How are you financing?

In addition to the article. I'm copying readers comments as well.

My experience is that small business creditors including vendors, credit card companies, and line of credit lenders, are all reducing availability, at a time when internal cash flow is deteriorating.

Commentor 2 refers to his "preselling" strategy, which is a good idea but may be an option limited to E Commerce. Most small business owners have probably already evaluated the possibility of internet sales, but now would be a good time to re-evaluate that model.

I work with sub-contractors who are already cash strapped, paying down vendor balances from 60 to 30 days, and meeting their payrolls. They also need to try to arrange prepayments, asking their best customers to pay in advance for material purchases on any job which will extend beyond their vendors terms.

Service providers have the advantage of not having to invest in materials or carry substantial receivables, but they will have to carefully review their expenses and redouble their sales efforts.


From the New York Times, Your the Boss Column

August 25, 2009, 9:00 am
Has the Recession Changed How Small Businesses Are Financed?
By Scott A. Shane
Recently, many people have been wondering if the poor economy has changed how small businesses are financed. Discover Card Financial Services has identified one interesting change.

The company looked at how small businesses were being financed before the recession and how they are being financed now. Ryan Scully, director of Discover’s business credit card, explained that the sources of financing for small businesses didn’t really change between June 2007 and June 2009. In both periods, Discover found, the same percentage of business owners used personal savings to finance their new businesses and similar percentages used credit cards and bank loans.

There was a change in whether or not founders of small businesses needed external financing to start their businesses. Mr. Scully explained that in June 2009 only a third of business owners needed to obtain financial capital to start their companies, substantially fewer than in June 2007.


While it’s possible that Discover’s findings show that entrepreneurs who needed financing couldn’t get started, the company’s analysis fits what many academics believe happens when credit gets tight — many owners change their business models so that they can rely less on external financing. This allows them to persist in their entrepreneurial efforts despite the tighter credit conditions.

I’m wondering if your experience jibes with this pattern, or if you’ve experienced something different. Since the recession began, have you changed the way you finance your new business? If so, what are you doing differently?

Scott A. Shane is a professor of entrepreneurial studies at Case Western.
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COMMENTS

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Look, eveyone is paying later. Which mean I have to pay more for what I borrow because of the lag time. Also, I have to make this ups by receivble financing which means I make less profit and in turn have to either take my prices up to capture some of this lossor or eat it in hopes that my business won’t drop off more. My strategy is to tread water for now, hope I can capture some of my competitors business and take my price up as the competiton drops in about a year or two..

— Marty

2. August 25, 2009
11:47 am

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When I started a similar business in 1992, I did it solely with credit cards and was rewarded with obscenely high credit limits. With this avenue closed this time around, I am pre-selling (allow 7 days for delivery). I deposit the clients funds, and with this capital I make my purchases.

G.A.Landry
Green Planet Meatz
Denville, NJ

— Greg Landry

3. August 25, 2009
12:11 pm

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I started my business in 2006, and at the time, I had no need of external financing.

With the recession, my business is down and I chewed through my savings faster than I would have liked. Now that I could really use external financing, I find it’s harder to come by. Companies that were begging me to take out loans are now not interested.

Like most entrepreneurs, I’m trying to be creative to keep the business alive. My husband and I have seriously cut our living expenses and to get through, I’ve also been relying on personal credit as my rating has always been stellar.

But here’s the rub… With new credit laws in effect, I find that credit companies are still finding ways to make money. I enjoyed low apr’s and no additional fees because of my rating. To compensate, my credit cards are now requiring higher minimum payments at a time when I am trying to keep monthly expenses lean. Before, credit companies punished bad behavior, and rewarded good behavior. Now they’re looking to make up for losses from everyone.

The bottom line, I will do what I need to in order to weather the storm. But at a time when small businesses could use a little help to get through, there’s none out there.

Maria

— Maria

4. August 25, 2009
12:23 pm

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I looked into a franchise and after serious thought, recognized it was a loser. The up front money, forty grand, would eventually be paid back, but I cannot tolerate debt.

I just read about a woman who lost her job and savings at Enron, but found a niche, and it only cost her a grand to start it up. She holds magnificent tea parties for little girls’ birthdays and all it took was some cute furniture she found at yard sales and lots of old linen. She managed to clear $25K after her third year.

How about some tea and sympathy? Tea Parties for Non-Tea Potty Little Black Bag Handlers who want to share stories of deprivation, not imagine them.

— Abby Tucson, AZ

5. August 25, 2009
5:48 pm

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All business owners,and in particular those start up will generally have more difficulty because all though security requirents have increases, finacial institutions will ve looking repayment through proven profit generation. This is demonstrated through ome’s net worth statement or work experience. Look towards financial institutions looking past the working relationship for even loan renewals.

— Terry jackson

6. August 26, 2009
10:23 am

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The tightening of credit will push would be entrepreneurs to more carfully study gaps in the market and real opportunities. When monehy was looser, one could have explored only ideas or developed a me-too business.

Hopefully the focus on better business models will create a new generation of stronger small businesses.

Domenick Celentano
Silberman College of Business
Fairleigh Dickinson University, Madison, NJ

— Domenick Celentano