The budget crisis in California has a few business owners wondering how they’ll survive when the government starts issuing IOUs instead of cash to its state vendors. The IOUs are a temporary stop-gap to keep the government operating while a new budget is hammered out. By October, they are supposed to be paid in cash with interest, but between then and now, many small businesses will be wondering how to cover the shortfall in ready cash at hand. Other types of credit will be essential to keep some businesses open, with many seeking alternative forms of financing, or some form of insurance, to get cash loans today in preparation for the arrival of tomorrow’s IOUs. These IOUs represent a large risk to small businesses in California who are already cash-starved and customer deprived due to large level of unemployment and defaults in the state. Some businesses will have to shut their doors upon receiving an IOU while others have negotiated with their banks or creditors to help weather the storm.

A Domino Effect Of Crushed Finances

Many businesses who have avoided credit all together and relied on a healthy balance sheet are finding that the bankruptcy or disruption of their customer’s finances can also crush their businesses. Lending is tight and unless there are advance preparations made to weather a large shortfall of cash due, if a state fails to pay its bills or a large customer defaults, the risk to a small business is high. Without sufficient credit history, even a cash-rich business can find itself falling from the weight of someone else’s misfortunes. While California’s solution of IOUs is unique to that state, the possibility of having a large account receivable go unpaid totally or at least for a long period of time is quite high during this recession.

Learning From California’s Example

Credit insurance is the type of insurance that business owners can get prior to finding out that someone is not paying them or will be paying them significantly late. There are all manner of policies out there that can be obtained, from insurance against a customer’s bankruptcy to even delays due to political decisions. The insurance can be costly, but there are ways to reduce the cost. A business owner can do a single transaction credit insurance for a particularly high income transaction that would have a devastating effect if the account receivable was not paid or paid late. They can also choose to get insurance on a particularly risky customer or all their customers. Credit insurance is becoming more popular as a way to offset the risks of doing business in an uncertain economic landscape, when even “too large to fail” entities have failed overnight. If the default of one of your customers is going to impact the survival of your own business, it’s time to take a look at your insurance options. In a time of great uncertainty it can be something that helps you sleep at night.