Coping with the credit crunch

As if the prospect of being sucked into a black hole wasn't bad enough, it seems not a day goes by without talk of an impending recession and how it's affecting global banking, house prices, the price of fuel, turbulence in the airline industry; in fact, pretty much anything and everything in capitalist society… with the notable exceptions of football and the dead-animal-in-tank market.

Naturally, the doom and gloom reaches small business, with owners facing tough financial conditions in the battle to establish and expand their enterprises. Credit firm Experian released figures earlier this year showing that 4,798 businesses had folded in the first quarter of 2008 alone.

The 'domino effect' of the economic downturn has made borrowing a nervy process, with banks already toughening their overdraft facilities. In 2004, the average start-up business requested £82k in loans, but by last year this amount had leapt to a staggering £450k, with an 85% success rate for those borrowing through loans and mortgages. This increase reflects the pessimistic outlook for short-term revenue, as well as rising running costs ranging from fuel price hikes to higher interest repayment rates.

Traditionally, capital-hungry small businesses have borrowed with their property as security. However, falling house prices reduces the amount of net equity at the owners' disposal. A loan of £100k secured against a £300k house provides £200k of net equity, a cash buffer that smoothes many problems should a business not last the first six months. With some predicting house prices to fall as much as 25% over the next two years, significant amounts of property value are wiped off, leaving borrowers facing smaller or even negative equity. With a 48% rise in home repossessions in the last year, the pitfalls of borrowing more than you can repay have never been so blunt.

Still reading? We salute you for your strong stomach! While there's no doubt that small business owners are feeling the pinch, the fact is that they are not alone. Sure, businesses have been forced into longer working hours and overhead cutbacks, but aspiring owners should take comfort from the backlash emanating from certain rather more positive corners of the online business community.

Financial adviser Gill Millington describes the pitfalls facing small businesses today as a "vicious circle":

"What often happens when the economy takes a dip is you find you're trading well with business still coming through the door, but your customers start dragging their feet as they don't have the cash readily available to pay you.

And then suppliers need paying on time to keep your accounts with them running, so the knock-on effect begins to get uncomfortable for your own cash flow. It's a vicious circle that, if not dealt with, will drag you down."

It’s a harsh reality that businesses need to be more proactive and forward-thinking than ever before to reach to customers old and new, and to keep that precious cashflow moving along nicely. In other words, now is the time to look at how your services are marketed to maximise interest at a time when disposable income is at its tightest.

This article by Steve McKee for Business Week promotes a fairly conservative approach to marketing in the difficult economic climate, avoiding any adverse effects on your budget. McKee argues that there are some key rules to stay noticed and move away from the doom and gloom.

Firstly, in the immortal words of Corporal Jones, don't panic! Sure, some commentators have suggested that the credit crunch will be with us "for years to come", but the economic woe will eventually pass. Be thrifty and careful, you still have to get your marketing across – so don't sacrifice it simply to save costs. McKee states that your competitors may well be falling by the way side, providing you with an excellent opportunity to mop up their customers. This will require a promotional push but may just increase your market share in the long term.

Continuing the panicking theme, don't start targeting businesses you wouldn’t normally chase – it’s more than likely this will be a waste of time and resources. They didn't form a part of your business plan before, so why would they necessarily be interested in you now? It's sensible to focus on your existing customer base, encouraging loyalty and potentially attracting new custom through word of mouth recommendations. Similarly, now probably isn't the moment to divert your already-stretched marketing budget towards any radical business overhauls – save that full web site redesign for sunnier times.

Discounting is a murky area, and McKee discourages reckless price slashing that could also discredit your product in the long run. Price cuts look/sound great and might seal the deal with potential buyers, but how will your patrons feel about paying 'full' price again after you return to your original margins? A more effective idea would be to embrace the art of the special offer, taking principles from mass-market retail and applying them to your business. Offer deals for multiple product bundles, encourage a quick sale with a time-limited discount, or try and generate popularity around certain items to promote a mad rush at your checkout!

McKee's final golden rule is quite simple – apply some humility, positivity and the truth. You'd have to be living in a cave to avoid hearing economic news on a day-to-day basis. Yes, we are knee deep in a tough economic climate but this doesn't end the need for goods and services. People respond well to honesty (stating the obvious, we know) so keeping your customers well informed with how you intend the ride the storm should strengthen your relationship with them. Likewise, apply a good dose of transparency and a clear plan to any employees you might have on the books to banish any nerves amongst the workforce.

The economy may be struggling, but there is no reason for small businesses not to make the most of a bad situation. Hopefully our advice will spark some creative thinking on the way to surviving and even prospering in these awkward times.

We will be looking to post a follow-up piece later in the year, so we would really like to hear the experiences of small business owners affected by the credit crunch. How have you kept your existing customer base happy? If you have picked up more business, which particular tactics worked best? Please leave your comments or e-mail us at businessblog@friday-ad.co.uk – we need your input!