This is a guest contribution by Steve Sildon.
American small businesses have suffered dramatically since the 2008 economic downturn. Discretionary spending has fallen across the board. Hiring has been at a near standstill for more than two years.
Credit standards have tightened significantly for small businesses, particularly for those whose finances are closely intertwined with their owners’ personal finances. The majority of small business owners have had a difficult time getting the credit they need.
Even those small business that have managed to grow during the Great Recession have struggled mightily with tougher credit standards, throttling both top line sales growth as well as new hiring. This is a double whammy for economic growth.
Despite the stringent new credit environment, many people have failed to recognize that tightening credit standards have actually served to benefit small business owners in many ways.
Here are 4 reasons that tighter credit has actually been good for small business owners:
No Cash, No Spend
Many small business startups have had such easy access to credit that they’ve never really had to make good decisions about their expenditures. Like spoiled children, small business owners never had to make hard choices about their expenditures. If business owners wanted something, they bought it, no questions asked.
Lack of credit, however, has forced many small business owners into the mindset of previous generations, including those who were raised in the Great Depression: “If I don’t have the cash to buy it, I just can’t buy it.”
Even though businesses have been forced to curtail their spending, small business owners still have needs that they must address to continue operating their businesses. As a result, many small business owners have been forced into frugality, having to become far more price sensitive in their purchasing.
Owners have suddenly been more actively looking for items on sale, discounts and closeouts for office equipment and supplies. While saving a few bucks on office supplies never seemed to be that important in the past, learning how to buy those items at a steep discount has been crucial for many struggling business owners looking to save money wherever possible. Saving money and learning how to buy those goods and services inexpensively has been another significant benefit of tightened credit.
Another significant benefit is the emergence of creative financing or so-called peer-to-peer lending as an alternative to traditional lending sources. Peer-to-peer lenders such as Lending Club and Prosper have sprung up and grown rapidly to fill a huge void left by regional and national banking institutions.
Peer-to-peer lending works by enabling individual lenders to locate individual borrowers, connecting them through an auction-like process. The lender that provides the lowest interest rate effectively “wins” the borrower’s loan. Many small business owners who no longer qualify for traditional loans and cannot qualify for SBA loans have found peer-to-peer lending to be a very effective alternative lending source.
Other alternative creative financing options for small business owners include business credit cards (albeit with much smaller credit limits than in the past), cooperative lending as well as friends and family.
Power of Lean and Mean
While the struggling economy has resulted in layoffs and a steep fall-off in revenue for many firms, tough business conditions and lack of credit have also required companies to operate with fewer resources at their disposal.
Many owners have been forced back into the salad days of their existence, requiring owners to once again wear many hats similar to when they first started their businesses. These tougher business conditions have necessitated running much leaner and meaner operations, cutting waste at every opportunity just to survive, forcing owners into running far more efficient businesses.
So, while tighter credit conditions have undoubtedly been incredibly challenging for consumers and business owners alike, these new credit standards have led to many unrecognized benefits for small business owners. Effectively forcing small businesses to sharply curtail excessive spending on credit, engaging in more frugal buying behavior, sourcing more creative financing options as well as developing lean and mean operating structures–all of these factors have forced many small businesses to get better even in the face of a very difficult operating environment.
Steve Sildon is managing editor for Credit Card Assist and has been a guest contributor on many of the top personal finance blogs, writing about small business finance topics, including small business loans and lines of credit, small business credit cards as well as equipment and commercial financing.