Finance for Small Businesses

I see that the Federation of Small Businesses has today called on the government to support non-bank finance for small businesses. It’s certainly true that since 2008 bank finance for small businesses has been in short supply, and whilst government support would be welcome, if somewhat belated, the fact is that over the past few years there are plenty of organisations that have moved to fill the funding vacuum left by the banks.

There are a number of online peer-to-peer lending sites catering for both small business loans (e.g. The Funding Circle) and personal loans (e.g. Zopa).

Whilst the B2B sites offer loans at fairly competitive rates many owners will be looking for more substantial finance for small businesses than these sites can offer. Fortunately companies are finding alternative and flexible ways of meeting this demand, and any competent business finance broker will be able find a suitable provider to meet a particular business need.

And there are plenty of business angels and venture capitalists looking for small businesses with high growth potential that they can invest in.

When considering what finance is needed business owners should also consider the availability of government grants, and tax incentives such as those available for research and development, the criteria for which are far wider than many business people realise.

Whilst not seeking to defend the performance of banks in recent years I have to say that many owners don’t put nearly enough effort into justifying their need for business finance. I’ve seen plenty of business plans that barely merit a second glance, much less serious consideration. Owners must understand that any organisation or individual with money to invest needs to see a coherent plan that sets out how the business will repay, with interest, the investment made.

Some find The Dragons Den good entertainment, but it bears little resemblance to the reality of finding finance for small businesses in the real world. Most owners don’t even get to the stage of having their requests looked at, much less meet an investor, because they’ve simply not written a good enough business case.

Well written business plans can attract investment, and fortunately there are experts who can write the plan for you whilst you focus on running your business.

Defining Business Success

I was struck by the following quote from Robert Brault, writer (b. 1938)

“If a rabbit defined intelligence the way man does, then the most intelligent animal would be a rabbit, followed by the animal most willing to obey the commands of a rabbit.”

It made me think about how we define success. For many people in business success is seen in terms of measures such as sale growth, profit, cash, and in lots of bigger organisations it’s growing your own little empire. Defined in those terms “success” is often achieved at a cost to others; those within the business and those in the family or close friends.

I’m not proposing that we all become tree huggers and spend all our time worrying about “work life balance”. Rather I’m suggesting that for all managers, but especially for business owners, we look at the broader measures of success that include achieving both business and personal goals.

As every business owner knows starting your own business takes many hours and lots of effort to achieve success, and most of us appreciate the help and support our nearest and dearest give us. There’s often little thought given at that stage to long term goals or to what we will in the future see as business success. But don’t we all want to see our businesses achieve stability, and increase in value, whilst having the time to enjoy the fruits of our labour?

I suggest that the only way you’ll achieve real business success is to develop a team around you that’s well trained, competent, and capable of running the business when you’re not there. Look at any self-made multi-millionaire and you’ll see someone who has recognised the need to employ experts who are motivated to take the business forward. They have recognised that no-one can be good at every aspect of business and so to build stability, long-term growth, and therefore value into their business they need to develop a management team.

For owners the result of business success is that in their personal lives they have both the time and the money to enjoy their leisure pursuits. And for those of us who work to live rather than living to work that’s a true measure of business success.  

The value of a brand

I was asked this morning about the value of a one-man business, and that led to an interesting discussion about micro businesses in general. In particular I was asked about the value of Intellectual Property Rights (IPR) in micro businesses.

For most micro businesses any IPR will comprise the Trade Mark(s) provided they are properly protected, and the brand image. Occasionally there will be registered designs and copyright manuals and training matter.

Whatever the IPR it only has any real value if it contributes to the profitability of the business. It’s any intangible asset and in assessing the value of a business it, like any tangible asset, is only worth something if it’s generating profit, otherwise what’s the point of owning an asset?

Let’s assume for the moment that a business is making a profit; what’s the value of the brand? Micro businesses can’t hope to have brand recognition like Cadbury or Coca-Cola for example, but what they can do is to mirror the attributes that give big brands their national or global recognition.

They can become recognised as having expertise in their niche market, for making high quality goods, for delivering excellent service, for delivering their goods and services in a timely fashion, and for giving value for money. All of which develops reputation and for a small business that’s the equivalent of brand recognition; being known in your region or niche market as the “go to” business.

Of course the only real measure of value of anything is what someone will pay to acquire it. With a large business it’s normal for most staff to remain in post after the shareholders have sold and gone, and so the skills and expertise remain post-acquisition.

For the micro business, and especially the one-man business this is not the case. But that’s not to say there’s no value in the “brand”. The trick is to work out how to maintain reputation post-acquisition. The new owner has acquired the business’s clients and will want to retain them, and that almost inevitably means an extended handover period, and a deal that’s structured so as to retain the outgoing owner’s commitment throughout the handover.

So, whatever the size of a business brand is an important factor in determining the value of the business.

Investment for SME owners

A new TUC report deals with the lack of investment in UK industry. Now it’s not often that I see eye to eye with the TUC General Secretary Brendan Barber, but in introducing a TUC report on the banking sector he said: “Much of the media and political debate around banking has been on top bonuses and preventing another financial crash.
“But while these are both important issues, people are more concerned about jobs, better wages and healthier businesses – and banks have a vital role to play in creating all this.
“Decades of under investment, compounded by banks’ poor track record of lending outside of real estate and finance, have left the UK economy dangerously lopsided. Our economy is far too focused on finance and banking, and in the South East.
“Greater lending to SMEs and support for green investment is vital to our future economic prospects but our current banking system is woefully ill-equipped to lend.
“Bold new ideas are needed to reform the banking sector so that it returns to its proper place as the engine of wider economy growth, and not as the cause of an economic depression.”
All valid points, but I would add two more comments. First is that many SMEs are woefully bad at preparing their companies for investment and putting together coherent business plans that will attract investment.. Put this alongside the fact that all banks have tightened their lending criteria and it’s hardly surprising that most banks are missing their lending target. I can help with that
Secondly, business owners should be aware of alternative sources of funding. As a consequence of banks tightening their lending we have seen the emergence of new and inventive methods of funding for business (and for the domestic market). If your bank won’t play ball it’s worth taking advice about these alternative sources.