“Small Potato” Borrowers Can Benefit from Big-Business Practices

You’re the kind of banker who likes lending to small business owners. You typically develop a face-to-face relationship with the principal, wrap your arms around the company’s financial condition quite easily, and like helping the “little guy.” But part of you knows that small businesses often carry more risk than their beefier, more established, counterparts.

Small businesses can learn from bigger businesses — there are reasons why the latter grew and why they endure. So, assess whether your “small potato” customers are benefiting from some of the best practices of the “big enchiladas.” 

Operating lean

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, if your small-business borrower is hiring its managers based solely on minimizing expenses (rather than professional expertise), it could be on a road to failure. Likewise, if, reluctant to make the financial investment, the borrower passes up opportunities to pursue new markets, it might be squandering its potential for growth.

Formalizing a vision

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 performance 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.

Penetrating the market

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. 

Leveraging assets

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.

Balancing work and life

People, they say, are a company’s biggest asset. And people at large corporations work hard. 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.

Shared concerns

Small businesses share many of the same concerns as large businesses, including operating and health care costs, regulatory intervention and uncertainty over economic conditions. It makes sense then that your small-business customers can benefit from employing some of the same best practices as do the big ones.

© 2015