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Small Businesses and the Credit Crisis in 2009

The FSB (Federation of Small Businesses) released their New Year’s message indicating that the government’s strategy to face the credit crisis in 2009 should begin by helping smaller firms avoid having to face closure due to late payments, an expected decline in trade and increased difficulty in accessing financial help for the year to come. The message continues to say that the government should present a light legislative programme for 2009 and a Budget focused on “getting the economy running again”.

John Wright, Chairman of the FSB points out that small business represent over half of the private sector turnover and that the innovative, enterprising and flexible nature of these businesses will help see the UK out of recession in 2009 and into recovery. Consumers will also play an important role in the New Year and will be urged to Keep Trade Local, this also goes for government departments and local authorities who shouldn’t let their global thinking stop them from buying locally.

The FSB New Year’s message calls for an extension of the Small Business Finance scheme into a wider business loan guarantee, access to working capitals to help with cash flow problems and guaranteed overdraft facilities. John Wright also indicates that bank managers lacking experience in dealing with a recession must undergo training to reduce the risk of having to close their offices unnecessarily and points out that there are 10,500 branches in the UK that could be affected by this lack of preparation.

One of the main concerns for small business in 2009 will be that of late payment from their service consumers as this would affect their cash flow and, in turn, their ability to pay business credit card balances on time. This is why the FSB has released the Prompt Payment Code; its purpose is to provide policies related to the payment of “B2B” bills focusing mainly on 3 areas:

- Paying suppliers on time; following terms previously agreed by their contract, without changing payment terms retrospectively or on unreasonable grounds.

- Providing suppliers with clear guidance; giving suppliers easily accessible guidance on payment procedures and a system for dealing with complaints and disputes whilst also ensuring suppliers are promptly advised of reasons why an invoice wouldn’t be paid in time.

- Encouraging good practice; requesting main suppliers to implement the code of practice down their own supply chains.

With many high street retailers closing down, it’s important to take precautions to avoid a similar fate. Considering that some companies rely greatly on the capital buffer coming from their business credit card, it’s important to take some measures to ensure it can still be relied upon in 2009. To avoid jeopardising your credit or being hit by higher rates you can resort to online banking to pay your business credit card balance in time, no matter where you are, find a low or 0 percent interest credit card and consider transferring some of your existing balance into it. In general, avoid leaving balances unpaid as low rate credit cards may prove harder to come by in the New Year.

Financing A New Small Business

In this second article on finance we’re going to shift our focus to money, banking and investments. Again, I thank my associate for enlightening me on this subject. You can really lose your shirt if you don’t know what you’re doing.

Everyone dreams of getting rich someday. Unfortunately, getting rich isn’t as easy as waving a magic wand. Unless you’re extremely lucky at picking winning lottery numbers, getting rich takes time, lots of it. Of course the more shrewd you are at investing, the quicker the riches may come but even then it’s no guarantee.

For every financial risk there is a financial reward that goes with it. The higher the risk, the higher the reward.

Let’s start with some low risk financing. You want to start a business. You have very little collateral. So you go to a bank and apply for a small business loan. If you at least have good credit you’ve got a pretty decent shot at getting one. The loan rate will vary according to the prime interest rate. Small business finance packages can run from $75,000 to $5 million. At the time of this article the prime rate is 4.81%. The business loan will probably have a rate about 2 or 3 points higher at around 7 or 8%. There was a time that 8% was an excellent rate, back in the 70′s when interest rates were double digits. But now interest rates are starting to climb again so 8% is just okay.

Of course you can try some high risk financing alternatives. This will bring you a higher return sooner to finance your business but you can also lose your shirt doing it.

What many people do is what we call leveraging. This is the practice of taking borrowed funds and investing them in a high risk stock hoping that this will yield a higher return so that they can finance their business with the profit and pay off the original loan at the same time. This way the money put into the business is all theirs and they don’t have to worry about defaulting on the loan.

The problem with this practice is if the stock or stocks tank, then you’ve lost more money than you would have, can’t pay back the original loan and can’t invest in your business so that you can make the money to pay it back.

Most people who practice leveraging invest in a number of different stocks, bonds and mutual funds in order to minimize the risk to some degree. Still, this is a very risky practice and if not done correctly you can lose your shirt.

Another thing some people do is get private investors to sink money into shares in their company to be. These are people themselves who are usually willing to take a risk on a new venture if they think they can get a good return. By doing this, you essentially are taking no risk at all. If the company tanks it’s the investors who are out their money. Of course some of them may not be too happy about this so getting an unlisted number and address may not be a bad idea.

There are many ways to get capital for a new business. Some easy, some not so easy. Make sure you choose the option that’s right for you and won’t land you in a situation where you have to be put in witness protection.

Finance Management of Small Business

Managing finances in a business is among the few important things that need to be considered when starting and carrying out a business. It is all about efficiently and effectively utilizing available funds in order to achieve the objectives of the business. Financial management is aimed at planning, observing, organizing and managing the monetary resources of a business.

Small business finance management strategies

Small business finance management is mostly concerned with procurement, allocation and control of financial resources so that a regular and adequate supply of funds is maintained to run a business. Once the funds are in hand, they should be utilized in maximum possible ways at low costs and should be invested intelligently in safe ventures. A few tips that can help you efficiently use your funds while running a small business are:

  • In the initial years of managing a small business, you need to estimate how much money you need for a decent living and pull out that money from your business income. Now invest the remaining money back into your business for its growth.
  • Early wins in the form of high profits may urge you to spend it on leisure holidaying or improve your housing status. You need to be firm and defend yourself against such ideas and wait till your business gets a little more established.
  • The main expense in a business is covering the payroll of your staff. It is advisable not to hire new employees unless you absolutely need them. When things get busy and a lot of work pressure builds up, you may get tempted to hire more people. Try and stretch the existing staff members to their full potential to get through the workload and hire only if necessary.
  • Try and save up money on applying for loans and procuring inventory. Taking up loans from banks is a common practice in the business world, but it carries an extra cost of its own in the form of interest you pay while returning. Reducing this extra cost can help you add up and save more money in the long run. This can be done by dividing the total money you need as loan and borrowing it in parts over a period of time. This reduces the overall amount of interest you pay back to the bank. Borrowing the entire amount at once will result in you paying interest for the money you are not going to use till later time.
  • Keep the money separate for paying the taxes and avoid mixing it with other funds. Paying taxes is of utmost importance and since that money is meant to be given away, it should not be kept or used for other purposes.
  • Bargain the terms of the agreement with the outside contractors and vendors like delivery services, electrician etc., such that you get a grace period in paying your bills. This grace period can be used to manage your funds and prioritize your other bills more efficiently.

Small business finance management can help you cleverly grow a successful business over time.