Small business and franchise owners nationwide are feeling the effects of the credit crunch, and experts predict that things will get much worse before they get better. Here is advice for weathering the economic storm from Blue MauMau.
With small business and franchise leaders saying that this is one of the toughest economic environments in decades, Bob Seiwert, head of the American Bankers Association’s Center for Commercial Lending and Business Banking, provides four banking tips to small business owners to help weather the credit crunch. The American Bankers Association is a trade association that lobbies on issues important to the banking industry.
Seiwert, a banking veteran of some three decades, advises small business owners to start with reappraising and possibly revising their business plan to reflect current realities. Here’s his advice:
1. Review the Viability of Your Business Plan
- Make sure that your business plan has three scenarios—a “most likely,” a “best case,” and a “worst case,” and be prepared to execute each of these business scenarios.
- Review your business plan with your “trusted financial advisors.” Ask for their input and revise the plan as appropriate. Make sure that the following people are a part of this review process: your banker, your accountant and your lawyer. A franchise owner should review the business plan with the franchisor.
- If your plan calls for expanding your business…revisit the assumptions that underlie the business and market needs for this expansion. These assumptions may not be valid given today’s economic uncertainty.
2. Maintain Contact with Your Banker
- Update them on how your business is weathering today’s economic storm.
- Make sure you share with your banker all of the news…”the good,” “the bad” and “the ugly.” Bankers don’t like surprises.
- Ask for feedback on your revised business plan scenarios.
3. Think Like a Banker
- Smart business owners understand the risks of operating in their industry as well as the special risks of their businesses and have a plan for mitigating these risks that they share with their banker. Bankers are going to do the risk analysis anyway…so it’s important that you help in this analysis. You may be able to provide a perspective that the banker has not thought about. And it’s important to the banker to know that you recognize the risks and have a plan for dealing with them.
- If your business has outstanding loans, develop a plan that allows for two ways to get the loan repaid. Bankers look for both a “primary” and a “secondary” source of loan repayment. For the sake of your business, you should too. Smart businessmen understand that now is the time to think about these things—not when they get into trouble.
- Don’t ask for loans that should be funded with equity injections. Bankers don’t get paid to take equity risks. They make loans which need to be repaid on a timely basis. Talk with your banker to better understand how much equity a typical firm in your industry needs to effectively operate.
4. Conserve Cash
- Limit withdrawals of cash from your business to only those that are absolutely necessary. Think twice about taking money out of your business to support a “grand lifestyle.” Bankers are unlikely to replace funds (via a loan) taken out of your business to support a lavish lifestyle.
- Review how your business “collects cash,” “disburses cash,” and “invests cash.” Ask your banker to review your cash management systems with an eye toward boosting your available cash flow. Your goal should be to accelerate your receivables, maximize your investment income and pay all bills on time.
This article has been reposted from Blue MauMau. View the article on Blue MauMau’s small business and franchise news website here.