7 Strategies for Dealing with Home Business Credit Crunch

Home buyers may have been stupid (or dishonest) and banks may have been stupid (or dishonest), but either way (or both) the mortgage crisis has spilled over in to other banking areas making the threat of a credit crunch likely.

According to CFO Magazine “Recent studies and reports from lenders show that small businesses are either having a harder time getting credit or struggling to pay off their debt.” To some large extent, that is because banks simply don’t want to take the risk of lending. In fact, over the last year, SBA loans to small businesses are also down 18%, a sign that even the government is reluctant to invest in a market which it thinks may end up with high default rates.

If you’re a business owner with an outstanding business or home equity loan, here are some action steps you should take:

  • 1. Stay informed about the health and stability of your bank. If they get into trouble, it may roll downhill.
  • 2. Understand that if slowing economy weighs on this year’s performance, your financial statements for year-end 2008 may worry your banker. If your 2007 performance was good, now may be the time to set up a line of credit–just in case.
  • 3.Understand and obey all the terms and conditions of your borrowing agreement. If your bank has routinely allowed you to violate loan terms in the past, such as failing topay down your line of credit annually or borrowing from another financial institution without permission, don’t assume it will fly in the future.
  • 4. Understand how and why lenders make their lending decisions. Understand how they value your collateral and what financial targets they expect you to hit.
  • 5. If your financial situation is weak, especially if you’ve had two years of losses, Be CAREFUL. During the last credit crunch many banks overreacted and started calling in loans without listening to reason.
  • 6. Establish and maintain a strong relationship with your banker. Make sure your banker, and a at least a couple of his or her associates, knows you by name. A knee-jerk reaction on their part is far less likely if they know you.
  • 7. If you’re uncomfortable or unfamiliar with issues in items 1-6, seek professional help. Someone who really understands what’s going on can help before things get critical.

When all else fails, many are forced to credit cards for financing. If you are forced to leverage your credit cards, be sure read the fine print. One late payment and you could find yourself with an interest rate that’s almost guaranteed to cause a default.

Insufficient capital is one of the greatest risks to a company.

Falling home values could mean trouble for home owners too. And that’s true of individuals too. We recently received a notice in the mail that our home equity line of credit has been reduced by $120,000. If we’d been fully borrowed on the line, we’d have had to come up with the difference between the old value and the new value in a hurry. We hadn’t used it at all, but if we had we could have been in a world of hurt.

With a little advance planning you can weather the trough of credit availability that the next year or two may bring.

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