10 Costly Lessons from the Credit Crunch

by Andy H on November 4, 2009

The recent credit crisis has battered our businesses, costs us jobs, crushed our loan prospects, smashed our hopes of a quick recession recovery, and generally made many of us mad as hell. Still, there are lessons to be learned from such a dismal situation. While you might not like what has happened and how things are playing out, you can learn from mistakes and use this knowledge to make you and your business stronger moving forward.

  1. Have a back up plan: Probably the most significant lesson to take away from the whole credit debacle is that it is important to have a back up plan no matter who you are or what your business. Plan for the worst and hope for the best. If your credit lines are cut or reduced, you suddenly find yourself losing customers or your income level drops dramatically, it is pertinent to maintaining your livelihood that you be ready to react before it is too late.
  2. Preparation is key: We now see just how many businesses could have been saved from the credit crunch had they simply sat down and discussed the possibilities of a dramatic loss of business or lack of credit. Creating business plans that involve key members of your operation and ensuring everyone is on the same page regarding their roles during an economic crisis, can save money, jobs, and even your business.
  3. Importance of liquidity: Another lesson of the credit mess that weaves itself between having a back up plan and preparation is maintaining available liquidity. We recently saw this lesson applied to everyone from the largest financial firms down to the average investor and business owner. Not having available liquid assets to pay down debt and maintain normal business operations forced many companies out of business and pushed many people from their homes.
  4. Save, save, save: While you and your business certainly don’t want to tie too much up in low return cash investments, they can be a real lifesaver if or when a credit crisis occurs. Whether this cushion acts to preserve timeliness on your accounts payable or continues to fund your payroll, cash savings can make the difference between a business that outlasts a crisis or folds under its pressure.
  5. It’s not the size of your credit line, but how you use it: Whether it’s a credit card or credit line, it won’t help you survive a credit crisis if you’ve already maxed it out. Having open and available lines of credit with reputable creditors can help you sleep easier at night, but as we learned during the recent crisis, those lines can rapidly be modified or simply vanish altogether. Ensuring that your credit is paid timely, kept at reasonable limits, and is available from multiple sources can help ensure money is available when you need it.
  6. Understanding what you sign: When it comes to mortgages, credit cards, lines of credit, or similar forms of lending, it is important to know what words mean – and if you don’t know, ask! Due diligence when it comes to receiving credit means more than just putting your name on the dotted line and assuming the lending company is going to act in your best interest. Remember, when it comes to credit, most companies (unless they are a credit union or owned by a family member) are there to make a profit, not to ensure you get the best deal.
  7. A name does not a business make: Lehman Brothers, AIG, Washington Mutual. With massive failures abounding during the credit crisis, we found out just what “Too big to fail,” really meant … not much. Just because a business or company’s name is associated with success, it doesn’t mean the drivers aren’t asleep at the wheel. Conduct your due diligence before first becoming involved with a business, even if it’s well known.
  8. Paying people what they are worth: Having a recognized CEO that is pulling in 100 million a year doesn’t mean a company is succeeding or even that this person knows what is truly going on inside the organization. In many cases, we’ve been taught the lesson that the higher paid the executive, the more wary we should be regarding bonus structures, investment risk, and the willingness of leadership to look the other way when it comes to the well-being of their creditors, investors, and company.
  9. Optimism vs. blinders: There is a big difference between optimism regarding investments, business trends, and economic forecasts, and just moving blindly ahead assuming that economic conditions will remain positive. Bubbles burst, businesses fail, and jobs are lost. It is a fact of economic life that we often lose sight of risk during the euphoria of the good times, and it can be a costly lesson that is all too clear when we are on the financial downslide.
  10. You aren’t in control: More recently as we watch credit card companies increase rates, banks penalize their best customers, and governments shift and change policies on a regular basis we learned another valuable lesson: credit should be used as a safety net, not a crutch. With guidelines and terms of use left largely to the whims of corporate giants and legislators, you can be left feeling like a puppet on a string. The big lesson here: it’s their game, and they can change the rules whenever they want.

About the author

Kris is student of business and finance who writes for an Australian money comparison website. You can read more of his work on their blog.

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{ 1 comment }

1 Sandesh Mascarenhas 11.10.09 at 1:55 PM

Good read. I will take good advice from this post thanks a lot.

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