Teach Small Borrowers to Think Big
October 9, 2014
Small businesses are often considered high risk by banks. Even if they are thrifty and focused on core operations, it can be daunting when the owners’ personal finances are heavily involved. Small businesses can be very uniquie, but that doesn’t mean they can’t learn from big-business practices.
Eyes on profits and 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.
Systematic, formal planning
Startups can successfully be run on gut instinct for a short while. But eventually every business needs a long-term strategic plan. Formal planning allows owners to communicate their visions down the organizational chart, as well as to lenders 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.
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.
Green business practices
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.
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 tax-deductible.
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.
Reminding borrowers to “think big”
Small-minded business practices ultimately limit a borrower’s growth potential. So, treat small borrowers like public companies in training. You’ll get the best of both worlds by encouraging them to imitate the best practices of large corporations.
For more information please contact a member of our lender services team at 404-874-6244.
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