Small Finance Companies: What to Know Before You Grow
David Helmes, senior vice president of FGI Capital, outlines what a small finance company needs to be aware of before it can really start to flourish.
In the days before the financial crisis of 2008, small business loans stood at USD317 billion outstanding. Fast forward to today, and that number has fallen to USD289 billion. For businesses looking to borrow, the crisis never ended.
With crisis, though, comes opportunity. As big-bank lending shrunk, the chance for smaller lenders to step in and fill the gap has grown considerably; but the need for small-business capital doesn’t guarantee success for smaller finance companies. What might help? Ask yourself a few basic questions before venturing out:
- What’s my niche? In a market crowded with lenders, find where you fit in. Chances are you’re the welcome alternative to banks that simply aren’t interested in lending smaller amounts, or don’t have the appetite for a particular credit profile. Often, you are the ‘can do’ for businesses that are used to hearing ‘no’ from traditional institutions.
- What sets us apart? Now ask yourself what you can offer that many others can’t. Often the answer lies in delivering a complete line of financing beyond just loans: By communicating to businesses your ability to offer creative financing solutions, your chances of gaining new clients should improve tremendously.
- How do we want to be perceived? Once you’ve identified your market, you’re ready to create one of your firm’s most vital assets: your brand identity. For example, you are not just that lender offering a wealth of solutions, you are the lender who will work harder than others for your clients. Maybe you want to be known as a specialist. Be sure to decide, and then communicate it to the market place.
Next you need to focus on operations. As varied as small finance companies can be, the successful ones share some things in common:
- They find the right people: Look for employees who understand and are used to dealing with different kinds of financing. In addition, a small-to-midsize finance company may do well hiring workers who are used to smaller work environments, which tend to be more flexible.
- They look before they lend: Successful finance companies know how to manage the deal flow, underwrite the credit, and deliver results. The rate at which new lending proposals are processed is a key aspect in this competitive marketplace. Keep in mind that, as eager as you may be to take on new business, you have to first make sure you underwrite the risk and have the resources to execute.
- They take full advantage of technology: Management in the digital age means you can hire underwriters in Chicago to support your sales staff in Miami, who in turn report to headquarters in Dallas. This makes either approach to doing business – satellite office or centralized – a viable option.
As you plan your growth strategy, it’s important to consider the type of equity and leverage you obtain to grow your business.Most new companies finance themselves through either equity or debt, and while both have advantages, it’s important to consider their drawbacks, too. Equity financing perhaps seems less risky, as the money doesn’t necessarily have to be repaid; however, your investors will require you to give up at least some ownership and a percentage of your profits, which in the long run could cost you more. Debt financing must not only be repaid, but paid back within a set amount of time along with certain limitations and restrictions. Furthermore, your assets are pledged to the lender as collateral for the loan. While both can be deemed viable options, both need to be reviewed and discussed in detail as to which best fits your growth strategies.
Once you start growing, stay flexible. You will likely find that the processes which worked when you started your company could become obsolete. While this may lead to some growing pains, your willingness to adapt and change will help you evolve an efficient work process. Another piece of advice for growth-oriented lenders: put capital preservation ahead of capital pursuit. This can be accomplished by trying to get deals credit-reviewed upfront, and developing a consistent portfolio management process throughout.
Last but not least, another major component of success is finding the all-important business development officer (BDO). Initially you may handle your company’s new business development, but many do-it-yourself types look for their own replacements as soon as possible. What’s the key trait of a new BDO? Many say it’s the ability to source, solve, and execute. The key is to find someone who is knowledgeable, personable, enjoys networking, and leaves a lasting impression on prospects.
Growing as a small finance company isn’t easy, but with the right blend of risk, operations and people, you will soon find yourself building a foundation for success – along with plenty of new business.
David Helmes
Senior vice president
FGI Capital