How to Survive the Credit Crunch What is a credit crunch and how did it happen?
"An economic condition in which there is a sudden reduction in the availability of loans/credit, and it becomes difficult and expensive to borrow money from the banks."

Its origins lie in the US housing market.

In recent years money has been cheap, and low interest rates and easy term borrowing, have in America, encouraged specialised lending companies, with commission driven sales staff to offer mortgages to customers, whose credit worthiness did not match the sums they were borrowing.

Lenders that provided these mortgages would package up the loans and sell them on as structured products to other financial institutions such as major banks and insurers. From the banks the loans were then sold onto private equity funds and investment companies

More and more borrowers defaulted or failed to meet rises in interest payments and therefore they became bad debt. Over the last two years the number of American families unable to pay their mortgage has risen and risen. Trading in debt was cheap and was a contributing factor in increase of equity markets. Sufficient numbers has created a mass of bad debt and the trading of the debt resulted in billions of dollars being wiped out.

Banks in Europe, as well as America have these debt packages, which are now worth a lot less than what they paid for them. Banks have to use reserve funds to write off the losses. They have been reluctant to lend to other banks and hence the difficulty with the Northern Rock as they could not raise the liquidity needed to fund its loans. Banks became reluctant to lend to smaller businesses and customers, and therefore raised the cost of borrowing.

This system has now affected most banks in our banking system and we are now experiencing global turmoil within the banking sector.

Whilst the term Credit Crunch is being bandied about by all and sundry it may be premature to worry. Whilst it is still not clear as to the impact this will have on small and medium sized businesses, it may be prudent to help minimise the impact of the credit crunch and review your business strategies by way of forward planning. Adopt best-practice and your business may compete and grow in these challenging conditions.

Don't lose faith and don't panic. Be clear about your business goals.

• Manage your Costs - Business budgeting. Make sure that you settle your invoices on time. Don't get the reputation as a late payer, as a word will spread. Keep a hold on expense claims. Look at supplier costs from office stationery to vehicles. Do long term relationships with suppliers give you discounted rates? Review energy consumption within the office. Even simple measures such as energy saving light bulbs can have an effect. Remember to turn off radiators in empty offices and do not leave photocopiers/computers and air conditioning units on standby.
• Credit Control - Today's challenging climate means that many businesses are struggling to pay their suppliers on time, resulting in a late payment culture, and further bad debt. Get on top of your credit control procedures. Don't' be afraid to ask for payment. Make sure that your terms and conditions are reviewed on a regular basis; delivery notes are collected and invoices raised on time, so that you are likely to be paid. Invoice clearly, accurately and promptly. Let them have your bank details and allow them to pay electronically. Agree payment terms before you supply.
• Assess your Customers - Talk with existing customers and make sure that you are meeting their needs at all levels; ensuring that any potential complaints are dealt with promptly. Do not let services standards slip. Can you cross sell other products or services that they do not already buy? Look for new opportunities. Ensure that you do not tread water and fall behind competitors. Develop new customers but ensure that you run a credit check and or a risk status report. Request the customer's business address rather than a registered office, so that they can be contacted. Whilst marketing is one of the first costs to be cut in this climate consider the cost of promoting your own business at a time when competitors vanish from view as they consider it is not worth the cost.
• Look after your Staff - Good businesses need great people. Keep them motivated and consider incentives schemes to your sales teams. Keep staff informed by making sure that they have a clear picture of where the business is and where you want it to go. If you can, continue investing in skills and training.
• Cash Flow - If you don't already, prepare detailed monthly accounts. Review an up to date balance sheet. Make sure you are in a strong position and have your business plans in order, Have a detailed cash flow forecast. This will be important if you are to consider further funding.
• Build up your relationship with your bank - Keep them informed of your situation. If you are thinking of borrowing money, strange as it may sound, then now may be a good time.

If you are affected in any way by the impact of the credit crunch and wish to discuss any of the above areas, then please contact a member of our team.