Credit crunch gets personal for small business owners

A common source of finance for small businesses is an unsecured bank loan taken out by the entrepreneur which gets invested in the fledgling business. Now the credit crunch threatens to make life very tough for this kind of finance.

An interesting article hidden away in the business pages of the excellent Guardian busines section.

The banks are getting tough with small businesses that need to take out a new bank loan, or perhaps increase the amount on an existing loan.

Small business owners are inceasingly being asked to provide personal guarantees (e.g. securing the loan on the entrepreneurs house) and the pricing of loans (arrangement fees + interest) is rising too. The squeeze is being applied, twist by twist.

A telling line in the article:

Insolvency practitioners said they expected a steep rise in the number of corporate victims over the coming months as businesses run out of cash

On a related note, The Institute of Credit Management has this week been warning small businesses to sort out their cashflow as the credit crunch looms. The ICM is leafleting UK small firms advising them to get proper procedures in place before the credit crunch starts to bite. It warns firms to set out payment terms before providing goods or services, invoice accurately and promptly, and to find out as much as possible about new customers including using credit agencies if necessary. Finally, it urges companies to act quickly if payment is not received or is late.

In 2008, it seems to me that cash flow will be king.