Savvy business entrepreneurs often feel that financing adds additional cost and 
try to stay away from the need of financing. It is normal to think of financing as a cost center. However, the very successful entrepreneurs that grow their businesses beyond $10 million typically understand the value of financing. In fact, financing is often used to grow the infrastructure and improve the overall value of a business.
On the other hand, many businesses do not qualify for traditional bank financing because of the bank’s stringent lending requirements and the business principles? own credit standing. Even when the business qualifies, it often does not receive a large enough line of credit to properly grow. Alternative financing such as factoring purchase order of financing, trade financing are often available as short term working capital to businesses whether they qualify at a traditional bank or not. These short term working capital lines of credit for business with strong management and purchase orders from strong clients can make a large difference in the overall sales volume on a yearly basis and the profitability of the business.
PMF Bancorp has financed businesses for over 30 years as a commercial lender and we have seen entrepreneurs decline financing at the expense of their growth many times. PMF Bancorp has observed that there are large costs to not having the right financing in place as well as forgoing financing that albeit, may not be perfect but allows the business to continue its growth momentum.
The following are the cost of not financing when growth is available:
- Loss of sales
- Inability to service large customers
- Inability to take on new customers
- Inability to buy new inventory
- Inability to hire proper talent
- Loss of enterprise value
Small Business Financing
Some of these costs like not having enough working capital or declining financing are obvious but I would like to discuss the damage that number 6 causes which most entrepreneurs do not think about because they are caught up in day-to-day operations, working capital needs, and customer service issues. The dream of many business owners is to eventually build a business that has value and that can be sold for a large profit but few entrepreneurs with fast growing businesses take the time to build the infrastructure or think of the strategy that maximizes the enterprise value or shareholder value. This is often and exercise that corporate America takes because of the rigorous quarter-to-quarter reporting of Wall Street, but small businesses do not have this oversight or push for quarterly reporting. In fact smaller businesses often run emotionally and based on decisions that are made quickly.
Small owners of businesses should realize that the value of their business is often charged by the size of their sales volume even if profitability is not perfect. Businesses that are very profitable but small are of no use to buyers in most cases so understanding enterprise value can only come when the small business owner starts thinking like corporate America. It is important to achieve a critical mass in sales for smaller business so that it can make the cross over to a larger businesses. Only then will you be on the road to creating enterprise value for another buyer.
