Small Business Owners Deal with the Financial Crisis

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"If your company is very strong financially, consider moving the loan to another bank that's not in trouble and where you know you'll be able to get personalized banking service," Thacker suggests.

What if you're applying for a small business loan? Even before the financial crisis deepened this week, loans for small business startup and expansion were already drying up. Because of the fears of the banking community about home mortgage defaults, new loans are likely to be even more problematic.

"Many small businesses are not eligible for loans because of their credit standings," says Paul Rauseo, managing director of George S. May International in Chicago. "About 20% of our clients are having their notes called. Out of the blue, they're receiving a letter either reducing their credit lines or calling in their notes."

If you are an established loan customer with an excellent repayment record, you shouldn't have a problem with your loan. "Money will always be available to the very best small business credit customers, so if you're in the top 10% you'll still be able to borrow money," Thacker says. "But if you're a startup, a restaurant, a consumer-goods company, a wholesale supplier to the retail market, or just marginally profitable, access to capital may get tighter yet."

Why are certain small businesses likely to be credit-squeezed? Several large retailers are poised to fail if they don't turn around longstanding revenue declines this holiday season, Thacker says. And small vendors whose business model is based on selling to those retailers are likely to go down with them.

Labor. The demographic most affected by major stock market and housing price downturns are Baby Boomers, Rauseo says: "Inflated stock prices allowed a lot of people to retire at age 55 or 60. Now many will have to keep working longer." This could help small companies whose longtime senior managers were walking out the door early, only to be replaced by less-experienced younger employees, but it also may negatively affect college graduates just trying to get into the workforce.

Pricing. Large corporations know they must pass on this year's increased fuel costs to their customers in the form of price increases. Small companies, often notoriously reluctant to raise prices, simply must learn to do the same, Rauseo says. "We worked with a landscaper who sees 200 clients a month. His cost for fuel increased by $6 a job, but he didn't do anything about it. We encouraged him to take the square footage of each job and tack on a fuel increase. He did it, and not one person complained," he says.

Small business owners also need to focus more keenly on their balance sheets, their business models, and on how much credit they're extending to their customers: "People must pay attention to their profit models and not wait for their accountant to bring them a statement 15 days after the month closes. Small business owners will have to be smarter about their key performance indicators, or they won't be around long," Rauseo says.

Insurance. Worried about the financial stability of your insurance carrier? Ask your broker to provide you with the corporation's most recent financial statements or check its credit rating with an insurance rating organization like A.M. Best, says Hana Rubin, chief operating officer of Maxon, a third-party insurance administrator based in New York City.

"In this uncertain financial environment, it's important to discover if your insurance consulting firm has any ties to financial institutions" and work with a vendor-neutral company if you can, Rubin says. "If you're nervous about your insurance coverage, diversify your policies so you don't have all your coverage placed with one carrier. There's often certain coverage that you have to buy in conjunction with other policies, but in general try not to put all your eggs in one basket."

Private Investment Capital. Despite the tight credit situation, there's still plenty of money available from private equity investors, says Joe Trustey, managing director of private equity firm Summit Partners, which has offices in Boston, Palo Alto, Ca, and London. "Given that growth private equity involves little to no leverage, these investments can go forward even if credit remains tight. Moreover, some private equity firms have their own subordinated debt funds, so they can offer debt financing to entrepreneurs even when banks and other lenders will not." Thacker agrees: "Venture capitalists and angel investors see this environment as the best time to find good deals."

The Big Picture. While the financial crisis doesn't necessarily affect the small business sector directly, economic pessimism and fears about winter fuel costs are likely to sap consumer confidence for some time. "Entrepreneurs should be mentally and financially prepared to hunker down in this economy for a couple of years," Thacker says. "The downturn that started a year ago could last another two Christmas seasons. I'm hoping its going to be less time than that, but people are worried."

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.