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14 Oct 2008, Posted by Matthew Reinbold in New Work Ways,Thought & Theory, 4 Comments

Next 6-9 Months: Reduced Lending, Fickle Credit


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Tossed by a turbulent financial storm small business, specifically freelancers, are sure to notice a number of changes. My generation has had the fortune of “suffering” through mild downturns. That is, a bulk of the bad has occurred in two or three fiscal quarters. Many feel the current recession’s started around January of this year. Further, current patterns project it lasting well into summer of 2009. That’s a downturn unlike anything many of my professional peers have experienced. The better prepared we are for what’s next the more likely we’ll see the other side. For now, however, its vital to recognize that:

Banks Will Reduce Financial Lending

What This Means:

  1. In light of dubious mortgage financing (“no job, no problem!”) bank funding for small businesses will become noticeably less. This is for two reasons, one practical and one psychological. The practical reason is that, having their over-leveraged positions on questionable assets exposed, they cannot raise the same amount of capital to then turn around and lend out. The second reason is that they’ll attempt to over-compensate previous bad behavior with new tighter monitoring; at least until the public’s eyes are on someone else. This means that a number of financial tools like lines of credit and small business loans will be harder to get. Bank of America has taken this step and will not be the last bank to do so. (Of course if your line of credit was with an institution like IndyMac, you’re just frozen screwed.)
  2. Banks, looking to limit their credit card liabilities, are reducing available balances and increasing percentage rates on even those who pay their bills on time and have good credit. Sure, there are people that abuse their balances and live beyond their means. And then there are small businesses for whom credit cards serve as a bridge between payment gaffs. No matter how diligent these people have been their ability to self-fund is under review.
  3. Web firms and freelance developers are often at the end of a long value chain: an employer pays wages to customers, customers buy goods or services from the client, and the client sends you a check in the mail. The rate at which you get paid is the summation of the delays in that chain (if there’s one reason to endure the hackneyed romance bludgeoned into The Goal it is this). IF the banks are unable to help an employer make payroll, the customer pay bills, or the client from covering his costs you, being at the end of the chain, will have to wait.
  4. Finally, expect even more inventive ways of trying to get development work done for deferred (or non-existent) payment. Often seen on free classified sites like Craigslist these are promises of equity upon completion, future revenue share, unicorns farting rainbows, etc.

What You Can Do About It:

  1. If possible, arrange for payment upfront. If the full amount is not possible arrange to have a percentage of the project cost to be payed at the project start and the remainder upon project completion. A 50/50 split is more than fair – it helps pay for your expenses while developing and also reassures the customer that they maintain leverage upon the completion terms.
  2. If that is not possible or you have an hourly arrangement consider accepting credit card payments in lieu of check or cash. While most brink-n-mortar stores have this ability I’ve run into a number of developers who do not. Allowing a customer an alternative payment method, one that does not immediately draw on their balance, helps them bridge slowdowns while making sure you get paid. It is dead simple to use a 3rd party processor like Paypal. It gives your client flexibility, their credit card details remains secure, and you get paid.
  3. If you have credit cards that are used in your own daily operations pay early, pay often, and pay ‘em off. As mentioned above, any foible is now cause for lending institutions to dramatically reduce available credit balances and increase percentage rates. To preserve your access to funds if things become dire you must be hyper-vigilant.
  4. As for accepting unicorns in return for work just say no. By accepting work that is equivalent to a lottery ticket you are incurring an opportunity cost of finding a stable, paying client. Unless you are bored to tears and/or simply don’t have enough drama in your life these arrangements are the opposite of what’s critical over the next several months: solid, dependable cash flow.
  5. Finally, if you haven’t already, begin a relationship with someone at your bank who works with small and medium business. The point here is not torrid missives of cash now. That entire industry is buried beneath a mountain of trust misappropriation. The point is to introduce who you are, what your business is, and what your future needs may be. By doing the hard work now you’ll have the trust in place when the need for capital comes…

…like when you’re ready to buy a unicorn of your very own.

What’s Next: