Small Business Survival Strategies

Global financial panic. Credit freeze. Consumers running for cover. What's a small business to do?

By Jonathan N. Crawford, Researcher-Reporter, the Kiplinger letters

October 8, 2008

Keeping your business afloat in these severely choppy economic waters won't be easy, but it can be done. Here's a checklist of useful tactics for riding out the storm:

• Plan for the Worst, Hope for the Best Prepare for an extended downturn so that you're ready for the worst of scenarios. Don't make hasty decisions based on a short-term time frame; consider what may be best for your business six months to two years down the road.

• Trim the Fat

  The first thing is to cut costs sharply. Cut back on purchases and negotiate more favorable payment terms with your vendors and your landlord. Be insistent, but polite. If your business has valuable assets, you may want to consider selling them. Think about leasing equipment, instead of borrowing money to make purchases. Take a look at your labor costs -- this may be a good time to institute a pay for performance system, pay commissions instead of flat salaries and even let go of noncritical employees, if need be.

  

• Hold on to Every Penny of Your Cash Like It's Your Last

  Fine-tune the timing of your payables. Take advantage of the maximum allowable time to pay your vendors and suppliers. Pay at the end of the month instead of the beginning. Extend less credit to your customers to reduce your need for capital.

• Optimize Cash Flow

  Provide incentives for customers to make timely payments by offering them discounts. For customers who cannot make payments, think about discounting their overdue balance. Going through a collections agency is more costly, and it may never succeed in obtaining the receivables. If you are billing customers for time, consider billing twice a month instead of once. Don't delay sending out invoices. Billing promptly on the 1st and 15th of the month speeds up immediate cash flow. But avoid appearing desperate for cash; it could send a bad signal to your clients.

• Monitor Your Finances

  When times were good, it was easy enough to simply work your way out of debt. But in a calamitous climate, small businesses need to look at their cash flow and debt load more frequently, keeping the balance sheet in order. Pay your credit card bills on time and keep balances low to prevent a rate hike. Resist the temptation of balance transfers. Transferring your balance to get a lower rate will likely pull your credit score down.

• Network with Other Small Businesses to Find the Right Bank

  Find out where other similarly situated small businesses bank. Do they get good service from their bank? Get their perspective on the lending climate in your area. One way firms can network with other firms is through their local or regional chamber of commerce. Don't limit yourself to one bank; identify about 10 banks that might be in a position to help you. When calling a bank, ask to speak to a vice president or someone else high up in the pecking order.

• Know Your Business Plan and Numbers Cold

  Once you identify a potential lender, take the time to prepare yourself. Make sure you understand what is driving your business and be ready to explain it clearly to a lender. Demonstrate your ability to repay the loan. Be prepared to show the banker a contingency plan in the event that sales unexpectedly slump. Have all your financial statements in order, and prepare to show bank officials evidence that you are in good standing.

• Have a Plan B

  Try negotiating with your suppliers to get more trade credit. Consider peer-to-peer lenders or micro lenders. As a last resort, only if circumstances warrant, look into getting a loan by using your receivables as collateral, known as factoring; selling your equipment and leasing it back; or borrowing funds against future credit card and debit card sales, known as a merchant account cash advance. But beware of exorbitant rates.

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