Encouraging Borrowers to Adapt Big Business Practices

by: Smith and Howard

July 10, 2017

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Many small business entrepreneurs have great ideas, but their business experience can lag behind their innovative concepts. Start-ups can successfully be run on gut instinct for a short while. However, every business eventually needs a long-term strategic plan. As a banker to small businesses, you can encourage your borrowers to adapt big business practices that can help ensure success over the long term, thus improving both your customers’ bottom lines and your loans’ longevity.

Help borrowers understand how to build value

Public companies answer to investors who consider earnings per share and stock price to be key indicators of their return on investment. Maximizing earnings is a short-term goal, but building value requires a long-term focus.

Many small businesses operate lean — with limited staff and overhead — but, in doing so, they may sacrifice value-building opportunities. Sometimes you need to spend money to grow or protect your assets.

For example, a company that fails to invest in marketing may lose market share to a competitor who aggressively advertises and offers promotions. A company that hires from within or chooses managerial candidates based solely on minimizing salary expense may lose out on the professional expertise that comes with a more seasoned management team. And, one that skimps on insurance or internal controls is at greater risk of incurring financial losses.

Educate borrowers about planning

Formal planning allows owners to communicate their visions down the organizational chart, as well as to bankers and private investors. Business plans give outsiders the opportunity to play devil’s advocate, which can help pinpoint potential flaws and weaknesses.

Planning should extend to employees. What’s each worker’s expected role in the owner’s strategic vision? Annual reviews help employers gauge whether each employee is meeting or exceeding management’s expectations — or whether his or her goals require revision. Reviews also give employees feedback on their performance and the opportunity to improve weaknesses.

Introduce the concept of branding

Most large corporations have well-known brands and strong online presences. Likewise, successful small businesses know their target market and are recognized by buyers on the local level.

Social media campaigns — such as Facebook posts and Groupon offers — are fairly inexpensive ways small borrowers can penetrate their local market and build brands.

Suggest going green

Every business, big or small, can benefit from going green. Green practices lower costs and engender loyalty from employees and customers.

Green America is a nonprofit organization that offers a “green business” certification. The Green Business Seal signals a borrower’s commitment to eco-friendly business practices, such as recycling programs, energy-efficient production and waste reduction campaigns.

Teach about leverage

Borrowing enables businesses to grow quickly. Unfortunately, many private business owners are debt averse, preferring to grow slowly using personal or company funds. But a little leverage can go a long way.

The theory behind the concept of leverage is that the business can generally earn a higher return from its operations than the cost of its debt. Today’s low interest rates make debt a particularly attractive form of financing. To sweeten the deal, interest on the debt is currently tax-deductible — although the deductibility of interest in the future is uncertain under some business tax reform proposals being discussed in Congress.

Encourage work-life balance

People work hard at large corporations. But there are usually specific work and vacation hours. Small businesses tend to blur the lines between home and office, especially if they’re one and the same.

No one can be productive or innovative when they’re overtired and overworked. A sign of a successful entrepreneur is the ability to take time off and relax. A true vacation allows the owner to recharge — and proves that the company is a viable going concern.

Beyond great ideas

Great ideas are a dime a dozen. More valuable are companies able to implement management’s vision and sustain profitability. You can increase the stability of your banking portfolio and improve your long-term lending relationships by guiding your borrowers toward more disciplined, professional business practices.

For more information on Smith and Howard’s commercial banking services, please contact Marvin Willis at 404-874-6244.

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