Jukka M:

Financial crises – a financing disaster for small and medium size companies?

Financial crisis has been in topics since fall 2008. In short a lack of trust between financial organizations caused a fall for few bad apples. It should not be news that the markets corrects itself –  sometimes drastically.

The first impressions were that this is not going to affect Finland, were the financial situation was stable and controlled. This was even stated by the Prime Minister Jyrki Katainen. Something he probably regrets for a long time.

Since then the situation in financing has nearly normalized in Finland. Everything should be in order and business should bloom in steady and well financed environment. For the large Finnish corporates a large variety of financing methods are available and the market is full of successful bond issuers. But this is not the case for smaller companies. It is getting more and more difficult to find finance for investments and working capital needs.

This is very harmful for the Finnish economy thus small- and medium size companies are very important as employers and taxpayers in the domestic market.

The economic factor resources can be split into four categories: land, labour, capital and enterprise (Begg & Ward, p. 22). Scarcity in one of these stunts the growth. As growth is necessary for our wellbeing, despite of the popular slow-life and back-to-earth movements, something must be missing from the equation?

For the SME companies the world has changed permanently since 2008. No more easy and hefty finance from the banks. This change was sudden and significant – something that the companies could not prepare for. Why? For the last few decades, companies have been able to sing the orders before finance decisions,  cheap money was available from several banks and investors. The decision making generation has changed since 70’s when an investment was not something a company could take as granted until the discussion with the bank was cleared.  At that time lists were held to line up the companies and financing needs. A company could face a 6 month waiting period until the list was cleared and your turn came.

This is not the case today.  Solid and good investments will find adequate finance. But how to decide which is solid and good?  A SME company has seldom resources or skills to produce economic forecasts to make the investment more predictable in terms of repayment or increase in revenue. A good and solid forecast is a necessity when the investment is presented to the bank.

The right figures will help the case, but are not the key to success. The company needs also solid story telling. Business valuers need a consummate understanding of business and finance and in particular detailed knowledge of the industry sector in case (Clive Marsh, p. 235). The list of details needed is very long. Anything from audited financial statements to aged debtors lists, details of contracts and agreements with suppliers… Somehow the competitive edge of the company must be visible and easy to understand.

SME companies might be good what they do, but lousy when they are selling their idea and the options they might have. To be able to give a through picture of the market and the investments needed – with the alternatives, gives a professional picture of the company to the investors (Niskanen & Niskanen, p. 206). It also gives the option for the investor or bank to value different options as plan b – if the market changes and the forecasts don’t aply. It’s an important part of the risk analysis needed for the financing decision.

So what I am trying to say is that in order to be successful in applying for a loan a company should concentrate selling their idea and method of being successful instead of just posting an application.

There are six key elements in strategic selling: buying influences, red flags, response modes, win-results, ideal customer-profile and sales funnel (Henry Cockerill, p.43). All these are valid when applying for a loan. For details you must read the book, but as an example, the ideal customer-profile.  If your business is not shipping or something else that banks have balance sheet limitations how much they can finance, it’s all about individual decision making.  Prepare a professinal approach, solid and in-depth numbers and a believable story of successes. A financing or investor discussion applies the same rules as a any direct discussion and follows the same rules: preparation, opening, need and problem identification, presentaton and demonstration, dealing with objections, closing the sale and the follow-up (Jobber & Fahy, p. 281) At the end of the day, with a little more preparation,  it’s easy to stand out from the average-application pile.

Source material, literature:

  •  Henry J Cockerill, The New Strategic Selling. 2004
  • David Begg & Damian Ward: Economics for business. 2009
  • Clive Marsh, Mastering Finacial Management. 2009
  • Niskanen & Niskanen, Yritysrahoitus. 2007
  • David Jobber & John Fahy, Faudations of marketing. 2004
Advertisements
This entry was posted in Corporate finance. Bookmark the permalink.

4 Responses to

  1. I’ve been working with SMB –companies for near twenty years. It has always been tough, but for different reasons. The trend to day, and I believe, for all future is that a company (regardless of size) must be able to adapt new ways with an increasing speed. If you think that what you did two years ago is still valid today, then also you thinking are outdated.

    There is money out there for the companies to grab. But you need more than a good idea to get it. You need a solid business plan and you must be able to sell the idea.

    There is also many new ways to get some funds. As a very good example is the Finnish movies Star Wreck, Iron Sky and now announced new movie Iron sky The Coming Race. They get their funding from the supporters. With donations from $10 to $25 000 you the to read the final draft of the script, to get your company as a “presenter” of the upcoming movie.

    Read more:
    http://www.indiegogo.com/projects/iron-sky-the-coming-race

    If you have a good idea for a product and the skills to sell it, you can get payment from customers before you even have it made.

    Use your imagination!

  2. jhaikio says:

    Well this is very interesting indeed, also your comment Niklas. Great post. Thanks This blog was very informative and knowledgeable. Free money will continue to flow out of the bank because money flowing to stronger economies,investors want good profit or they want support the new, if you have a good idea, you can get money from small investors (like Iron Sky). But stil you need “preparation, opening, need and problem identification, presentaton and demonstration, dealing with objections,…” like Jukka wrote.

    Excellent blog

    Jari

  3. nanagraf says:

    Well, I have to say that this blog is great. Financial crises is always tough for the small and middle size companies because they always have to fight against different issues like banks which is demanding credit payments, investors, who’s willing to leave companies and last but not the least the employees of the companies who have to go when the companies can not guarantee enough work for them. You can say that financial crisis is like a visiting of the ripper for the small and middle size companies.
    Maybe if it is possible the European Union has to support small and middle size companies. Especially those companies who have the potential to growth. Anyway there are a lot of good stuff in you blog that I liked. Great job.

    Best regards

    Nana

  4. kniemela says:

    This is real competently and professionally written. It couldn’t help noticing how familiar you are Jukka with your topic and your personally interest in the matter. The blog is well-structured and background information has been sought for so much! I believe that your blog is such that many will read it with interest for sure.

    Thank you Jukka!
    -Katriina

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s