Small Business - Surviving the Credit Crunch

The bad news is that the onset of the credit crunch means that the banks are no longer going to be as accommodating with requests for increased overdraft or loan facilities as they have been for the last seven years. In fact they may well be looking to reduce their exposure in some cases.

Banks look first and foremost to the debt to equity ratio, or gearing as it is also known to establish the credit worthiness of any business client. So if a company has debts of £30,000 and equity (shareholders’ funds) of £60,000 then the ratio is 0.5, which is acceptable but if the figures are reversed it is 2 which is not. The problem for small businesses, especially young ones though is that unlike their more mature counterparts there has probably not been enough time to build up significant shareholders’ funds and this is where the issue of falling house prices is likely to arise.

It has long been the practice for banks to close the debt to equity gap here by taking on personal guarantees, which almost always means your net equity stake in your house. For example a £400,000 house with a mortgage of £50,000, means that there is net equity of £350,000: If the mortgage is £200,000 however then the net equity of the house falls to £200,000. It is this net equity on the security of a house which banks have always partly factored in when considering requests for small business finance but as house prices are seen as likely to fall in the coming year things will be getting more complicated. If the £400,000 house is reckoned to be falling in value by £50,000 by the end of the year, that net equity reduces by the same amount.

So how does one cope with the possibility of dealing with tougher lending rules? The first is to carefully plan your cashflow forecast for the coming year, which is something that figurewizard is designed to do for you and the second is to make sure that your profits and cashflow forecasts reflect the new business conditions of 2008. Cashflow will be the key element and as such will come under the closest scrutiny. By using the figurewizard cashflow / liquidity planner you can play with your figures and see the results updated and charted in real time as you do, but whatever you settle for you must be prepared to do all that is necessary to make them come true. Also it is important to remember that a cashflow forecast based on soaring sales or increased margins is likely to be viewed with a jaundiced eye in the present climate.

One option for those selling goods or services on credit is factoring or invoice discounting. If you are in the right kind of business this can produce an immediate and dramatic improvement in your cashflow, while reducing or eliminating altogether your reliance on overdraft finance; there is a dedicated article on here covering factoring and invoice discounting.

The banks are currently listing their priorities in respect of their small business clients but the financial scene has changed for everybody and so the good news is that you are not alone. Figurewizard will make it possible for you to produce accurate and plausible month by month forecasts for cashflow which can help to get you off the top of the list. Accurate profits and cashflow forecasts depend on what you put into them though and this may well mean that you will have to be prepared to take tough decisions to make the figures fit the plan. If not then a few months later you could be faced with an irate manager who feels that they have been duped. This is not recommended so don’t hold back on taking such decisions.

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