Small and Medium Businesses (SMBs) are the most unappreciated segment of the economy. Most people somehow forget that all large businesses started somewhere. This is even more prevalent in today’s markets given the rapid rise of startups.
Most people in the financial sector frown upon SMBs simply because they are not savvy. They are not large with a fully equipped finance department and neither have they come up with a unique solution like tech-startup. We see them as the problem child of the economy, with high rates of failures and defaults. Yet, SMBs are the lifeblood of any economy and over the last five years, SMBs have grown at a phenomenal rate. In 2019, 6.3million businesses were launched in the US alone.
There’s a whole subset of the population who no longer aspire to the nine-to-five lifestyle. They want to realize their dreams as business owners. Some of them go on to become freelancers. Some of them aspire to Mark Zuckerburg with the next big tech-startup idea. Yet, most people who start their own business, are entrepreneurs with solid business models and less-than-glamorous offerings. They create real value products that are required for the economy.
What is the difference between a Startup and a Small Business?
Put simply, startups are usually characterized by unique ideas, high growth potential and the ability to scale up quickly. A small business on the other hand, is practically everything else. Your local coffee shop, your favorite bookshop and even your hardware supplier.
The Failure Rate is Shocking
According to the SBA, almost 20% of small businesses fail in the first year with over 50% failing in 5 years’ time. So if you think you’re over the hump because you’ve survived for the last 5 years. Think again.
The truth remains that they are still the most neglected subset of the system, with high rates of failure that don’t seem to be plateauing.
I’ve worked with hundreds of large companies during my banking career. I’ve advised them once they were big and functioning. So, it’s only when I started consulting on my own that I came across SMBs. I realized that here was a segment that desperately needed the help that larger banks or capital firms were not willing to serve. Not only could the SMBs not afford their services, they couldn’t understand their offering. These established companies will spend hours advising and teaching larger organizations on how to manage their capital and resources, and the chances are the larger companies won’t even listen. Yet, they will look at smaller businesses with contempt and wonder why they don’t know any better. Bankers can be vicious people.
I can’t claim to be a full-blown expert but from my experience in advising small business owners over the last few years I’ve come to the conclusion that there three main areas where small businesses need help.
Access to Education
Small business owners are brilliant at what they do. They know their line of work and the technicalities that go with it. Take a bakery for example. The owner probably makes the best cakes in town. He knows exactly the right amount of sugar, flour, butter and icing he needs. But, when it comes to managing his cash flows and to mitigate potential risks, he’s not too savvy. He knows about social media, but he’s not adept at placing ads or managing promotions.
One could argue that my small business owner is a baker so why can’t he just hire people to do that for him? The simple answer is he can and he should. However, that doesn’t mean that he shouldn’t know what is going on in his own business. For a company to run like a well-oiled machine, all the cogs need to fit into place and the owner should be the one running the machine, not only looking at making cakes.
So the idea of consulting with small business owners is more to educate them. You’re not there to throw a bunch of jargon at him and tell him he has a problem. You’re there to work with him through the process and educate him along the way.
Access to Talent
SMBs don’t have a lot of money in the beginning. Most owners start with hard earned savings and it’s a while before they start turning a profit. Naturally, hiring people with high salaries becomes a challenge. No one wants to leave business school, only to be working for a quarter of the salary they would normally earn at a big corporation. As a result, small businesses don’t have their pick of the top talent.
It’s okay to hire people who don’t have all the credentials. That doesn’t mean you can’t hire talented people. Investing in employees is important and there are plenty of talented individuals out there who would rather work for a small company and learn than get lost within a massive organization. Working for a small company has so many advantages - you take on more responsibility, you learn more, you get to the top quicker and there’s always less politics - SMBs need to learn to make the most of this.
Small business owners also need to pay attention to their soft skills. Having good ideas doesn’t make you a good leader. A person can be great at deal making but terrible at inspiring people. Most people think entrepreneurs are charismatic. The truth is, more businesses fail because the entrepreneur fails to lead. Having a great product idea can help you build a business but it won’t help you retain talent. Either you have a mass exodus of good people or, you begin to have poor controls, revenue leakage and fraud. Disgruntled employees are bad for business.
Access to Finance
Small businesses usually don’t have access to venture capital like startups do. Their option remains traditional banking or private investors.
If you’re raising money for a small business, you’re basically saying trust the owner’s instincts and expertise, versus buying into an idea that could explode like startups. It always takes time for SMBs to turn a profit. If an owner was swimming in cash, she wouldn’t be coming to you in the first place.
This is where we need more specialist lenders to step up. Every bank has a SMB financing division, and most of them have ridiculous expectations. They ask for everything short of your first born. More banks drive SMBs into bankruptcies than would otherwise take place.
Most of the people who work in these departments are not happy bankers. It’s a challenge for most big banks to attract good talent to this segment because they’re not exactly working with the glamorous corporations nor are they selling private banking to high net worth individuals. As a result you have miserable employees looking after customers who need the most help when it comes to financing. They lack knowledge and motivation.
The alternative to specialist lenders are then consultants who step in and actually advise the client instead of simply being a loan broker. The idea is for consultants to prepare the client to a point where getting financing should be a cinch.
It’s a vicious cycle. Without the proper guidance / support, SMBs are bound to fail. And, lenders don’t believe in SMB’s because of the failure rate.
Working with small business owners is not easy. The owners get very protective of their business and defensive about their decision-making. When someone has built a business with some success, the last thing they need is for a stranger to come and tell them that they’ve been doing it all wrong
We need more consultants to pay attention to the small businesses. We need more people to stop chasing the glamour and the big bucks. The truth is, with bigger companies, the big bucks will only come once. A large company may give an independent consultant a one-time chance to work with them. More often than not, they will revert to the big boys of consulting when they need something major done because they feel there’s a certain prestige that comes with the brand name, even if your work is better.
Yet, working with SMBs can be very rewarding. There’s something beautiful in helping a smaller company grow and realize their full potential. An owner needs to understand what is happening in his business and he needs you to educate about running it efficiently. Ultimately, you bring the expertise and helping him will only enhance your stance to build a long-term partnership.