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Credit Crunch - How can it affect my small business

Jun 7, 2008
With the current financial situation in the UK not looking good and more and more being spent on credit cards the credit crunch doesn't look like it will be going away any time soon. This is a big problem for most people, but what if you own a small business? You can be most at risk of going bankrupt over the next 12 months, but by following a few simple points you could avoid bankruptcy all together.

How did the credit crunch start? With the American mortgage holders on low incomes unable to meet their loan repayments, many homes have been repossessed and banks now have to write off the so-called sub-prime loans. These loans are what a lot of banks in the US and in Europe have bought packaged up in collateralised debt obligations which are basically pools of debt. These debt pools are now worth a lot less than when the banks paid for them and are very difficult to sell and have forced some banks to close funds that were exposed to these loans and the US sub-prime sector.

Banks have now increased the cost of borrowing which is now well above the target rates set by institutions E.g. the Bank of England. This means that people, especially those with poor credit ratings are finding it harder and more expensive to borrow money or get a mortgage.

How will it affect my business? The main problem will be the distinct lack of loans any business can make from the bank. If your business relies heavily on overdrafts and bank loans then you could be most at risk due to banks are now declining people and businesses loans. The credit crunch can claim jobs although these seem to be limited to relatively well paid members of staff in large international banks, but there is a threat that job losses from employers in other parts of the economy, and is seen as the next logical step.

So what can I do? Obviously the first step is to cut down on spending and borrowing. Loans are now coming with an interest rate in excess of 10% which will put business in more debt so try to cut back on the items and products you don't need at home and for your business, try switching to supermarkets own brand products and take advantage of two for one offers, or buy one get one free. Make sure you produce accurate and plausible month by month cash flow forecasts as these will help you to be prepared to take tough decisions if the credit crunch hits you harder then you first thought.

But if you are desperate for money consider releasing equity in your home. This will allow you to get access to funds and also have the peace of mind that your home is secure. Sell to rent back companies work by buying your house and then renting it back to you over a period of ten years. You can get companies which will give you 100% of the value of your home by giving you 70% when you sign up and the remaining 30% at the end of the tenancy. Some sell to rent back companies will offer a by back service if you think you will have the financial security in a few years to purchase your house back from the company.

Looking forward. The credit crunch is a problem for everyone, but if you make sure you manage your finances carefully you and your business won't have a problem.
About the Author
Giles Bertie Harrison is a freelance writer covering the sell your house and rent it back sector within the property market
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