Financing Small Business projects

A short article on small business financing caught my attention today. A study conducted in Spain, you can find it here, attempted to test the hypothesis that small business with a lower risk profile will self-select financing options that trade collateral for a lower interest rate while business with a higher default risk will self-select for financing options that have a high interest rate but no collateral. The study is very interesting, and although definitely on the academic side, it poses serious questions for young entrepreneurs.

1. If I believe my idea is sound and profitable (almost everyone does) do I raise the necessary collateral to have access to a lower interest in a loan?

2. Instead of using the collateral in the loan should I invest the money in my company?

3. If I have no collateral, is my business ever going to receive funding?

Financing for small business is a touchy subject. The link between collateral and riskiness of the business can be argued both way. The bank might be trying to diminish its risk by asking for a higher collateral. On the other hand the higher collateral might be the result of conditions within the bank itself or macro-economic conditions outside of the control of the small business. My advice to small business owners is to carefully evaluate the need for financing to begin with. Everyone will push financing, from small banks to venture capitalists, but they have their own interests. The bank needs a client, the venture capitalist wants a piece of your company if successful. If you don't have a plan as to what you are going to do with that money, detailed plan, then seriously reconsidered asking for it to begin with. Slow, steady, internally financed growth expansion might be a better option.

Thoughts?

Intangible Assets Valuation

I read an interesting article on Intangible Assets valuations today. The article was published in the Engineering Management Journal, http://www.asem.org/asemweb-emj.html (you have to pay to get access).  The authors explain how they develop a tool to help SMEs in Italy asses the value of their intangible assets. You can read the article for the full story and methodology but what interested me is that they defined intangible assets as:

Human Capital(i.e. the skills of the employees)
Internal Structural Capital( i.e organizational knowledge that belongs to the Company)
Relational Capital (the relationship between companies)

Placing a value on this can be quite difficult but essential for SMEs as it is usually these assets that are the most valuable for small businesses that do not have huge financial assets. I am curious about the small business owners themselves. How many small business have you encountered that have even attempted to place a value on this, should this be taken into consideration when looking at financing options? If so by whom the bank or the small business owner?

Relational Capital in particular is interesting. Its the "Who do you know?" concept. A business might be small but if the owners are well connected, say with city hall or the city procurement officer, this is a huge asset with potential value. I understand that the ethical considerations are there but to believe that a small business owner will not exploit such a relationship is naive at best.

Thoughts?

Market Research Lessons from the Czech Republic

I read a good article today in the International Journal of Management Cases, you can find the complete article here http://ijmc.org/IJMC/Vol_16.4.html . If you want to read about the methodology and actual research study more in depth please visit the site. The authors basically surveyed Czech Republic small businesses to determine what did they consider to be barriers to exporting and what are the actual barriers to exporting based on data. They found that many small business believe that the following are their main barriers:

1. Lack of language skills
2. Lack of experience with foreign markets
3. High costs of promotion
4. Lack of public support
5. Lack of information about foreign markets

The findings suggest that the main barrier to exporting is actually:

1. Lack of information or experience in foreign markets.

Those companies that either searched for information about foreign markets or had key employees with experience in foreign markets actually had decent volumes of export sales (as a ratio of total sales). Although the first list is intuitive and i think almost every business owner that has not exported will list the same reasons, I wonder if small business owners in the US have the exact same concerns?

Thoughts.

Small business valuation

I read an intetesting piece on small business valuations today. It was mainly focused on Succession planning and how valuations are essential at the time of selling or transition the business to new owners. This is a very essential service for SMEs yet its in short supply. Maybe a possible business opportunity?

Financial tools for SME

What financial tools do you use in your small business? I have mostly stuck with either Quicken or QuickBooks.  I must say that after going thru numerous versions of both software packages the differences are starting to blur.Yes, Quickbooks is better for invoicing and P/L reports but Quicken is not far behind in the reporting arena and frankly even Excel can create fairly decent invoices. My point is that Small Busineses might have to start thinking about these tools, and their characteristics,  as commoditized.  Having them will not give your company a competitive advantage, its just the price to pay to stay competitive.

New Year's resolutions

The year is almost over. Hopefully it was a succesful year for your business but maybe it was not. During this time of the year just like we usually take stock of our lives its a good idea to take a look at how your business is performing. Many consultants recommend doing this often, however I tend to recommend to do this at least twice a year, but no more. We have to give time for our ideas to be Implememted, take hold and yield results If any. Take some time to ask yourself some of the following questions:

1. What have you failed at this year? Its easy to think of the successes,  its a bit harder to acknowledge mistakes. Think about those things that didnt go quite as planned.

2. Did your customer base increase or decrease? This is a fact that will tell you whether you are providing the right products to the right customers. Think about your offerings and what is working or not.

3. How do your employees think the business is doing? This is not a one man operarion, seek the input of others. If you think everything is going great but when you ask your employees its all doom and gloom then there is something wrong and they might be on to something that you missed entirely.

4. Am I focusing on the customer or my profits? There is one right answer to this one, you should know which one it is.

What do you think? How are you reshaping your business for 2014?

Look forward to your comments.

Challenges in Small Businesses

Recently I have noticed that some fellow small business owners are finding some new regulations challenging. Whether it be grappling with the new health care law or trying to figure out how to charge taxes on online sales, new regulations are continually forcing owners to adapt. This is not necessarily bad as it forces some sort of "survival of the fittest", or  "creative destruction" via Schumpeter, however doing so by imposing more regulations is hardly ideal. As a small business owner below are some tips that you can use to stay informed:

1. Be "involved" with your area chamber of commerce. Now this is different from joining, which usually involves a fee. Joining the Chamber of Commerce is not for every owner, but selecting a few chamber of commerce functions a year and paying the non member rate to attend will allow you to get some insights into what the business community in your area is facing. Listening in these functions is key!

2. Stop by City/County Council meetings at least once a quarter. These governmental bodies are notoriously slow, you dot have to be there for every meeting, it usually takes them months to get anything done. Go once a quarter and see what issues they are discussing.

3. Talk to your business partners and customers. If you have suppliers talk to them about their issues and how business is going. Talk to your customers about their issues. Most importantly listen. Their issues will ultimately affect your business. I am not talking about long conversations (although if you want to have those go ahead) but 2 or 3 minutes here and there with a big enough sample might help you make generalizations about your business environment.

The point here is that in order to adapt you must identify the problem and in order to do so you must listen! These are just different venues to arrive at the same conclusion. Listening will give you an edge on what the problems are now, what problems might arise and how to tackle them. 

I look forward to your comments.