Cash, Not Pretense: An Entrepreneur's Guide to the Credit Crisis.


Compared with most businessmen, 41-year-old Charlie Wilson has some reason to like the economic downturn. President of Salvex, a Houston-based salvage firm he founded in 2002, Wilson has seen huge growth in the bankruptcy business over the past year. It is keeping his 10-person staff, and his 55 agents around the world, busy.

But the credit crunch still creates headaches for Wilson. With loans hard to secure, many would-be customers cannot bid on the merchandise in his inventory. "We are booming with more deals because people are defaulting," Wilson notes, "but the buyers are gun-shy because they can't get the money to pay."

So what do you do in these circumstances? Charlie Wilson is taking a back-to-basics approach. Rule No. 1: Stay away from people who rely on credit, not cash. This means private companies – including many outside the U.S. – are often better customers than larger, but now cash-strapped, public ones. "The further away I get from Wall Street, the better I feel," Wilson says.

Cheap is the new hip. Focus on cutting costs and streamlining operations. Don't spend money on unnecessary employees or hard infrastructure; use the Internet wherever possible. It helps, Wilson says, to be located in an affordable building and in a place, like Houston, where taxes, regulatory costs and rents are generally cheap. "I work out of a Class C building," he says, "and now everyone thinks it's sexy."

Expand your range of customers. Look for new customers who have cash resources and access to markets that are still growing. This has led Wilson to look outside the U.S, to places like India or China, where many companies still have cash and see the current crisis as a great opportunity for bargain hunting.

These three trends – the growing importance of cash, cost cutting and expanding one's customer base – are defining entrepreneurial response to the credit crash. All three trends can be seen in the strategies of entrepreneurs who are focusing on burgeoning, often cash-oriented immigrant markets.

Consider the success of La Gran Plaza, a massive Latino-themed shopping center on the outskirts of Ft. Worth, Texas. Not so long ago, La Gran Plaza was a failing suburban shopping center. Now it's thriving, but only after being regeared to service the cash economy of the local Latino community. Similar success can be seen elsewhere in the country, even in Southern California, which has been hard-hit by the recession but where ethnic malls and supermarkets continue to thrive.

Some urbanists, like scholar Richard Florida, maintain that the post-crash environment favors densely populated (and very expensive) cities like New York. But in fact, it may make more sense for entrepreneurs concerned with costs to work out of places like Houston, or even the Great Plains states, where local governments are more business-friendly. And everything, from housing to energy, tends to be less expensive.

Indeed, over the past few recessions, the basic pattern has been that cities come into the downturns late and stay in them longer. In the last decade, many big cities have become very dependent on Wall Street and asset inflation. In 2006, for instance, financial services accounted for a remarkable 35% of all of New York City's wages and salaries, compared with less than 20% 30 years earlier.

So it seems likely that the credit crisis will hit pretty hard in those places most addicted to credit – places like New York, San Francisco and Chicago. This occurred early 1980s, the early 1990s and will occur again now. It might even be worse this time around. The federal takeover of the banks will mean lower salaries and bonuses, which will make such places less attractive to ambitious young people. If you are limited to $250,000 a year, it's much easier to "get by" in Charlotte or Des Moines than it is in Manhattan.

The biggest hope for New York, Los Angeles and other big cities lies with immigrants and the fact that lower property prices could keep some talented individuals from migrating elsewhere. But the one expensive big city really well-positioned for the credit crunch may be Washington, D.C., since it "creates" its own credit. As key financial decision making shifts to the capital, we can expect to see some financial-industry titans (and their retainers) spending more time in, or even moving to, the capitol. Washington, it's time for your close-up.

Beyond the beltway, the credit crunch will eventually benefit places with lower costs of living – including Houston. High rents, strong regulatory restraints and prestige spending make little sense in a cash-short environment. Now, fancy high-rise offices in elite areas are an albatross for even the strongest business.

The remade economy may hold some much-needed good news for hard-hit sun-belt markets. Some places, like Phoenix, may be poised for a comeback. "Phoenix is paying for being overbuilt, but [lower] prices will attract people back," explains local economist Elliot Pollack. "The fundamentals that drove the growth are still here with the return of lower costs – the ease of doing business, lower taxes and the attractiveness of the area."

But the real winners may be the people now leaving big companies to start new firms. Unburdened by bad habits developed in the bubble, they will be able to fit their business models in lean times. Many won't mind being in an un-fancy building or neighborhood. Whether they are forming new banks, energy companies or design firms, they will need to do it more efficiently – with less overhead, smarter use of the Web and less pretension.

"People are watching their companies go under. You get three vice-presidents who get laid off but know their business," Wilson says. "They start a new company somewhere cheap that is more efficient and streamlined. These are the companies that will survive and grow the next economy."

This article originally appeared at Forbes.

Joel Kotkin is executive editor of and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.

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Ken Stremsky