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The credit crisis and how it effects small business

Many small businesses are starting to tap in to lines of credit, even if they don't need it.

This is driven out of a fear that the line of credit may not be available when it is most needed. This may not be a bad idea, but you need to measure the risks, and the cost of dipping in to your credit line, and the likelihood that you will need it at some point in the future. The decision must be weighed on how high your current interest rate is, and how likely you are to get a line in the future, or how likely it is that your line will be closed. Data now seems to be indicating that the credit crisis is not hittling all small businesses equally. Those in the construction trades and real estate development are in fact seeing lines closed. But other companies are not reporting closures near as often.

If you have a very high interest rate on your line of credit, and you can cut costs and survive without the loan, it probably doesn't make much sense to drive it to zero just to hold the cash at seven or eight percent interest. That being said, never underestimate the power of confidence, and peace of mind in growing your business. This is not just a financial issue. If you are truly worried, and feeling stress about your cash flow, and you have money available in your line of credit, go get it.

Nothing is worse than undue stress on a small business owner.

If you can spend a few hundred dollars a month in interest, and buy yourself peace of mind, and confidence in at least your short-term future, the price is well worth it. We are seeing far too many small business (and even big businesses) owners stop work on projects that would increase sales, or increase productivity in order to save a little bit of money. This is an issue of opportunity cost, and it's the reason you have a line of credit in the first place.

Small businesses must remember why they are so successful. It is flexibility and productivity that drive the edge. If you slip in to survival mode to quickly, you'll not realize gains when the economy rebounds, and could put yourself at a distinct disadvantage against your competitors. Healthy stress focuses the mind and helps you to make sound business decisions. Panic leads to cutting muscle and keeping fat, loss of confidence in your staff, and ulitmately will cause your small business to shrink. Let the big companies panic, they seem to do it well. You focus on your core business, and make it stronger.

Very successful companies often emerge after a crisis has passed. Managing your credit now, as well as cash flow, should put you in a stronger position when the storm passes. But you must not curl up in to a ball and hope to ride out the storm. This is a time for calculated, measured risk taking, but also long-term planning. And we all know long-term planning is something many of us small business owners are not particularly good at.

The summary:
Banks are in business just like anyone else. They make money by lending money. Those businesses with a proven track record will still be able to borrow money, but the cost may be higher. Those with suspect credit, and a short history of being in business probably will find it much more difficult if not impossible to borrow money in the future. Long term planning is key right now, and this credit crisis should not be long term. But it may be long enough to drive out quite a few of your competitors.

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