Unless you’ve been in a cave for the past month, you know we are in the midst of a credit crisis.
And if you’ve been watching TV, listening to the radio, reading the newspaper, or looking at the Web, you realize that the credit crisis has hit small business owners particularly hard.
So what can small business owners do to cope with the crisis? I’d like to offer a few suggestions.
1. Extend less credit to your customers. You can better cope with the credit crisis if you cut back on the amount of capital that you need. Many businesses lend money to their customers, in the form of trade credit, increasing their own need for capital. Providing less trade credit to your customers will allow you to conserve your capital for your own operations.
You can also reduce the amount of credit you provide to your customers by reducing your accounts receivable. You can do this by cutting the length of time your customers have to pay you or by offering them greater discounts for paying quickly. You can even turn over your receivables to a factor to get your cash immediately and let the factor collect the receivables.
2. Borrow from different sources. Some lenders still have capital. Community banks, in particular, did not get involved in the toxic mortgage mess. So going to community banks might get you a lender willing to lend to small businesses today. Also peer-to-peer lending is growing at a rapid pace. Borrowers with good credit still seem able to borrow at reasonable rates from private individuals. So you might consider peer-to-peer borrowing rather than going to banks and other institutions. Finally, if your trade creditors are still offering you credit, you can get money from them.
3. Bootstrap, or raise equity. The credit crisis is a crisis in the debt markets. Sources of equity capital — friends, family, business angels, strategic partners, and venture capitalists are in better shape. So you could seek equity instead of debt. If you can’t get the equity you need from outside sources (that’s hard for most companies to do), you might try getting equity from inside sources — the founding team of the venture. While you might be less diversified by putting more of your capital into your business, you won’t face lenders who aren’t lending if you go to your savings. Finally, don’t forget bootstrapping. You can use retained earnings to grow your business instead of borrowing.
4. Cut your costs. The difficulty that you face in getting credit is a good opportunity for you to think about ways to avoid needing capital in the first place. Instead of borrowing to buy equipment, you could lease it instead, and cut your capital needs. Similarly, instead of hiring employees on salary, you could use commissioned sales reps to keep your labor costs down.
5. Sell Assets. If your business has valuable assets, try selling them. You might find that you don’t need to borrow additional money for growth if you, say, sell your trucks and lease them back. The switch from owning to leasing might generate you enough cash to fund what you need to do.</p> <p>While nothing is a perfect solution to the effects of the debt crisis on small business, these steps will help small business borrowers more than bemoaning what the Wall Street wiz kids did to make a mess of the credit system.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.