Small business owners are starting to feel the effects of the credit drought. Many may already have experienced disappointment with a loan application. Meanwhile unexpected needs for a cash injection keep coming up such as a delivery vehicle breakdown or an opportunity to pick up some normally expensive office equipment or machinery at a good price. With credit getting tighter and credit card charges going up, who can a cash strapped owner turn to for a loan?
Increasingly these days, the answer is – to a stranger. A peer-to-peer (P2P) loan (also known as ‘person to person lending’ and ‘social lending’) is a loan mediated directly with another person without using a bank or financial institution. Would-be lenders compete with each other on the basis of the interest rate they apply. The lender willing to provide the lowest interest rate ‘wins’ the borrower's loan. The majority of these deals bring together a borrower and lender not previously known to each other. For a flat fee, P2P lenders may also perform a ‘family and friend’ transaction helping a borrower and lender who do already know each other (family members or business associates) to sort out the terms of a loan arrangement and then formalize it in writing.
The process has become popular because it is mediated by the social networking capabilities of the internet. Popular P2P lender organizations, such as iGrin, LendingHub, Prosper, Zopa and Virgin Money, have become the eBay equivalent of the personal loan market putting borrowers in direct contact with lenders for loans up to around $25,000.
The allure of peer-to-peer lending goes beyond finding a willing lender charging a reasonable rate of interest. The process is not known as ‘social lending’ without reason. One unique aspect of P2P lending is that it gives borrowers the chance to tell their story, so applying for a loan can be as much about winning hearts and minds through mentioning shared hobbies or interests as about a compelling business plan. At LendingClub, lenders pick borrowers based not only on their credit profile, but also on their affiliations; at Prosper, users can create groups that, based on members' repayment history, receive star ratings and can help member borrowers get lower rates.
It may be easy money but is it smart money?
The fact that money may be just a few clicks away makes P2P borrowing a very tempting proposition. But that doesn't automatically make it a smart choice. The P2P option can be used intelligently to deal with a short term cash requirement or to trade a high rate credit card debt for a lower rate P2P loan – their lower interest loans can be used to pay off a high interest credit card balance. However, as with all financial deals, you need to understand the rules of the road if you don’t want to crash.
Generally, the basic principle of lending - that the lower your credit score, the lower your chance of getting financed - applies just as much in P2P deals as it does with traditional lending institutions. P2P lender sites usually grade borrowers' credit worthiness in some way, based mainly on their credit score.
Money borrowed through a P2P lender is reported to the credit bureaus as a personal loan. Paying off $10,000 in credit card debt still leaves your credit report showing a $10,000 debt – only now it will represent your personal loan. You haven't gained any ground in reducing your overall debt but you have lowered the interest rate you pay on the debt. That may be a good result in itself, but it doesn’t improve your credit score in any way. Loans taken out to fund business activity can even reduce your credit rating. Regardless of the purpose the borrower has in mind to use the money for, it really amounts to, and is treated by credit companies as, just another personal loan. By adding this new loan to your debt, your credit score may go down. That can affect your longer term ability to get a loan from the conventional sources or even credit from vendors or suppliers.
The new P2P lending sites, as with credit cards before them, may be making it a little too easy for a business owner to get their hands on money. P2P lending obviously addresses a gap in the credit market, but such loans can hurt personal credit scores and potentially draw business owners in over their heads. Before seeking money from a P2P site a prudent business owner should sit down and take a really hard look at their financials and do a cash flow projection to make sure they can pay back the loan. Otherwise they could be making a bad situation even worse.
Every business has its share of high maintenance customers, but not every business subscribes to the ‘customer is always right’ philosophy and feels they have to go on supporting them no matter what. In fact, some businesses will actually ‘fire’ a customer they no longer want to work with and often report being happier and financially better off once having done it.
In some instances firing a customer is a no-brainer. Those that don’t pay their bills or break the terms and conditions of sale are probably going to be more of a headache the more you deal with them. So let’s assume you have decided there is no recourse but to fire one of your customers. Is there any way to do it tactfully and without creating lasting resentment on their part?
Firing tactics
Price them out of your market: Cost conscious customers who constantly complain about price and expect service way beyond what they are paying for are likely to move on if they face a price increase from you. You can justify it by telling them that you are getting busy and have raised your rates to be more competitive and in line with your value. Give them the new price structure based on restoring the balance between the costs of serving them and the value they contribute to your business and leave it up to them to make the decision whether to stay or go.
Pass them on: Contact the customer personally and politely explain why you think you may not be the best supplier for them in future. There are a number of business related reasons you can come up with that aren’t accusing or confrontational – you are cutting back on doing that sort of work; your plate is full and you can’t take on any more work; you intend serving a different market and they don’t now match your customer profile, whatever. Thank them for their past business. Conclude by offering them a list of alternative suppliers you feel would be a more appropriate match for their needs.
Stop rewarding them: Some customers are chronic complainers. Often their game is to rip you off by playing on your commitment to customer satisfaction. They’ll return a product they damaged knowing you replace ‘no questions asked’; or complain about something because you offer a discount on a subsequent purchase to make up for slips by your employees. When it becomes obvious a customer is just playing the system it’s time to answer their next complaint with a simple, “Thank you! I am sorry that we did not meet your standards.” No discount voucher or any other incentive to come back to you.
Don’t let your action backfire
Get paid what’s owing: A fired customer may just take the attitude that if it’s alright for you to fire them then it’s alright for them to not pay what they owe you. Take what steps you can to recover unpaid invoices before firing them. Don't threaten them with what you will do if they don’t pay up within the specified time, just assume they're going to pay and wait on events.
Complete all contract obligations: Firing a customer without having met all your contractual obligations leaves you open to legal action for breach of contract. Before giving notice, review all your written contracts to ensure you have met your end of the bargain.
Retain supporting documentation: Any record of the customer’s dealings that would support your decision to fire them, such as letters or emails in which they have threatened you, maligned your character or made a promise to pay that was subsequently broken and so on, will be valuable support if the customer does decide to take legal action.
After the break, avoid fallout
Even when it’s well handled with tact, courtesy, and professionalism a customer who realizes they have been fired is likely to feel a little resentful. The best you can hope for is that they don’t complain too publicly about what happened to them. Meanwhile, you may feel like crowing over the fact that you are finally free of this albatross. Don’t! The wider you broadcast the news the more potential for damaging fallout. It could harm your professional reputation to be seen to be gloating. It could damage business – other customers you had no intention of firing may hear of it and wonder if they are next. They might take pre-emptive action and leave before being fired. Just be quietly glad that the customer from hell is no longer your customer!
Customer loyalty programs work big time for big companies but SME owners are often deterred from developing one because of worries about how much it would cost or how difficult it would be to organize and manage. As a matter of fact, the very same principles that keep customers coming back to big companies can be utilized to develop an SME scale loyalty program without a lot of cost and drama.
Make customers feel like ‘members’
Creating a ‘club’ that provides special incentives to members is one of the best ways to retain customers. This approach works because it is based on the primal human need to ‘belong’ to something – especially where belonging also makes us feel we are being treated as special.
Who gets to be a member? A customer loyalty program based on membership should convey a feeling of privilege for those selected so it can’t be open to all and sundry. Customers may qualify for membership either by purchasing their entrée or by dint of their past support and loyalty.
General Nutrition Centers, a specialty retailer of vitamins and supplements, offers a Gold Card membership program that provides discounts on products, personalized mailings and email on health related topics, product news and exclusive offers. GNC found that they could even use their program to actively iron out lows in their sales pattern by offering a special discount on sales made on Tuesday, traditionally their slowest sales day.
Only your imagination limits the opportunities for coming up with a bundle of services around your basic product offering that some segment of your customers would find appealing – a dry cleaning business could offer a discount on cleaning, free alterations and a pickup and delivery service; a book shop could offer discounts on items purchased, a magazine of latest releases and reviews, invitations to catered book launches and author talks.
Reward customers for purchasing from you
Reward based programs are among the most common of loyalty schemes – think frequent flyer points and coffee cards. They provide gifts and perks that are earned according to the amount of business a customer does with you. Providing a free reward after multiple purchases is an effective enticement to keep them coming back.
Usually, all that is required to manage the program is a card on which each purchase is registered. After a certain number of purchases, or after making purchases that add up to a certain value have been made, the customer receives their reward – after 6 cups of coffee, one free; after 10 CDs, a free CD; after 9 car washes, the 10th for free.
The reward doesn’t have to be related to what you sell. A clothing store could reward customers who purchase above a certain dollar value of their lines with a couple of movie tickets; customers who have earned enough points can go to an online store and choose from a variety of products there.
Let customers feel good about themselves
Many customers love the idea that while purchasing something for themselves they are also doing something for someone else. Letting customers know that part of what they spend in your store helps out a good cause, whether you choose to sponsor an internationally recognized charity or the local kids’ baseball team, will appeal to some segment of your customers. They’ll be drawn back through their sense of charity or community spirit to make their contribution to the good work.
A customer loyalty program reduces customer defection and may even attract new customers once word gets around about the benefits it provides. Keep the scheme simple. It shouldn’t be too hard for customers to understand how it works or to earn their reward. Put the real thinking into just what sort of reward would be encouraging to your customers - knowing what is most important to them is the secret to making a customer loyalty program successful. Small businesses are actually in a great position to implement loyalty programs because they can find out fairly easily what interests, motivates or inspires their customers.
Caught in the crunch between tightening credit and increasing energy, transport and material costs, an SME owner’s mind turns to … cost cutting! Great idea, but where? Use lower quality materials to cut down inventory cost? Maybe leave out that final inspection before packaging up? Cancel the ad in the Yellow Pages? Fire a couple of employees? Pruning the big ticket items will save on costs right enough, and quickly, but at what long term consequences to the quality, reputation and awareness of your product.
There may be any number of costs lurking in your everyday activities and procedures that just don’t get noticed simply because they aren’t big ticket items. But that doesn’t mean they can’t add up to a significant spend nonetheless. Look around and see if these tips can help drive down costs before making any drastic decisions that may come back to haunt you later.
Fuel
Organize your errands so you can take care of several on the one trip
Arrange delivery schedules, sales calls or installations according to the shortest route between them rather than zigzagging across neighborhoods
If delivery is a courtesy rather than an integral part of your sales process, then consider cutting it out, offering it to only your best customers, scheduling it in late morning or early afternoon when traffic is lightest, or introducing a fee for it
Utilities
Turn off equipment that’s not in use - computers, photocopiers, lights, air conditioning
Switch to energy efficient light bulbs
Use high efficiency rated appliances
Install automatic light switches and put the aircon on a time switch
Make use of natural lighting where possible
Office supplies
Put a moratorium on buying all but essential supplies
Reduce printing to essential documents and use the reverse side of paper for copying draughts and internal documents
Use recycled paper
Buy from office warehouse companies or discount stores
Purchase locally –shipping costs from distant distributors can more than double costs
Office equipment
Before buying new furniture check out second hand office supply dealers
Communications
Cut back on unnecessary phone service add-on features like music on hold
Price compare phone service providers and consider a VoIP solution
Take away cell phones from employees who don’t rely on them to do their job
Price compare website hosting service providers
Consider next afternoon or two- or three-day service instead of express shipments
Use email instead of postage mail whenever possible
Make cost cutting a continuous improvement program
While you may have been pushed into a cost cutting exercise by the current economic situation it’s smart to make cost review a normal and regular part of running the business. Now that you have carried out this review, ensure the process of actively searching for cost cutting opportunities stays alive and keeps contributing to increasing your profitability.
The three great essentials to achieve anything worthwhile are, first, hard work; second, stick-to-itiveness; third, common sense - Thomas Edison
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Small business owners are starting to feel the effects of the credit drought. Many may already have experienced disappointment with a loan application. Meanwhile unexpected needs for a cash injection keep coming up such as a delivery vehicle breakdown or an opportunity to pick up some normally expensive office equipment or machinery at a good price. With credit getting tighter and credit card charges going up, who can a cash strapped owner turn to for a loan?
Every business has its share of high maintenance customers, but not every business subscribes to the ‘customer is always right’ philosophy and feels they have to go on supporting them no matter what. In fact, some businesses will actually ‘fire’ a customer they no longer want to work with and often report being happier and financially better off once having done it.