow, not only to the auto industry but to the economy as a whole. According to Keith Gerard at AllBusiness.com, Independent suppliers manufacture 70% of the 15,000 parts that go into making a single automobile. Taken together, these companies comprise a $388 billion industry within the overall automobile industry, accounting for over 600,000 (of the 2 million) American jobs tied to the auto industry. The overwhelming majority of these suppliers are small businesses with an average of 80 to 100 employees.

Will These Small Businesses Get Paid?

It is not just future work that is imperiled as the number of nameplates—and the associated production—is trimmed down. With the government holding such a large interest in the company, they will not let it die completely. There will always be a level of productions, though how much and of what is still in question.

The more immediate issue deals with payments on product that has already been delivered. Many of these companies have been waiting for weeks or even months to be paid and the bankruptcy protection is likely to stretch that out even further. Those companies participating in the administration’s Supplier Support Program—funded by the Troubled Asset Relief Program (TARP)—are seeing payments withheld up to 180 days, which is resulting in severe cash-flow problems for small suppliers. This has the effect of raising their risk categories for lenders and receivables insurance brokers, which, in turn, leads to even tighter credit terms, if credit is extended at all. Lenders and brokers no longer see the auto industry, or those connected with it, as a good risk.

Of course, there is always the government’s 7(a) small business emergency loan plan, right? The problem is that it doesn’t offer enough to keep these firms afloat, and it requires personal collateral to the tune of 20% of the loan and in this economy that is simply not realistic.

More than that, if the experience with Chrysler’s investors is any guide to the way the government is likely to handle things, these small businesses have little hope to recoup all of the money—or even most of the money—that they are owed. Forced to take pennies on the dollar, and later forced to renegotiate their prices to continue supplying the new GM and Chrysler companies, you will see these firms struggling to survive and those that cannot widen their customer base, or who cannot get ever-more-elusive credit, will probably fail.

The Bottom Line

While an emergency loan may help bridge the gap for a time, a look at the way the automaker crisis was handled by the government shows rather graphically that it is no solution. After all, Obama threw billions of dollars at the automakers to keep them out of bankruptcy, and it failed to save them. It did, however, give him a chance to payback the unions, but that is a different issue. The bailouts failed because they failed to address the labor, product and management problems that had been plaguing Detroit for ages. In other words, they failed because the problem was not money.

For these companies to have the best chance for survival, they have to realize that their cash problems are not their real problem, either. Rather, they are symptoms of a more fundamental problem—the market they are in. Many of them will have to turn away from the auto industry and find other markets to serve, other products to build, which will further exacerbate the problems with the auto industry, but we are in an environment where “every man for himself” is pretty good advice. These small businesses need to look to themselves for salvation and with their skills and knowledge, they can do it. These are good companies—too good to be trampled under the jackboots of a government-run auto industry—and they should go forth to greener pastures. Waiting for Washington to do right by them could mean the end of them all.