What Can Entrepreneurs do When Credit is Tight?

Tight credit conditions can hit small businesses particularly hard. That was the case during the credit crisis of 2008. Yes, that’s right, during our lifetime we had a credit crisis. Some of you will recall it. The tight credit markets caused a rough time for some businesses. This piece is what Professor Shane wrote at the time, offering pointers for how to respond in times when credit is tight:  

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 tight credit markets or when credit is not available? I’d like to offer five 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. Try Different Sources to Borrow

Despite the fact that credit is tight, some lenders still have capital. Don’t take a “no” answer from one lender as the only answer.

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 terms, you can get money from them.

3. Bootstrap, or Raise Equity

The credit crisis is a crisis in the debt markets — in other words, lenders have less money to make traditional loans.

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 small businesses 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 and contractors to keep your labor costs down.

In other words, when credit is tight, try to reduce your need for outside capital.

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.

While nothing is a perfect solution when credit is tight for small businesses, these steps are action oriented and will help small businesses with cash flow and liquidity pressures. And they help a lot more than bemoaning what the Wall Street wiz kids did to make a mess of the credit system.


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

13 Reactions
  1. Good points Scott. I think in the next coming year, we will become more of a cash & carry society. If you’ve got cash to pay for something, it’s yours. If no cash, no service or products. That’s not necessarily a bad thing though. Maybe it will finally teach consumers to buy only what they can afford and to stop charging everything.

  2. Your suggestion of extending less credit to customers at this time is a very wise one. Everyone’s feeling the crunch and your customers likely are as well. And when they start experiencing cash flow problems . . . so will you. I think the best place to start is your accounts receivables. Start collecting more and extending less. Keep it tight . . .

  3. Cash is king and gold is money! 🙂

  4. Recommended reading in the Wall Street Journal: Loose Money And the Roots Of the Crisis by Judy Shelton. http://aefain.notlong.com

  5. This is why I’m so glad I’m starting a business that requires low start-up cost and low overhead. I can always expand gradually when I need to, but with my self-funded, small operation, I’m not panicking over credit at this point.

  6. Yeah to extend your point on cutting costs, I would recommend open source applications to help you start or grow your business. Of course there’s a slightly bigger learning curve because you are moving away from the traditional Microsoft applications but it will save you money right off the bat. There are a lot open source software out there for a lot less, if not free. Do your research though, not all open source applications may be right for your company.

  7. Given the context, it’s not such a coincidence that I too covered this topic in my blog just today. (link below)

    Scott, you have rightly focused on the cash flows. I would really focus on 3 – boot strap – because there are no limits to that. The more creative you get, the less capital you need and more business you can earn. Check out this link on SMBCEO: http://www.smbceo.com/2008/09/15/smart-ways-to-finance-your-small-business/

    Similar to this post, I spoke about the following tips:
    1. Take advantage of the influx of talent that is now available
    2. Revisit services to customize them to crisis period and customer’s needs
    3. Look for new markets
    4. Cut your own costs
    5. Cut costs for your customers
    6. Look for alternative sources of funding

    Here’s the link: http://www.p2w2.com/blog/index.php/six-ways-you-can-survive-and-even-thrive-during-wall-street-meltdown/

  8. Hi Amanda,

    Good Point. Especially on this part – “Maybe it will finally teach consumers to buy only what they can afford and to stop charging everything.”

  9. I’d certainly say that Angels could still a good source of equity investment even now. But it depends on every organisation’s individual needs.

    But there will be limit when even angel investment is restricted by the financial situation. How close we are to there being a liquidity issue with angel investors is anyone’s guess!

  10. My company has saved thousands by simply using free software solutions like Google apps, Skype and Yugma. Just like Ron mentioned above, there are so many fantastic low-cost software applications on the market right now. I would recommend trying out one freebie application a week, that way you can slowly adapt what works for your company while cutting your monthly expenditures.

  11. I like the point of extending less credit to your customers.

  12. Yes Rose. As What Amanda said, we will all learn from these. I, too, have become dependent on acquiring things by charging them to my credit card. Now, needs double thought before doing it.

  13. There is a book “How to Use the Credit Crisis to Grow Your Business” by John B. Hayes. Complimentary copies available at http://bit.ly/bvhhER . Sandra Chesnutt, Ftrans