The entrepreneur's dilemma: generating cash in a credit crunch

Ivey Business Journal Online, Nov-Dec, 2008 by Eric Morse

Over the past several years I have had the privilege of working with entrepreneurs who are the leaders of a number of successful high-growth companies. Most of these entrepreneurs don't like to take on debt or give up equity to grow their businesses. They are more comfortable growing organically, at a measured pace, because they are in it for the long haul and are not in a hurry to harvest the value they have created through private sale or public markets. For the most part, these are the value creators, or builders, of the Canadian economy, and collectively they have a significant impact on the quality of life that each of us enjoys.

The current economic downturn poses problems for all firms, and these successful entrepreneurs are no exception. Many are finding it hard to generate the cash needed to take advantage of the opportunities in the current environment or are having trouble getting the credit they need to simply operate business as usual. The first thing they all need to realize is that we are in a downturn. While this seems simple, I've spoken with too many entrepreneurs who are convinced for one reason or another that they are immune to the current crisis. I hope they are correct but I suspect that they will all be affected in one way or another. Certainly, creditors are not of the opinion that certain parties or firms are recession-proof in the current climate. Some firms are scrambling for their very survival, while others are looking for expansion opportunities. All firms, however, should be prudent, and make realistic plans for the difficult period ahead.

Cash on hand, specifically making sure that you have enough of it, is perhaps the greatest and most important challenge in a credit crunch. So then, what can entrepreneurs do to increase the cash position in their organizations?

1. Keep it simple--think cash flow. Cash flow is your lifeblood and if you can manage your cash flow effectively in this downturn, you will position yourself well for the inevitable upturn, when it occurs. You can increase your cash position by adding to the cash coming into the business or by reducing the cash being used by it. Cash is king in an economic downturn and it is even more important when the downturn is specific to the availability of credit. To some extent, entrepreneurs have an advantage over their older corporate counterparts who have never had to bootstrap a business. To get ahead it is time for all entrepreneurs to once again think like a start-up. This time you will have the tremendous advantage of a track record.

2. Obtaining cash from traditional credit lenders is difficult for entrepreneurs under the best of circumstances (e.g. an ongoing relationship with a lender where you have a great track record; operation in a stable and growing industry; solid asset base). Given most entrepreneurs' bias against debt, many will not have developed the relationships or track records necessary to get significant credit from traditional lenders. In today's market this is even more unlikely for all but the completely risk-free bets. This doesn't mean you should not begin or continue to build this relationship. If you cannot qualify for a large loan or line of credit, start small (better if you don't need the money now) and build the track record and relationship.

3. Depending on your needs, you may still be able to engage Angel investors to help improve your cash flow. They may be willing to help you convert debt to equity or give you more favourable terms than your current creditors. They may also be willing to inject the capital necessary to qualify for further financing. For firms with larger needs, there are still a number of private equity groups that are treating the current environment as a buying opportunity. Look for what Geoffrey Beattie (The Globe and Mail, Oct. 27, 2008) recently called "builders," the firms guided by the principles of people like Ken Thompson (Woodbridge), or Warren Buffet (Berkshire Hathaway). There are others currently searching for great partners. The key for entrepreneurs is to search out those who look to take long-term positions and grow value with the entrepreneurs running the business. Use your networks and do your due diligence before partnering with anyone. Stay away from the traders and speculators who at best recycle the value you've already created.

4. Don't forget your customers and suppliers. If you have invested appropriately in these relationships, a credit crunch may be the time to tap well-positioned customers or suppliers for more favourable terms or even a line of credit. Think through what you may be able to do to create additional value for these partners: faster delivery, preferred service appointments etc. Peers (other entrepreneurs within your network) may also be a source of temporary funding, although they are more likely to be of help in reducing your cash outflow through shared buying, marketing or service partnerships.

5. Reducing costs is the other way entrepreneurs can improve their cash positions. Think carefully about implementing growth plans and be sure they generate sufficient cash in a number of scenarios. Outsource or take on partners in areas of your business where you have cost disadvantages. Rethink your views on competitors; perhaps there are ways you can work together to decrease costs (buying groups) or serve different segments of the market more effectively. Rethink hiring needs; if business has already slowed or you foresee a slowdown in the future, perhaps you can continue to get by with fewer people. As an alternative to full-time employment, look to your local university. Many business schools now offer entrepreneurship programming, and students in these programs are eager to gain experience working with entrepreneurs. The students can be hired on a reduced or no-salary basis, as they often have to complete research or consulting projects as part of their programs. You get smart, young talent to help with pressing issues, and if you mentor them the students get invaluable experience working in a downturn. This is definitely a win-win experience.