"One of the worst mistakes you can make is to borrow more money than you can pay back." John Marder- Banker.
introduction
In the world of business, there are a series of decisions that are inevitable, regardless of the sector in which the company operates or the main activity in which it is dedicated. As it is known, from own or other people's experience, one of these decisions faced by the person in charge of any business (general manager, finance manager or administration manager, finance or simply the key factor that is the entrepreneur) is that of establish the procedure and obtain the necessary resources to finance (via loans) the activities at hand, both existing and future.
In this sense, comments are frequently heard of the type of "the healthiest way to grow in the business is, exclusively, through the capital generated by it", or "the less debt or credit (change of present wealth for future wealth) we have, the better and more secure we will have the business ”. Which leads us to question ourselves: Is the premise that indebtedness is an evil that must be avoided or at best tolerated only when necessary, true? Will financing (own or others) be the panacea of the problems that overwhelm the companies?.
Let us therefore enter without further ado to unravel and analyze what concerns this exciting topic such as debt for debt.
II. Basic definitions
i) Finance
Provide the necessary economic resources to be used in the acquisition of productive assets.
ii) Debt
The debt represents something that must be repaid, it is the result of the loan application.
ii) Financing a debt
Take money on loan to pay a debt.
iv) Debt financing
Based on the aforementioned, we can refer that it is the action of accessing money as a loan (with or without collateral), the same that constitutes a promise of future return (via interest or royalties).
III. About business debt financing
3.1. Possible ways to obtain financial resources to create and maintain the company
Obtaining resources is a necessity not only when the activity begins, but it is usually an ongoing necessity. Thus, we must distinguish between debt financing, in which the entrepreneur agrees to repay the amount due plus the stipulated interest, and financing by own resources, in which contributions of funds are received, transferring part of the shareholding of the company, with the possible loss of control that this may entail.
The financing of the company is the set of economic resources that are made available to it for the acquisition of the goods and rights (the Asset) that are used to carry out its productive activity. The financial structure or LIABILITY is what finances the economic structure or ASSETS.
3.2. Tips for financing
Basic to be clear about what you want to finance:
As external resources we have:
- Long-term debts: Fixed assets.
Ahem. Issuance of debt, Bonds and obligations, Long-term loans and credits, leasing and renting.
- Short-term debts: Initial purchase of merchandise, or cash mismatches as a result of the start of the activity.
In financing, suppliers grant loans to commercial creditors (also, credits, commercial credit -discount, factoring, confirming -) with the deferment of payments to be made.
It is recommended to accurately quantify the financing needs - the amount of money to request - to avoid not being able to meet the entire planned investment or pay interest on unused amounts.
It is very necessary to foresee the period of time in which the borrowed resources can be taken, avoiding late payment, which is very expensive and risky.
In the cost of financing, interest is particularly relevant, that is, the price at which the financial institution lends us money (price of money).
The main barrier to entry to access debt financing is the lack of guarantees required by financial institutions to ensure the risk of default.
3.3. Liability composition (loan)
The liability is made up of two large masses:
- Own funds:
No refunds (royalties only). Eg: Capital, Founding Partners, Business Angels (capital, private technical knowledge and personal network), family, friends and others.
- Foreign resources:
Those contributed to the company by persons or entities outside the company (within the framework of a financial contract that in no case grants him the status of partner) and which, therefore, must be returned to the contributors when due.
The external financing sources include the debts or payment obligations that the company has contracted. They are used to finance the Economic Structure or Asset.
Debt financing implies, in part, the assumption of an interest or financial cost that increases the expenses of the activity and damages the income statement, and in part, the return of these resources, at one time or continuously, which can generate cash difficulties.
The difference between "own" and "foreign" is established by the fact that they are disbursed directly by the entrepreneur and his partners, or that they are disbursed by third parties or entities, with two intermediate figures such as subsidies and participative loans that we will include as own funds.
3.4. Types of debt financing
Commercial banks, public banks, financing entities, mutual guarantee companies, leasing, factoring, confirming, strengthening and debt issuance through securities.
3.5. Most common loans
- For the amortization period:
Short and long-term loan (Short-term loans are to finance Mype's working capital and long-term loans are to finance the company's fixed assets).
- By the way of formalization:
Loan formalized in policy (usual in loans granted by financial entities) or loan formalized in financial effect (eg one letter).
- For your guarantee:
Mortgage loan (guaranteed with real estate on which the mortgage is constituted; requires formalization in writing); Pledge loan (guaranteed with movable property pledged), etc.
- Subordinated loan:
Partially linked to the profit of the beneficiary company.
- Participatory loan:
It is characterized by foreseeing a variable remuneration or interest depending on the evolution of the company, to which another tranche of fixed interest can be added, independent of the results. In the event of early amortization, an expansion of own funds is required in the same amount by the borrowing entity.
3.6. Advantages and disadvantages of a credit
Advantage:
- It has a very wide use, by allowing long and short term agreements (lack of liquidity, launching of new activities, etc.).
Disadvantages:
- It has an additional cost compared to other formulas such as the loan: the non-availability fee.
- It weakens the financial position of the company.
3.7. Credit costs
They practically coincide with those mentioned for the loan. Not everyone will show up at every credit transaction. These include:
A) Initial expenses:
Its application will depend on the type of credit, the relationship between grantor and accredited, etc.
- study commissions.
- opening commissions.
- expenses of a notary public.
- management expenses.
B) Interests:
As a peculiarity, it should be noted that they are calculated on the part of money or money actually used (not on the total amount available) and are generally paid periodically.
C) Non-availability commission:
It is one of the peculiar characteristics of credit. This is a global and periodic percentage that is applied to the part of the credit that has not been disposed of. It is, therefore, a kind of interest applied to the unused part of the cash.
D) Cancellation expenses.
E) Other expenses.
3.8. Money for what?
Banks make loans almost only to companies that already have a track record in the market. Check your business plan. If that doesn't give you the answer, look it up step by step. But why do you need the money?
• To buy supplies and maintain inventory while waiting to be paid.
• To pay wages and rent.
• To purchase equipment and accessories.
• To purchase a computer.
• To buy the company.
• To leverage the company.
Priority should be given to areas where options are limited to paying in cash and reviewing alternatives where you can otherwise pay. For example, you don't have to pay for a delivery truck in cash if you can rent or lease it. Then discuss what can be collateral for loans.
3.9. Types of loans
- Unsecured loans:
• The credit cards.
• Unsecured lines of credit (such as those you receive in the mail).
• Loans made by friends or relatives.
- Loans with collateral (require goods to ensure payment):
• Mortgage loans.
• Auto loans or leases.
Some common types of collateral are your home, accounts receivable, company inventory, and equipment. Potential lenders evaluate the guarantee offered and, based on it, decide how much they can lend you. These are some key variables of the conditions in the loans that you can get:
• Number of years in business: refers to your career and is extremely important. Banks generally ask for three years; other entities are less strict.
• Company size and required amount: financial institutions differ according to the service they offer to the public.
3.10. How to get a loan?
The first thing to do is find out what your lender wants. The most common way is to ask. A better option is to consult a friend or business advisor, such as your certified public accountant.
According to bank policies, the minimum conditions or rules of the game to grant credit are:
• The company's financial statements (sustained future cash flow and its valuation).
• The company's tax returns.
• The business plan with budget or projection.
• The personal financial statements.
• Personal tax returns.
• Guarantees that cover the risks (demand risks of the product to be financed and convertibility risks of the securities that support the guarantee).
• The financial function is based on Trust and this lies in the seriousness and ability of the company to honor its commitments (Goodwill or good business reputation).
The second step is to prepare to answer questions about your company and to be ready to highlight financial performance both in the past and in the future. It will make a better impression if you analyze and know your business plan well. If you need help, go to your accountant.
Prepare to tell them why you need the money. A "because I need it" response does not inspire confidence or demonstrate an analysis of the matter. Earlier in this session various purposes were discussed. Give details. Suggest a payment plan.
Most entities offer some flexibility. Lenders like to know that you not only think about the loan, but also how to pay it back.
Getting the money is only the first step. Try to be a good customer so that you can get cooperation if you need help in the future. A good client complies with what has been agreed.
3.11. When to get into debt?
The Capital Weekly notes: "Financial wisdom recommends that all debt is good as long as it maintains adequate levels of debt / equity for the company."
Define what silver is needed for, how much the company can pay with its normal cash flow, and what impact it will have on the profitability of shareholders.
The level of indebtedness will be determined by that which the company can pay and that which satisfies the owners.
When contracting debt, it is necessary to take into account that the behavior of sales is a variable that implies risks, since its behavior can be affected by short-term situations of low demand in the economy, the thinning of the international environment or the entry of new competitors to the market. market. Therefore, it is advisable to be cautious about committing to a certain level of debt in the hope of increasing sales.
Debt financing is more related to collateral and previous credit history.
3.12. Financing of startups and new companies
Type of financing: own resources, injection of capital from partners, venture capital funds (Credit is only a part of capital and generally cannot be considered to start a business).
Reasons: A new business manages a cash flow that, in addition to being uncertain, may face negative periods. Assuming the commitment of a debt with the financial sector adds a very large pressure variable in this stage of a company's life. Furthermore, few financial institutions are willing to finance this type of initiative due to uncertainty and the lack of real guarantees on credit. When the credit is accessed, it does not exceed two years.
3.13. Financing considerations (for young companies).
• What type of financing can my company qualify for?
• How much debt can you ask for?
• How can payments be managed if the flow of capital is altered?
• What happens if the interest rate increases?
• Are you willing to use personal assets?
• Can personal guarantees be given and accepted?
3.14. Financing of companies in consolidation
Type of financing: in normal times, access to credit with the financial system is usual, negotiating preferential rates and terms of up to 5 years depending on the type of business in which the company is involved. In crisis, it is usual to resort to capital of partners, as an alternative to preserve the company's working capital without putting pressure on cash flow.
3.15. Financing of mature companies (Large-scale projects).
Type of financing: issue of shares, issue of bonds, issue of bonds convertible into shares, issue of securities. The age of the company, as well as the amount of resources required, allows for a higher structuring cost to be assumed, with the issuance of special titles that provide an adequate term for project execution.
3.16. Valuation of risky debt
A risk means the possibility of an event occurring, as well as the resulting consequences. When we talk about financial risk, we refer to the uncertainty that an investor has when he contributes resources to an investment (via debt, for example) and he is not sure about the amount that he will obtain at the end of said operation.
In this sense, the valuation of risky debt refers to the evaluation that the indebted or indebted businessman must make, regarding the possible risks that he will eventually have to face. Risks that will be related to the behavior of the market, to monetary stability, to the valuation of shares in the stock market, to the lack of liquidity, to the risk that cumulatively it has to face or is facing.
3.17. Financial risk coverage
In principle, it should be noted that the means of coverage always represent a cost that decreases the value of the investment.
When an entrepreneur seeks to achieve his financial goals, it is inevitable to incur a certain amount of risk. Risk is therefore necessary and unavoidable, however, effective risk coverage can protect and improve operational performance.
Risk coverage consists of a series of strategies that can be implemented to minimize uncertainty and failure in the face of a threat. Financial risk coverage is the use of a set of financial and commercial instruments in order to assess risk, develop specific strategies and reduce it as much as possible.
3.18. Types of risk
The types of risk include:
i) Market risk (exchange and interest). Alterations that may significantly affect the company, ii) Liquidity risk. Absence of cash for the operation of the company, and
iii) The counterparty (or credit) risk. Losing credibility as a company before the financial system.
3.19. How to mitigate the risks?
The most important thing to minimize the potential risks of financial operations is to recognize and accept the type of risk that we will be subject to. In general, the operations that imply a greater economic profit are also the riskiest.
It is always recommended to study the relationship between risk and benefit that financial operations offer us. Low-return investments, which are more stable, are generally the least risky. It is recommended to plan your investments and financing calmly, as well as consult a financial manager.
3.20. Recommendations for good risk management
In order to carry out good risk management, you must first cover the risks that the company has; Such coverage can be achieved through three main elements:
i) Contracting insurance. Which are mechanisms through which we reduce the risk of loss of the company, when an entity insures itself transmits the risk to the insurer and therefore reduces its own.
ii) Hedging operations (Forward). One risk is assumed to offset another, this type of trading is represented by forward contracts, futures and financial swaps; in all of them its value is determined by the value of another asset.
iii) The financial swaps (Swap). Operations of exchange of amounts of money at future dates at different interest rates, the company assumes debt at fixed interest and obtains profitability at variable interest, thus diversifying its risk.
3.21. Financial risk hedging techniques
The most recurring techniques include:
• Transfer of risk. It consists of transferring the risk to another party, either by selling the risky asset or by acquiring an insurance policy.
• Evasion of risk. It is simply deciding not to expose yourself to the identified risk avoiding the risky financial operation.
• Retention of risk. It is about taking the risk and deciding to cover the losses with your own resources.
Financial risk coverage has been transformed and enriched since the 1980s, both by new computer technologies and by the global financial crises that have arisen as a consequence of globalization. Some strategies will be more useful than others and will always depend on the type of activity, as well as the type of risk they are aimed at mitigating.
3.22. Steps for designing a risk coverage plan
The basic objective of the hedging operation is the elimination or reduction of the risk profile of a certain financial position. With this general objective, numerous alternative coverage plans can be designed, and to design alternative coverage plans, it is necessary to follow three steps:
i) Definition of objectives. Achievement of almost complete protection against unfavorable financial risk (premium payment) or against any price movement. Also, protection only from a certain level on that unfavorable result.
ii) Selection of a certain strategy. That is, the selection of a certain coverage objective. From the choice of this objective, we would enter into the design of a certain hedging strategy that consists of the use of derivative products (futures, options, colds, swaps) individually or in the combination of several of these instruments. This possibility is called a complex risk coverage strategy.
iii) Measurement of the effectiveness of the strategy. Periodically control the performance or response of the applied strategy, in order to make the appropriate modifications and, where appropriate, redesign the risk coverage plan.
IV. Composition of the Peruvian business sector
In the first place, for the purposes of a better approach to the subject in comment, we consider it essential to have a vision or reading of the way our national business is integrated.
In that order of ideas, we have that not only our companies in general, can be classified taking into account different points of view. Considering only their magnitude or size, they can be:
a) Transnationals.- Souther Perú Limited, Shell del Perú, IBM del Perú, Daewoo, Nestlé, Coca Cola, etc.
b) Large.- Minera Yanacocha, Gloria SA, SEDAPAL, Banco de Crédito, etc.
c) Medium.- Wong SA, COSAPI, Diario El Comercio, TV Channels, Universal Textil, Farm Industria SA, Papelera Atlas SA, etc.
d) Small and micro-enterprises.- SMEs.
In this sense, it can be concluded that the overwhelming percentage of Peruvian companies corresponds to SMEs.
Consequently, acknowledging receipt of the limited information, we consider it appropriate to approach this study in the light of SMEs, since they correspond to the most representative group of the national business community.
V. About micro and small businesses (mype).
5.1. The mype in Peru as an engine generating employment, income and decentralization
According to INEI, Mypes represent 97.9% of all companies and have managed to absorb 75.9% of employment. Even the commercial sector stands out as the main sector, followed by manufacturing and services.
A study by the IDB indicates that in Latin America Mypes represent 97.56% of all companies.
The IDB and the CAF emphasize, in general terms, that the main source of financing continues to be banks.
The number of Mypes that access formal credit in the financial system grows 26% annually, said the manager of the Commercial Division of Banco de Crédito BCP, Lionel Derteano. On the other hand, it is necessary to record that most Mype prefer to borrow from the savings banks, which require fewer guarantees.
The General Secretariat of the Andean Community of Nations has indicated that microcredit is the most expensive segment since it implies higher operating costs, due to the effort that financial institutions must make when lending small amounts to partners in which there is a high risk of default. Likewise, public banks finance popular economies through institutions that play important roles in first- and second-tier banking.
Peru has prepared an Anticrisis Plan with fiscal measures, which aims to maintain construction activity, support Mypes through COFIDE to finance activities of Mype exporters. Likewise, it promised to create a Business Guarantee Fund in favor of the Mype, which will be administered by COFIDE.
5.2. The mype according to the law
According to the Law on the Constitutional Development of Micro and Small Businesses, Mype are the economic units constituted by a natural or legal person, under any form of business organization or management contemplated in current legislation, which aims to carry out extraction activities, transformation, production, commercialization of goods or provision of services.
Microenterprise:
From 1 to 10 workers inclusive and annual sales up to the max. From 150 ITU.
Small company:
From 1 to 100 workers inclusive and annual sales up to the maximum amount. From 1700 ITU.
5.3. Participation of the mype
(SOURCE SBS)
5.4. The other side of mype
On the other hand, it should be noted that although it is true that in recent decades there has been an accelerated growth in the number of Mypes, in charge of a new emerging entrepreneur; they are very dissimilar in their dynamism and level of driving success.
Mypes are informal units, with low productivity and very little professional and modern management. Only a percentage that does not reach 5% presents an opposite and plausible reality.
The owners of the Mype (which are their self-employment) basically use two strategies: i) in addition to their economic capital, their social capital (social networks, preferably family), previous work experience is crucial (empirical learning of the trade), with only in learning the secrets of the business turn and its stages; and the recourse of informality as modus oprandi; and ii) that it is developed from a combination of work experience with professionalization of the entrepreneur, the use of more extensive networks and the application of modern management techniques.
In this sense, it is not by chance that those companies that show a better performance in terms of their management and development (measured by the productivity and growth rate of the employed labor force) are, in general, companies led by people who they have a higher level of professional training.
By the way (speaking of empiricism, informality and non-professionalization), it is illustrative as regrettably true that the abysmal distance of Image between the Chilean and Peruvian businessmen.- How is the Chilean businessman ?: i) Well-prepared professional, ii) Aggressive in business, iii) Daring, risky, iv) Visionary in investment, v) Manages cutting-edge technology, vi) Manages important capitals, vii) Demanding in work relationships, viii) Capable of everything for commercial success, and ix) Cold, arrogant and contemptuous. And how is the Peruvian businessman ?: i) Little daring to risk, lack of vision, ii) Short-term, iii) Little commitment to the country, iv) Little honest, and v) Apply unfair labor policies for the worker.
Finally, we note that not only when the company has sustained growth, instinctive (or business) methods of management must give way to urgent and unavoidable serious and professional management of it.
In addition, we present a comparative table of business and professional management, where it can be seen that while the former presents a defined performance and direction, the latter does not.
5.5. Diagnosis of mype.
5.6. Features affect the management and development of a mype.
- Concentration of ownership that requires them to obtain financial resources from third parties.
- Low participation and influence in the market.
- Low level of personnel qualification (lack of professionalization in administration).
- Little research and development of products that generate added value.
- Limitation of resources for investment in technology.
- They do not have adequate information and accounting systems.
- Decisions made by the owners are based on operational and non-strategic issues that ensure their growth and permanence.
5.7. Obstacles to mype growth
5.8. Obstacles to the professionalization of mype.
- Fear of losing control of the company by the family.
- Absence of a possible alternative profession for the owner.
- Family loyalty to employees.
- Authority positions are probably reserved for family members.
- Difficulties in delegating responsibility.
5.9. Credit offer for mype.
- Banks: Mibanco, BCP and Scotianbank.
- Second Floor Banking through microfinance institutions (Banco de la Nación and Cofide).
- Municipal Savings and Credit Banks (CMAC).
- Rural Savings and Credit Banks (CRAC).
- Small and Micro Enterprise Development Entities (EDPYME).
- Edyficar Financial Institutions and CrediScotia (Former Bank of Labor).
- Savings and Credit Cooperatives, supervised by FENACREP.
- NGO.
5.10. The mype and the indebtedness
Debts in SMEs are not only frequent in their business development, but also belong to their nature, since Jean Robidoux in his work "Les crises administratives dans les PME en croissance", refers that they correspond to the fifth moment (due to their rapid expansion, bank and supplier credit limits) of the seven crises that these companies face in their growth and development. Verbigracia:
- Launch Crisis.
- Liquidéz crisis.
- Delegation crisis.
- Leadership crisis.
- Financing crisis.
- Prosperity crisis.
- Continuity crisis.
However, it should be noted that the nature of debt financing or not, does not only correspond to the state of crisis of a company; since it can be due, for example, to the initiation of a certain project.
SAW. Conclusions
As a first point we can affirm that obtaining resources / financing for a company will always be a necessity in the development of its management.
In general, a company's operations can be financed through debt and some form of equity.
Financing can be obtained through the employer's own contributions and debt. In the first case there is no demand for repayment, although there is a requirement for profitability, in the second case there is an obligation to return these resources within a certain period and at a certain cost.
Business debt financing management must be assumed, both by debt or debt financing management policies, and by financial risk policies.
Bank financing facilities in Mype is a key factor for investments that generate financial profitability, therefore financial institutions and specifically access to credit play a central role in the growth of financial profitability of Mype.
The cost of debt is not the only determining factor to establish a correct financing policy, from the point of view of profitability; Since having a greater amount of debt carries with it an additional level of risk, which, if not managed carefully, can lead to very bad results. However, if it is used wisely, it will result in extraordinary profits for the shareholders. This will require the capacity of the management team to manage the debt.
The proper use of indebtedness is a way to improve profitability on the company's own resources and, consequently, generate value for the shareholder. As in so many other activities, the key is to successfully manage the amount of debt assumed, for which it is essential to maintain a proactive attitude based on knowledge of the business and perspectives on its future evolution.
To achieve this adequate management, all management team must analyze and make decisions on aspects such as: real cost of the debt, nature of the interest rate (fixed or variable), nature of the indebtedness (national or foreign currency) and attitude towards risk, and be very clear about the difference between speculation and business management. Likewise, you should bear in mind that if you do not assume it in this way, you will inevitably go over-indebted, refinance, trifinance, refloat, but if you continue like this you will fall into insolvency and default.
Finally, it goes without saying something very important: “the successful experience of entrepreneurs in recent years, without development banking, with high interest rates and little access to credit, allows us to conclude that the central problem does not lie in financing and that the basis the development of Mype is and will be the theme of the market ”.
VII. Suggestions
Given that the majority Peruvian business percentage is made up of the Mype (informal micro units with low productivity and little modern management. The most dynamic small companies are a minority that does not even reach 5% of the total number of establishments) and the fact that they also they are not directed by professional staff in terms of management; We suggest the urgent and unavoidable implementation of a Mype management and financial professionalization policy; assumed by the State, Professional Associations, Chambers of Commerce and Universities.
On the other hand, it should be noted that although it is true that the majority of the Mype (emerging, empirical and “multifaceted” entrepreneurs) represent the Peruvian business sector and contribute greatly to its development, it does not mean that they present even optimal performance and conditions; Since on his recent visit to Peru, the guru of global strategy and competitiveness, Michael Porter, mentioned among other pearls: i) that the Peruvian economy does not have a defined course, ii) that when an investor thinks of a new factory, think of Peru, iii) that in the long term Peru's difficulties will have to do with low productivity, poor education and a high level of informality. Ergo, our country at the business level did not fare very well in this evaluation.
We suggest the creation of a state fund for the financing of the Mype (or the one that is about to be created), however, the same, for efficiency reasons, is managed by technical and specialized non-public entities.
Banking entities should give more facilities to obtain financing (loans) to merchants, in the long term so that they in turn can grow as entrepreneurs and formalize their business. In similar terms, ECLAC has indicated that in order to advance in inclusive financial markets and to facilitate the channeling of resources, it is necessary to strengthen microfinance and its respective instruments.
We propose the establishment of a facilitating element (which is applied in Spain), such as the Reciprocal Guarantee Society (SGR), which is defined as a “mercantile society made up of entrepreneurs, generally small, with variable capital, and whose sole objective is to provide collateral by endorsement or by any other means admitted by law in favor of its partners for the operations that they carry out within the business or traffic of the companies of which they are the owners ”.
Likewise, expansion or expansion projects (applied in that country), which are financed by combining a percentage of own capital, with contributions from partners, and a percentage of debt resources with the financial sector; via a Project Finance through which the project financing is offered to a third party in exchange for royalties or the payment of a monthly fee during a certain period.
financial resources
