Starting a Small Business in a Tough Economy
The Impact of Today's Economy on Start-Ups
Jun 25, 2009
Many entrepreneurs are hesitant to begin a business until the economy stabilizes. Others want to continue with business as usual, but aren't sure whether it is possible to get the money they need to fund a start-up. Banking expert Thomas Woolway recently answered a few questions about banking and small businesses in the current economy that can help these potential small business owners make a decision.
Has Credit for Small Businesses Really Dried Up?
This question requires a two-part answer. First, in today’s current environment, certain banks have cut-back or completely stopped their lending activities because they have encountered problems with their existing loan portfolios. These actions have contributed to the general feeling that “credit has dried up.” By turning off the lending faucet due to their own problems, these banks are giving the public the impression that credit is tight and it is tough to get a loan. By the same token, there are many banks that have a clean loan portfolio and as are quite active in the lending arena.
The second part of the answer, then, is focused on the small businesses themselves. If a small business is creditworthy there are banks out there that are interested in lending them money. A small business owner has to demonstrate to the bank that they are creditworthy. They need to show to the bank that they have the ability to generate sufficient cash flow to service the requested debt. There needs to be strong primary and secondary sources of repayment. The small business owner has to expect that they will be required to personally guarantee the loan. Assuming the small business qualifies for a loan, there is money available even in these difficult economic times.
Should an Entrepreneur Who Is Starting a Business Now Do Anything Different?
The sector of the business community that has been hit the hardest by this economic downturn has been the retail sector. Almost all businesses that sell directly to the general public are having significant financial difficulties. It is expected that these difficult times will continue for at least another 9 to 12 months. As such, if an entrepreneur is planning to start a retail business now they should make sure that they really want to start the business now as opposed to waiting 12 to 18 months.
If they still want to go forward with the business at this time, they should make sure they have a significant cash reserve available to support the business during this time period. No matter how much time they spend on developing projections, the actual business will likely require more cash to survive than the owner ever expected. Remember that “Cash is King” and once a business runs out of cash it is essentially dead.
Right now, retail businesses are facing a drastic reduction in sales. Obviously, with reduced sales there is less money to pay expenses. For most businesses, there is a significant capital outlay to get a business up and running. If a business owner goes through the effort and expense of getting a business open at this time, they must be aware that they are not likely going to be able to recoup this capital anytime soon.
Do You Have Any Tips for People Who Want to Start a Business in a Bad Economy?
For those that want to start a business now in this economic environment my best advice is to make sure you do your homework and develop a detailed business plan. This exercise will force you to examine all aspects of the new business so that you will eliminate as many surprises as possible. In today’s environment, one mistake can ruin a business.
Try to avoid making mistakes. It might be worthwhile to talk to other business owners who are in that business/industry. Learn from them, as to what works and what does not work. Finally, be prepared to work hard. You will have to spend long hours working the business in order to make it succeed. It is your business – no one else is going to do the hard work for you.
Need more financial small business help? Don't miss the small business banking interview with Thomas Woolway.
