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Firms: Stacking The Odds In A Crisis;
Entrepreneurs finding ways to thrive in hard times
Printed in Investor's Business Daily
Small Firms: Stacking The Odds In A Crisis
Friday November 7, 2008
Gary M. Stern
It pays to be a big guy.
When losses at American International
Group (NYSE:AIG - News) hit the billions, the federal government bailed
it out to save the economy. When subprime mortgages tanked at Washington
Mutual, regulators arranged its sale to JPMorgan Chase (NYSE:JPM - News)
to protect the financial system.
But when small businesses
falter -- despite contributing over 70% of GNP -- they're on their own.
"There's no safety net
for small businesses," said Steve Bloom, an Atlanta-based counselor
at SCORE, a nonprofit association that partners with the Small Business
Administration. "The SBA is not in the business of making loans
to small businesses; it only offers financial guarantees to participating
lenders," he said.
This means that typical small-firm
owners have to rely on themselves and not governmental agencies. The
good news is that they can not only survive, they can thrive by acting
on their own.
One ways to do that is to
generate enough capital to invest in growth, or network to find investors
willing to lend the money.
But before taking action,
it's always best to know where you stand. The first thing to do is "analyze
why you're in trouble, why you're losing customers or why customers
aren't paying you fast enough," explained Ed Hess, co-author of
"So, You Want to Start a Business? 8 Steps to Take Before Making
the Leap." Entrepreneurs must cut costs, generate cash flow, and
if the system self-corrects, tap community banks for loans, he added.
Beware Ripple Effect
When access to capital from
banks is cut off to most small businesses, there's a ripple effect.
Small players can't expand or hire more employees so unemployment rises.
Orders to suppliers are cut back, reducing the revenue of other businesses.
When small firms can't grow, the impact is felt in loss of jobs, revenue
stagnation and supplier retrenchment.
Without access to capital,
small businesses are at risk. Retail businesses without a seasonal line
of credit that do much of their business between Halloween and New Year's
face hardship, says Dennis Ceru, an adjunct professor of entrepreneurship
and business strategy at Babson College. Desperate for cash, some small-business
owners are forced to borrow against their homes, take out expensive
loans, or offer suppliers a small percentage of profits to pay faster.
This credit crunch worsens
the money squeeze for many small firms. Most small businesses already
have a tough time getting loans from banks, which want to see three
years of rising profits, something many businesses can't provide. "Banks
are collateralized lenders only," Bloom said.
A Baker's Example
To survive, Dan Leader, owner
of Bread Alone, a Boiceville, N.Y., wholesale and retail bakery with
three outlets, raised bread prices three times and added a fuel surcharge
for deliveries. In fact, he raised his prices to offset the $140,000
jump in his cost of flour in 2008.
But Leader also focused on
expanding business without requiring additional capital. He spends one
or two days weekly making cold calls to new customers who have multiple
locations that can yield $100,000 of annual business. He made presentations
about new products to major customers like Fairway's, Whole Foods (NasdaqGS:WFMI
- News) and Zabar's, which led to a surge in orders.
Diversification is key to
Bread Alone's keeping its $7 million in annual revenue intact. One-third
of its business comes from retail stores. Another third comes from wholesale
orders, while the remaining third comes from mail order and Internet
In case he needs to open
another retail outlet, Leader maintains a strong relationship with a
local bank, which loaned him $100,000 several years ago. The money was
repaid. "For a small business, a close relationship with a local
banker is key," Leader said.
If a small business has some
capital to invest, it can prosper during these hard times. In times
of tight credit, SCORE counselors advise that owners with capital on
hand turn to buying used trucks or used office equipment, for example,
rather than buying new. "With foreclosures and bankruptcies, you
can get things for 30 cents on the dollar via eBay and Craigslist,"
To obtain capital in tough
times, savvy small businesses are advised to intensify networking. Join
trade associations, chambers of commerce and rotary groups to tap private
investors, Bloom said. Angel investors are more likely to invest in
the hot tech firm, not the local hardware store, restaurant or uniform
Most small businesses fail
when "they haven't planned for the proverbial rainy days and haven't
established an emergency fund," Ceru said. He advises that owners
put aside three to six months in operating cash and salary to withstand
a downturn. "Businesses have to plan for eventualities that can
happen outside of their control, like a luncheonette (that finds itself)
near Wall Street after 9/11," he added.
Hess urges entrepreneurs
to draft a detailed emergency plan to stay afloat. Included in the plan
would be detailing which employees are critical, which 10% of employees
can be cut, how severance pay will be handled, and ways to cut personal
living expenses and increase cash flow.
Some businesses are taking
smart steps to stay alive. One business sends out invoices that day,
instead of after 30 days, and gives discounts to customers that pay
within a week.
Businesses that thrive during
a credit crisis and downturn "understand how to best manage their
cash, minimize expenditures, and utilize their resources effectively.
They lease rather than buy and hire part-time rather than full-time
employees," Ceru said. Small firms, knowing that they can't rely
on the federal government or banks in a jam, depend on their own resources
"In tough times, entrepreneurs
must adopt a survival mentality, do everything you can to focus on getting
cash in, delay paying expenses and keep the essence of your business
alive to survive and play another day," Hess said.