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Small 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 sales.
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," Bloom said.
Networking
Works
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 supplier.
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 to succeed.
"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.
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Copyright © 2008
