Despite economy, small businesses remain resilient

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Small businesses are the backbone of the U.S. economy, comprising half the nation’s nonfarm, private gross domestic product. And small business — along with the rest of the economy — has been struggling during 2008 and 2009.

But Americans are resilient and continue to become entrepreneurs.

Although changes in the economy may make it more difficult to launch a start-up, it doesn’t necessarily change the hows and whys of starting a business.

When would-be entrepreneurs seek the advice of Matthew Barrett, executive director of the Small Business Development Center, the first thing he does is help them determine if the business idea is feasible.

Sometimes an idea is not wrong, but how they plan to implement it can be — for instance, opening a gas station “out in the middle of the country,” instead of closer to a busy intersection.

“Some people get it in their heads that they have to run a business the way they’ve dreamt about it all these years,” Barrett said. “But they need to adapt the plan to the forces that will impact it.”

Social forces, such as social media and Internet usage, will impact a business and need to be addressed — as do economic or legal concerns and changing laws. For example, if blue laws change and “big-box” retailers start selling beer and wine in a region, that will affect liquor store owners.

And entrepreneurs dare not forget their competitors — “are they better than you? More established? How many are out there?” Barrett asked.

And one’s habits and lifestyle must also be considered.

A start-up business creates a new “personal lifestyle.”

People need to know whether they actually want to or are able to work, say, 80 hours per week, or whether they prefer more of a “part-time hobby.”

If none of these questions deters potential entrepreneurs, then the lack of liquidity in the credit market might.

The economic downturn has made it more difficult for people to stay on time with mortgage or automobile payments or medical bills.

“And lower personal credit scores make it harder to get loans” — not only for start-ups but also for existing businesses that are ready to expand.

If a business showed a decline during the last two years because of the economy, he said, then financial institutions are less inclined to lend to that business.

When the economy was racing uphill, people were able to take out home equity lines of credit to finance or expand their businesses.

“But because of the mortgage crisis and less equity in homes (because prices have dropped), they’re not able to do that or borrow as much,” Barrett said. “And banks require about 30 percent cash (up front) for a loan.”

Creative financing

Entrepreneurs, of course, tend to be creative and risk-takers, so they will likely discover a resourceful way to finance their companies — despite the lingering effects of the recession.

But here are a few pointers from the Dun & Bradstreet white paper, “Managing Credit in the Current Economic Climate.”

Before applying for a loan, determine the financial position of your company by rigorously tracking revenue and expenses and ensuring that “you have a solid reason for the loan, such as buying equipment or inventory to expand your business.

“Prospective lenders will be less interested in loaning you money to meet your payroll or dig yourself out of a severe financial crisis since these are not necessarily business-building activities,” the report stated.

And D&B offers the “5Cs,” inside-the-financial-institution tips for assessing whether a business is creditworthy.

Capacity: Do you have sufficient cash to service the loans as well as potential future loans?

Character: What is your credit history? Are you trustworthy?

Collateral: What non-cash business assets can you use to secure a loan?

Capital: What is your business’ net worth? What is your personal net worth?

Conditions: What is the loan’s intended purpose? Should any outside factors be considered, such as the current economic situation?

Gene Fairbrother, lead small business consultant with the National Association for the Self-Employed, recommends that business owners set up business checking and savings accounts, credit or charge cards, loans and credit lines — and use them solely for the business, to establish the company’s credit history.

New businesses, sole proprietorships and small companies might have difficulty separating their business and personal assets, Fairbrother said. Because such companies tend to have limited business credit information, “lenders often rely on what is called a ‘blended’ credit score” — a combination of business credit and the personal credit scores of the principals.

“The business is one aspect of the owner’s history, but a lender is also going to look at the owner’s personal history,” Fairbrother said. “There’s no separation between the two at early stages — if the individual’s history is bad, they won’t ignore it.”

To improve one’s business credit rating, “make timely payments, check your credit report regularly and correct errors on the report.”

Expansion

Often, entrepreneurs contemplate expansion — especially if they have access to credit and have managed a successful company for several years.

But expansion means “you’ve become a risk factor again.”

Be sure that this next risk is one that you and your business are ready to face.

There will be issues such as delegating, loss of control, and possible loss of quality, Barrett said.

“If you’re comfortable with one store on the west side, make sure you know what it will be like to operate two stores,” he said.

“Solo-preneurs” or mom-and pop operations usually need to hire people in order to expand. And that changes everything.

“If you don’t have enough money to pay an employee on Friday, they don’t come back to work,” Barrett said. “Or if the business fails, you may have the (emotional) liability of an employee’s spouse and children on your shoulders as well.”

Expansion should be contemplated and planned for as carefully as the original start-up.

Don’t forget to include a tax adviser, business coach, marketing genius, accountant and legal adviser in the preparations.

And, to expand successfully, entrepreneurs must have the ability to trust others and allow them to control certain aspects of the business.

Business owners “can learn to delegate and trust that it will get done,” Barrett said. “But you have to be OK not knowing or controlling everything, or not knowing what an employee did all afternoon.”

To view the most recent SBA Colorado profile, which offers various small business statistics, click here.

One Response to Despite economy, small businesses remain resilient

  1. Rebecca, this very timely and helpful to all of us small businesses out here. I appreciate you including the need for seeking outside experts, including a “marketing guru.” While we are under the marketing umbrella, when Gain-Stovall, Inc. incorporated earlier this year, we had to give ourselves permission to seek out experts in fields such as accounting, legal, IT and others. That’s the hardest lesson for sole proprietors and partnerships to learn, that you can’t do it all yourself. Delegation, or outsourcing is the key.

    Rosanne Gain, Gain-Stovall, Inc.
    October 30, 2009 at 12:45 pm