Credit Crunch – What to do if you own a small business

by Giles Bertie Harrison

The current financial situation in the UK not looking good with more and more being spent on credit cards, the credit crunch doesn’t look enjoy it will be over away any time soon. For most people this is a huge problem, but what if you own a small business? You can be most at risk of going bankrupt over the next 12 months, but by following a few simple points you could avoid bankruptcy all together and beat the credit crunch.

How did the credit crunch start? With the American mortgage holders on low incomes unable to meet their loan repayments, many homes have been repossessed and banks now have to write off the so-called sub-prime loans. These loans are what a lot of banks in the US and in Europe have purchased packaged up in collateralised debt obligations which are basically pools of debt. These debt pools are now worth a lot less than when the banks paid for them and are very difficult to sell and have forced some banks to shut funds that were exposed to these loans and the US sub-prime sector.

Banks have now increased the cost of borrowing which is now well above the target rates set by institutions E.g. the Bank of England. This means that people, especially those with poor credit ratings are finding it harder and more high-priced to borrow money or get a mortgage.

How will it affect my business? The main problem will be the distinct lack of loans any business can make from the bank. If your business relies heavily on overdrafts and bank loans then you could be most at risk due to banks are now declining people and businesses loans. The credit crunch can claim jobs even though these seem to be limited to relatively well paid members of staff in huge international banks, but there is a threat that job losses from employers in other parts of the economy, and is seen as the next logical step.

So what can I do? Obviously the first step is to cut down on spending and borrowing. Loans are now coming with an interest rate in excess of 10%. This can put business in more debt so try to cut back on the items and products you don’t need at home and for your business, you could try switching to supermarkets own brand products and take advantage of two for one offers and purchase one get one free. Try to produce plausible and accurate cash flow forecasts on a monthly basis as these will help you to be prepared to take tough decisions if the credit crunch hits you harder then you first thought.

But if you’re desperate for money think about releasing equity in your home. This will grant you to get access to funds and also have the peace of mind that your home is secure. Sell to rent back companies work by buying your house and then renting it back to you over a period of ten years. You can get companies which will give you 100% of the value of your home by giving you 70% when you sign up and the remaining 30% at the end of the tenancy. Some sell to rent back companies will offer a by back service if you think you’ll have the financial security in a few years to purchase your house back from the company.

Looking forward. The credit crunch is a problem for everyone not just businesses, but if you make you manage your finances carefully you and your business won’t have a problem.

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