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Every Business Faces Tough Financial Times at Some Stage

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Every Business Faces Tough Financial Times at Some Stage

I’ve yet to meet a business that hasn’t gone through tough financial times.

I firmly believe there are two kinds of business – those that have had financial tough times and those that will have financial tough times. In hard financial times, the amount of credit we think we have access to is often very different from the amount of credit the bank thinks we have access to. Of course, you can keep your head in the sand and not worry, believing that you are fine because you can draw down on your loans or overdraft if things get tough. But when push comes to shove, it might not work out the way you think it will.

Let me share a simple story with you about some friends of mine

Some friends of mine had a home, and they hit some hard times. They had quite a large debt facility in place, which gave them access to $800, 000 whenever they needed it. This was secured against the family home, which was very nice, owned outright and worth about $1.2 million. They had drawn down on the debt facility to make some major renovations to the motel-times were getting tough, and they wanted to make sure their well established business was looking pristine and fresh. Unlike many of the tired-looking competitor businesses. A strategy that I thought was great.

They came unstuck because property prices started to drop, and they dropped fast.

The properties that lost the most value were the ones at the top end of the price range. My friends had their house revalued and found it was now worth $ 600, 000, half the original value. Their bank facility had to be reduced by $ 400, 000 immediately and they didn’t have the money. They ended up losing virtually everything in a fire sale. In reality, it wasn’t anyone’s fault (well the bank could have played nicer), just a result of a falling market.

There is a happy ending to this story.

The family worked incredibly hard for almost ten years, and they ended up buying back the motel, rebuilding their wealth, and today they run a very successful family business with virtually no debt.

When times get tough, it is risky to assume that you have access to a certain amount of cash.

When times get tough, it is much wiser to get the facts. If that means getting your house revalued, do it now rather than wait till a creditor or someone else forces you to.

The reality with finance is that when you really need finance, it is harder to get. If you are cashed up and asset-strong, credit will be readily and easily available, as we have seen in recent years.

The last part of the equation is timing.

It’s no good if you can borrow $ 50, 000 today but it will take two months to access it. If you get into a pickle, you will need it immediately. I suggest trying to free up as much cash and credit as you can to give you a buffer zone in case times get worse.

Now I am not suggesting you go and pile on credit card debt. However, if you don’t have access to funds to bridge any deficit in cash, you will struggle to survive. There are many different arguments for and against this.

On the other hand, I have always made sure of one thing.

When I start getting nervous about what is happening around me, I free up as much credit as possible. If I can stop going broke by putting some debt on my credit cards, I will do it in an instant, and every small business owner will do the same.

Our financial fortunes in business can change quickly. My advice is always to be prepared for the worse possible scenario, and your chances of survival are greatly increased.

Originally posted on inc.com

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