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We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
Home / Small Business
Thursday, May 01, 2008
Shining Stars
To see the complete Hot 100 rankings and company profiles,click here.
Entrepreneurial companies have long been the engine driving our nation's economy--and when you consider the stellar successes displayed by the companies in our annual Hot 100 list of the nation's top fast-growth businesses, it's not hard to see why. Despite a roller coaster economy and a global marketplace that grows more competitive by the day, all our Hot 100 companies have added jobs to the American economy since their inception.
This is our14th Hot 100 listing, and in some previous years, one industry (such as technology) easily dominated the group. It wasn't so this year. In fact, a quick look at these 100 companies reveals that they encompass an astonishing range of products and services--from hanger manufacturing and food sales to energy suppliers and defense contractors.
That same diversity is reflected in the individual entrepreneurs behind each company's success story. Whatever their backgrounds or industries, however, these fast-growth entrepreneurs share two common traits: the ambition to set far-reaching goals and the drive to make those goals a reality.
Throughout the history of this country, entrepreneurs have helped it thrive. With the global economy still uncertain, the innovative spirit of entrepreneurs like those in our Hot 100 listing is more crucial than ever in helping the United States remain competitive. If the strengths of our Hot 100 entrepreneurs are any indication, we have great faith in the future.
Making The Cut
This is how it all begins: The Hot 100 ranking is compiled with the help of CentrisPoint, a research organization. Entrepreneur and CentrisPoint started with CentrisPoint's database of nearly 21 million U.S. businesses and considered only those businesses that met the following criteria:
- Must have been founded no earlier than 1999 and no later than 2003
- Company sales in 2003 must be $100,000 or greater; 2007 sales must not exceed $1 billion
Must have positive job growth between 2003 and 2007
Must have a minimum level of sales growth or a sales growth quantifier of 1 or higher between 2003 and 2007; the growth quantifier is a measurement that combines percentage and absolute growth.
Only 64,000 businesses--or 0.3 percent of the nearly 21 million businesses--met the above criteria. Entrepreneur then contacted the businesses with the greatest growth to confirm eligibility. To be eligible, the founder must be actively involved in the company, the company cannot be a spinoff or a division of a larger company, and company sales for 2007 must be at least $1 million. From this list, the Hot 100 was selected.
For information on applying for the 2009 Hot 100, go toentrepreneur.com/hot100/companysubmission.html.
Entrepreneur research conducted by Maria Anton Conley, Emily Weisburg and Tracy Stapp, with additional assistance from Kristen Henning, Jake Kilroy, Adam Salazar and Mallory Somerset.
About CentrisPoint
CentrisPoint is a leading provider of economic and business data, research, and information. From its Washington,
DC, headquarters, CentrisPoint serves businesses and governments worldwide, offering high-quality insights into the U.S. economy,
the companies that compose it and the forces that shape it.
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