small business finance company

small business finance company

Strategies for Small Business Finance Companies: A Comprehensive Guide

1. Introduction to the Small Business Finance Industry

The small business finance company industry fills an important gap in the overall commercial finance structure of the U.S. economy. The lenders who are most interested in this sector are the group we shall call small business finance companies, which are regulated and licensed by the various states. While many companies, particularly those in states which have established a helpful regulatory climate, are wholly owned by the private equity of a small group of major stockholders. Such companies operate under various other regulations. Information is also a major and related problem for prospective borrowers who may not wish to reveal their financial problems.

The small business finance company industry fills an important gap in the overall commercial lending structure of the U.S. economy. Businesses of all descriptions make use of financing by small business finance companies. Over the past, surplus funds in private pension funds, in endowment funds of universities, in insurance companies, and in many other institutional types of investors have discovered the small business finance industry and found much that was attractive. Regulation is a major constraint on the growth of your business and will be the subject of Section R.

2. Key Financial Concepts for Small Business Finance Companies

The business of a small business finance company is to provide funds to customers on a contingent repayment basis. Risk management is engaged by making sure that the funds are collected. Conventional debt capital—funds provided to the business by suppliers of capital as borrowers—plays an essential role in the collection process. When debt capital is properly structured and provided, there are fewer personal financial risks to the company owner, and the protection of business and personal credit ratings is enhanced. The quality of the business environment is also enhanced, for the claims and collections risk is transferred to well-informed financial markets.

Small business finance companies require stable cash flows and reasonable capital accounts to grow and prosper. The biggest difference between a finance company and other small businesses, however, is the manner of engagement in the financial activities that generate cash flows. It follows that owners of finance companies should understand the jargon and practices that are the domain of commercial lending and leasing activities. This chapter is an introduction to the borrower/other party, financial statement, and performance concepts that form the infrastructure of the business. Characteristics of conventional debt capital are also presented.

3. Risk Management and Compliance in Small Business Lending

While this part of the business is at the farthest reach from where the sales are made, it has the power to halt or delay the origination process in situations where compliance seems unachievable. It can also damage a portfolio by insisting on high-risk weights or large non-quantifiable reserves. Since ideally the compliance function serves as the finance company’s first line of defense against legal and regulatory action or censure, one must be prepared to weigh and balance the detriment embedded in the restrictions faced by the business side against the risks inherent in the determination to proceed outside of those guidelines.

The small business finance company must take a proactive and opportunistic approach to risk management and remain committed to a sound and researched risk management strategy. Further, the risk management strategy must coincide with a well-thought-out and conscientious adherence to diverse regulatory and compliance requirements. It is the company’s compliance department that must be involved in and in agreement with, or at a minimum, aware of the risk that others in the organization are willing to assume.

4. Innovative Technologies and Trends in Small Business Finance

Digital technology has changed the relationship between customers and finance companies. For the first 100 or so years in the development of these institutions, the method of delivering service and the type of service offered made the resulting results with the customer rather transactional in nature. You have a need; you come to the bank for help to fulfill it; the bank meets your need by providing its depth investment assessment and pricing before providing the capital to help fulfill the demand need. And then you will go to the bank on the next need to arise. Digital technology caused a boom in the extraordinary choice surrounding who can provide what service; it has laid a thin veneer of friction when it comes to shifting and buying ideas, and Tobin’s Heredil is unpaved. The result with the customer across the value chain is now more likely to be a dialogue than a set of disconnected transactions.

Digital technology continues to revolutionize the way financial services companies operate and do business. Digital technology has changed the relationship between customers and small business finance companies, redefining which companies will be successful by giving a new set of competitors new capabilities to provide service. The speed and direction of change have been primarily driven by two factors – the emergence of a digitally savvy customer base and the continuing evolution of new and innovative technologies that have completely changed the game.

5. Building a Sustainable and Profitable Small Business Finance Company

In a remarkably high percentage of cases, state banking agencies surveyed levy the exam fees only if they ‘find’ something wrong with the books, often an ‘error’ that is not present. Bankers should recognize the double-digit nature of these fees charged as a complement to your public service and should show some gratitude toward their customers.

Even though you are the underwriter with ultimate responsibility for approving a loan, it may make sense to allow loan officers to approve a specific loan transaction up to a certain level of requested or appraised value based on a well-documented set of guidelines.

Substantial amounts of administrative and legal fines can be conserved by having properly trained and empowered marketing personnel. After netting out those year-to-date charge-offs that will still be on your books months from now, your current charge-off rate is a more reliable indicator of future bad loan costs than your current delinquency level.

When conducting mass marketing all over town, not only may you have to talk to as many as 10 potentially unattractive lies for every one attractive truth, you have to offer the same amount of management attention. These clients, whether they take out a loan or not, are a major sink of your production resources. High rates of promotions and requests for applications are not analogous to high rates of loans. High rates of personal meetings and applications by the business or its officers are the best indicators of a successful marketing effort.

By adopting a bulletproof marketing strategy, you can dramatically increase your production of balanced commercial activity for those months when a segment of the market is under stress. Your marketing strategy must target those potential borrowers who have the best chance of getting an appropriate loan from you. A complete direct mailing list used judiciously can be the most productive marketing tool available.

Strategic Partnering: Few out of a hundred companies can solve their clients’ total range of capital needs. Partnership with a company synergistic to your business can make it possible to do just that. Potential companies would include factoring companies, specialty asset-based lenders, purchase order funders, and specialist long-term second-tier asset-based lenders. You are better off concentrating on one or two forms of finance where you do not lack the optimum expertise and capacity to invest in operations. Spreading yourself too thin can compromise your charter in other areas.

5.1 Business Strategies

We are now ready to summarize the comprehensive guide with a bullet list of principles and strategies for building a sustainable and profitable small business finance company.