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Business Class

November 13, 2008

Small Businesses Feeling the Pinch

Joshua Howe

Techdirt

Summary

A quick economic recovery would allow small businesses to use cash and existing lines of credit to meet their costs.To do this, small busine

A quick economic recovery would allow small businesses to use cash and existing lines of credit to meet their costs.To do this, small businesses are going to need to be cautious regarding their outgoing expenses thatare not immediately generating income in the short term.This may mean that they need to reign in unprofitable aspects of the business or control other expenses, such as personnel or marketing costs.

Small businesses are going to struggle during the current crisis due to a increased difficulty in getting reasonable rate lines of credit, which is going to impact their ability to weather the crisis as as well as their ability to adapt or expand their business during this period, both of which may be necessary in order to weather this crisis.

Scott Shane on the Open Forum noted that businesses with bad credit, as of September, are paying three times the interest rate that businesses with good credit have. He speculates that because of those inflated rates those businesses are not going to be able to make a profit. This is going to hit the younger companies who are struggling to stay afloat more than an established company which is already profitable.

Small businesses are also going to be hit on the consumer side. Whether they supply other businesses or the public, both are going to be cautious during this crisis, whether they have great need to or not. Having already spent their stimulus check, consumers are going to be less free with their available cash, and asan Anonymous Coward wrote in comments on the Tech Dirt Blog, once businesses struggle getting credit, consumers can't be far behind.

This will impact the cash coming into the business, but they'll need to resist the urge to deeply discount their services to keep things moving, because it will devalue their product or service as the market comes back.They'll instead, need to make savings in less transparent ways, and, as suggested by the National Federation of Business, promote the lower cost products and services.They're going to have to be cognizant that this crisisis temporary, and be careful not to gut potentially growth areas of the business or alienate customers or suppliers during this crisis.

It is during this period of uncertainty as to which way the market will move, whether it will continue to slide or whether it will start to stabilize and recover, you are going to see businesses doing some paring and being less development and expansion focused. There will also be far less development of new businesses as both banks and VC's are going to be holding close to their money, and making it more difficult for those without a current line of credit to get some. Its going to be a rough period for small businesses as consumers and lenders are going to be more cautious about their money, and asking more when they do part with it. The small businesses that are supported themselves on credit and were struggling before this crisis, will likely fold under the pressure.For those that are profitable, the small business that can successfully control costs without sacrificing quality or reputation should make a recovery.