How to Make Sure Your Business Will Survive in the New Economy

There’s a major disconnect between companies and their lenders. While businesses are still playing by the old rules, lenders have a whole new set.

How has the credit game changed? In a word, dramatically. Until recently, when it came to the evaluation of its financial condition, most companies relied on the financial statements prepared by their accounting firm. That doesn’t work now.

Everyone is asking tougher questions. How do you determine which information is credible? Can the figures be trusted just because they look good? If they do look good today, will they be that way tomorrow? If you’re an investor, how do you make investment decisions? And, if you’re a supplier, how do you go about making decisions on extending credit to your customers? Is past performance a reliable basis or have all the old rules been thrown out?

That’s not all. Whether you’re a business or an individual, how do you select a bank or investment house for your money? For most small to mid-size companies, those decisions were once relatively easy. If we knew a banker, we could be quite sure to get the financing. Due diligence was generally minimal. We trusted the system to work for us.

But the New Economy is taking us into uncharted financial waters. Questions that were not even considered a few years ago are coming up now. For example, your company is in the market for equipment that requires maintenance and service contracts. In the past, most purchasers checked out the supplier to see how long they had been in business or merely went on their reputation. Experience indicated that nothing more was needed, even though it may have been a less than prudent practice.

Today, we worry about the viability of companies we’ve been doing business with for years. Will they be there to fulfill their obligations?

In a recent conversation with a customer, I asked how it was going. “Business is OK, the receivables are there,” he reported, but he’s also having a hard time collecting from his customers. “How far should I go in extending credit?” he asked himself. “How aggressive can I get in collecting? I don’t want to lose accounts, but I don’t want to get caught holding the bag, either.”

These issues were very much on his mind, particularly since a longtime customer had just shut down, owing him $27,000, which he had to write off. “How many times can that happen?” he asked. “Frankly, I never imagined that this account would go out of business.”

At the same time, his suppliers are pushing him to be more aggressive with collections since they don’t want his account to get either too high or too delinquent for fear that he may be the next victim.

Is it any wonder why so many companies are feeling stifled? On the one hand, they are uncertain how to protect themselves from accounts going bad and on the other, they are thwarted by onerous borrowing requirements. The approach taken by many bankers is simply to cut off credit.

This was underscored at a recent hearing of the U.S. Senate Small Business Committee when a business owner from New Orleans reported that the bank where he had been doing business was sold and his credit lines were cut off, even though he had never missed a payment. Unable to find a new lender, he was facing the possibility of going out of business.

It’s not necessary to look very deep to figure out why this is happening. Bankers see conditions changing so rapidly they are simply reducing their risk as close to zero as possible. While we may find it difficult to justify the strangling impact such policies have on business, the message is clear:
In this business environment, there are not enough reliable ways to gauge when disaster will strike. It’s showing up everywhere, including the use of consumer credit cards, where it’s reported that those with excellent credit histories are having their limits curtailed, sometimes drastically, simply because they are shopping at stores frequented by customers with poor credit histories.

Here’s the point: when there are no stable, verifiable credit benchmarks, all bets are off. This will eventually change. Nevertheless, it’s prudent to assume that current conditions will prevail for a substantial period of time. And before credit “loosens up,” if it ever does, every business is faced with serious credit issues, particularly when we take into account the fact that 40,000 businesses a month have been closing their doors recently.

If all this isn’t enough for any company to bear, there is also the fact that those who own and manage businesses are incurable optimists. The cup is always half full and there are no storm clouds on the horizon. “Our customers are different,” we say. “Anyway, we know them. We’ve been doing business with them for years. Others may have problems, but I don’t think we have much to worry about.”
It’s this positive, upbeat attitude that allows entrepreneurs to see their way through what others shy away from; “hard work conquers all. There are no barriers, just opportunities.”

As the foundation of our economic system, this attitude attacks problems and solves them. As entrepreneur Will Pike says in William Martin’s historical novel, The Lost Constitution, “We might be dreamers, but we have to be doers, too. So we get up in the morning, we go to work, and we solve our problems.”