How Small Business Owners Can Cope with the Crisis

Don't wait for that bailout to take effect. Manage your credit, watch costs, think globally, and hang on until a recovery materializes

Record financial bailouts that are followed by historic stock market drops, frozen credit markets, and a growing global economic crisis. Each day seems to bring a new round of bad news, and there's no end in sight. How will small companies be affected by the bailout that passed last week—and by this week's events? And how should they respond?

Chad Moutray, chief economist at the U.S. Small Business Administration, says small business owners are scared like everyone else. "A lot of them are sitting on their hands at this moment, which is no different from what we've seen all year long in surveys. When asked what they're going to do during the next three months, small business owners are saying: 'Not hiring, not investing in the business, and not expanding.' I suspect this will continue to be the case."

Donald Wilson, president of the Association of Small Business Development Centers, says entrepreneurs are contacting SBDCs around the country to ask for help getting loans or managing their existing business loans, but it's not easy (, 5/14/08). "Just this fiscal year, the number of SBA loans are down substantially and the dollar volume on those loans is down 11% to 15%," Wilson says. "Frankly, our clients are scared, particularly the retailers who are realizing they'll probably see very minimal growth—if any—this holiday season." (To find retail strategies for this holiday season, see our story How Small Stores Can Lure Holiday Shoppers (, 9/23/08) and tune in to our podcast Reaching Holiday Shoppers Online (, 9/23/08).

Bailout results will take months

With credit still very tight, Wilson says, "our counselors are telling them to look at cutting extraneous expenses, reevaluate their marketing budgets, and get creative with their cash flow. If consumer spending is down, and you have a normal inventory request every few months, maybe you don't have to order as much now, based on your historical economic data."

Many people are confused about why credit is still frozen, given that Congress just approved such a massive federal bailout package. But it will not have an impact until implemented, Moutray says, which is likely to take months.

Of course, not all small business lending has stopped (, 9/26/08).

Eric Aanes, principal of Titus Wealth Management, a financial planning firm based in Larkspur (Calif.), says local banks have been advertising that they are still making loans to established businesses. "I went down to try it out and when they looked over my application, they wanted to give me $100,000," he says, "so it does work."

No 1: Your Credit Manager

Aanes also says many of his small business clients are doing well. "One client sells $400,000 saws and they're seeing new orders from Europe, so they're not having issues. And I also have in my client list a small apparel company that factors and they are doing fine," he says.

But for small business owners whose firms are suffering—or whose loans have been called—times may be tough for a while.

Howard Anderson, a long-time entrepreneur and management professor at Massachusetts Institute of Technology's Sloan School of Management, says those entrepreneurs may need to live by an old New England adage: "Use it up, wear it out, make it do, or do without." Small businesses, squeezed all year between rising expenses and reduced demand, are likely to be the first to cut employees and growth—sometimes foolishly. "We often take it in the chops when our bigger customers delay their payments," he notes. "At times like these, the most important person in your company is your credit manager.

And if you don't have one, you've got to become one yourself."

Entrepreneurs are most likely to sleep well when no single client represents more than 10% of their business, notes Anderson: "If one of your big clients catches cold, you could get pneumonia and die." It's tempting to rely on one large customer to make most of your sales, says Ron Adair, a partner at the Resource Group, a Glendale (Calif.)-based financial planning firm that serves many small business owners. "It's easy to invoice, easy to do the books, and easy to control just one relationship. But if you have a client that has a controlling position over your business and that client experiences some hard times, you'll really be suffering."

Think Globally: Export

Small business owners who can't get new credit or whose credit has been reduced may need to put more of their own equity into their companies. "Your first and only rule is to make sure your company doesn't run out of money," Anderson says. "Reduce inventory, extend terms you pay out, speed up payables, cut future plans—do what you have to do."

The SBA's Moutray says this may be the time to reevaluate your business: "There are opportunities out there in the export market. It may be time to look at international trade, or it may be time to tighten your belt. Just know that at some point in the next few months or years, things will turn around. And you want to make sure you're in a position to act then." (For more on exporting, see our story How to Sell Overseas [BusinessWeek SmallBiz, 4/16/08] and watch our video Protecting Your IP Overseas [].)

Anderson is certain that most small business owners will persevere, despite the difficult times. "Small businessmen are very adept and they are total pragmatists. Having run a business for 30 years, I can say that the small business owner is the most resilient animal on earth."

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