The term “credit crunch” has been banded around now for around 12 months so I’ll spare you my thoughts on why it has happened. However, I’d like to share my thoughts on what effect the credit crunch has on businesses and what opportunities it provides.

In a nutshell, what is the credit crunch?

This is where the banks have reduced their lending of funds to each other as the banks are unsure of exactly how much money they have. As a result, the amount of money available as credit is considerably reduced. The reduction of cash for credit has resulted in increased interest rates, which is why loan and mortgage rates have increased for ordinary people like us.

So the crunch refers to the rapid decline of funds used for credit. The BBC has a useful finance crisis glossary, which explains a lot of other terms you may have heard related to the credit crunch.

What effect does this have on businesses?

Some businesses take out loans in order to purchase equipment, property or services in order to conduct themselves. So less credit available means that it is harder and more expensive to take out a loan.

Since we are also seeing increases in costs, particularly with the rising price of oil, businesses are also facing rising costs. As costs increase, the harder it becomes for families to afford certain products, and therefore families are making huge attempts to cut their spending to afford the essentials they need.

Therefore with higher costs and reduced spending by customers, businesses are struggling to cover their outgoings, let alone make a profit. The lack of credit means businesses cannot afford to take out a loan until things start to improve. This climate therefore is a catalyst for a business to fail.

What can businesses do?

Generally speaking, any business should be routinely examining their procedures and processes to ensure they are operating at the highest efficiency; i.e. the best return on money and time. The current climate should be a warning to ensure your business is not relying on obtaining credit to achieve success.

Here are some ideas on what you could be doing:

  • Determine if there’s something you do with your business that you can do more cheaply. e.g. outsourcing the work to another company, or buying your own equipment.
  • Brainstorm new ideas of leveraging your existing assets to create another product or appeal to a different market. For example, creating a similar product to what you already produce, yet it appeals to a different group of people. This means you can attract more customers with minimal extra effort.
  • Can you reduce your prices for a short time? This special offer period might attract more customers who are price sensitive, and possibly create a number of returning customers who will pay full price in the future.
  • Can you increase your marketing budget? Can you think of ways to spend a little more on advertising in such a way that it attracts customers you’ve never targeted before?
  • Can you improve your product or service in such a way that it offers better value?

The ideas I’ve suggested are very high level, but these are things that might boost your revenue or reduce your costs. Consider asking yourself questions such as “Can I do this any better?” on a regular basis.

What opportunities exist in credit crunch?

If you have some extra cash that you’re not using, you might be in an opportunity to bag yourself some bargains. Failing businesses can mean cheap equipment and property for sale as liquidators attempt to generate cash from a failed business. You might even be able to pick up some bargain domain names associated with a company.

As businesses fail, competition in certain areas decreases. The lack of competition means there’s an opportunity to exploit a niche until the economies of the world recover.

Sadly, some people are losing their homes due to repossessions as they were not able to afford repayments on their mortgage. As a result, you might be able to pick up some cheap property too. If you’re not relying on a mortgage to fund a purchase, you’re in a very strong position to bag a bargain. Generally it’s accepted that owning property in the long term is profitable. However, that’s only if you do your research and sums properly.

And what about the stock market? Well, if you spread your risk and do your research, you can also take advantage in the current low prices. A great way to spread risk without much effort is with an index tracker. I’ll leave you to do your own research on that one.

Is the credit crunch a bad thing?

Yes, because it has caused so much stress to so many people. Particularly families with low incomes who have lost their homes.

And no, because businesses who conduct themselves badly are now failing. They’ve relied on bad risks and incorrect assumptions. Therefore the credit crunch is cleansing the bad apples in the business world.

The credit crunch has served to highlight the significance of learning to live within our means and to avoid impatience when risk is involved.