There are a few factors used in evaluating the credit risk of small businesses, and it is crucial that small business owners know these factors.

Understanding what these factors are will lead to a greater chance of securing credit. These factors have been determined as a result of a two-year study with more than 400,000 participating businesses conducted by Experian. The factors are: how well the business is managed, whether derogatory accounts are present, the target market, and, although not explicitly stated, a personal guarantee.

*Business management and derogatory accounts:

These two factors seem to coincide with one another. According to the study conducted by Experian, a well-managed business was one that suffered no or very few derogatory accounts, delinquencies, bankruptcies, tax liens, judgments, etc. These factors are all contribute to Small Business Credit Scoring (SBCS), which is a technique used by nearly 90 percent of all small business lenders.

Like other credit scoring, SBCS does not eliminate risk. A SBCS does show indicators that make the potential for loss more predictable.

When recognizing the probability that a business will default, lenders are armed with the ability to continue to reduce the risk of potential loss. If a business has little history with borrowing, a strong outline in the management structure and projections of the company in the near future will be a close substitute for the preceding factors, but is not a guarantee.

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As indicated in a prior blog post, effective management of an organization requires knowledge of the four functions of management: planning, organizing, leading and controlling.

One of the biggest problems for both start up entrepreneurs and business owners in the growth stages of business is organizing.

Organizing is the allocation of resources and establishing procedures for accomplishing company goals. Unfortunately, many small business owners either do not allocate the time, or do not pay attention to the need for organizing. Where are the receipts? Do I have a job description for my employee? What are my employment policies? These are only a few of the questions that regularly come about during the early stage of the business.

Items such as sales receipts and expense receipts are necessary for profit and loss statements, yet many times I have heard accountants say “my client needs to keep the receipts.” Establish a formal or effective informal method of categorizing documents and keeping them to support year-end financials.

Another problem affecting organizing is lack of a specific description for the position of the employee.

Often, I have heard employees say, “I really don’t know what my job is,” or, “ I had an interview, but I didn’t know what the owner wanted me to do.” Even though the business may only have one or two employees, it would be helpful to have a general written description of the job. This helps communication and morale.

There should also be a written document on company employment. It does not have to be extensive, but should include work hours, absentee or late policy, overtime, and overall behavior at work. When I review this item with entrepreneurs, a number of them indicate, that they should have one and have been planning to write one, but it has never happened.

Good organizing helps good management.

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At a recent SBA Resource Conference conducted on the Catonsville Campus of the Community College of Baltimore County, attendees were informed about a program conducted by SBA known as the HUBZone.

The HUBZone program helps small businesses located in distressed urban and rural communities known as Historically Underutilized Business Zones have opportunities to gain access to federal set aside contracts and sole source contracts.

There are several requirements for eligibility including that the business must be located in the designated HUBZone area and that 35 percent of the firm’s employees reside in the zone and have lived in the area for at least 180 days, or are currently a registered voter and intend to live in the area indefinitely. Obviously, these businesses must also meet SBA size standards and be owned by a United States citizen.

Since there are several places in the Baltimore Metropolitan area that qualify as HUBZones, businesses located there should pursue government contract opportunities.

Click here to see if your business is located in a HUBZone, or for more information on the program.

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Good management skills are essential for the success of small businesses, large businesses and any formal organization. The basic functions of management are planning, organizing, leading and controlling. For many small business owners, there is always a shortfall in one or more of these functions.

The function of planning involves establishing long-term and short-term goals and the objectives to attain the goals for the direction of the business. Available time to sit down and establish goals and understanding future trends are necessary, but does the average small business owner do this?

How about organizing: Where are the important documents? Is the equipment properly maintained? Does the business respond to customer needs efficiently and effectively?

Leading is perhaps the most important function for any entrepreneur. Does the entrepreneur have the skills to influence employees to be motivated to achieve higher levels of performance? Are employees properly trained ? Is there effective communication? Do employees feel a sense of trust?

With controlling, it is essential that the small business owner check on goal attainment work on a budget and adjust to changes in the economy.

All managers and business owners must engage in these functions on a daily basis. Trying to improve management skills for the entrepreneur should be an ongoing effort.

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In trying to increase opportunities for small business development, it might be helpful to understand the impact small businesses have on our economy. While we constantly hear about the Dow and Standard and Poor’s analysis of major publicly traded companies, there is no real index of how small businesses are performing.

However, our economy is very much dependent on the success and growth of small businesses. According to current statistics, there are approximately 29 million business entities in the United States. Of the 29 million, it is estimated that 90 percent of those businesses are considered “small.”

What is the definition of small? Some academics might say businesses with less than 50 employees, some say less than 100 employees and some say less than 500 employees. The United States Small Business Administration has a specific definition for businesses seeking loan or government set aside contracts. SBA’s size standards are based on the North American Industry Classification System Codes. In addition to meeting the industrial standards, the company must be independently owned, cannot be part of a larger enterprise or a company that sells it stock to the public and cannot be dominant in its field of operation.

However, regardless of the definition of small business, it is vital to note that small businesses contribute significantly to our economy. Approximately half of the United States’ gross domestic product is provided by small businesses. About half of all private sector jobs are provided by small businesses. Every year there has been an increase in the number of start- ups, which contributes to new jobs and many workers find their first job working for a small business.

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When I joined the United States Small Business Administration a little over 40 years ago, there was no demand for business plans, no mission statements, no demand for goals and objectives.

Few colleges or universities at that time were offering courses in small business management. The word entrepreneur seemed to be a secret term with almost no definition.

Gradually, the SBA and the commercial banks began requiring business plans. The SBA began offering workshops in starting and managing a small business. Many of these workshops were conducted by SCORE, the Service Corps of Retired Executives, and the faculty at local colleges. Gradually, academic institution began offering credit and non-credit courses in small business management.

Today, entrepreneurship is a universal curriculum in academia.

Offering assistance in preparing business plans is a major factor in the development of startup businesses and their growth stage. As the director of the Enterprise Institute at the Community College of Baltimore County, I speak to about 15 to 20 potential entrepreneurs each month. Many of these clients are current college students or persons between 19 and 30 years of age.

In surveying students each semester as to their goals, the number of students who want to own their own business and who already have started one is really satisfying.

While the business plan is the work of the entrepreneur, it would be most helpful if the professional providing assistance would be familiar with the plan. Lawyers, accountants, insurance and commercial real estate agents should be familiar with the plan. We have seen problems with partnership agreements, overstated sales forecasts, under-priced insurance, wrong locations based on target markets.

Many of these mistakes could have been avoided had the professional taken the opportunity to review the plan and consider themselves part of an advisement team. As organizations providing potential business owners with advice, we always suggest the business seek good caring professionals who will understand the business and its purpose.

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