SMEs, financing, macroeconomic efficiency and a peaceful dream.

Las Pymes, el financiamiento, la eficiencia macroeconómica y un sueño tranquilo

Who has not listened to some SME entrepreneur, and others who are not so SMEs, who do not ask for credits or other forms of external financing, to finance their business needs because they prefer to sleep peacefully?

And there are few who are absolutely convinced that this is the right way to manage your business.
What should be the motive of an entrepreneur? Using a musical term coined by the analysts of R. Wagner.
Maximize the profitability of your company. That is nothing other than optimizing the value of your company. And what is the stage that maximizes the value of the company. The one in which the weighted cost of capital is minimal.

And we fall into the financing structure as a central element in the generation of value.
The weighted cost of capital has two major components. On the one hand, a rate of return required to equity capital or costly assets, and on the other, the cost of the debt we acquire.
The first term, for purists, takes into account the risks inherent to the business.
Modigliani and Miller enunciated in 1985 their famous theorem. Both holders of the Nobel Prize in Economics. From there, and with the contribution of other researchers, the paradigms of Corporate Finance changed.
Nowadays, in tax environments, with information asymmetries, agency costs and bankruptcy costs, the value of a company is the value of its pure projects plus a factor between the tax rate at which it is affected and the debt acquired by the company. However, the greater the debt, the greater the risk of bankruptcy. ie, the more the debt increases, the greater the probability of not being able to serve it. And therefore reduces the profit of the tax shield on the debt.
Estructura Óptima de Capital

In the adjacent figure what is stated is observed.
There is a point, for an amount of optimal debt, that maximizes the economic value of the Company. At that point, and only in that, the cost of capital is minimal.
There is talk of an optimal capital structure..

For entrepreneurs, in my experience, the perception they have of their own resources is that these resources have no risk and that the rate of return required for these capitals is, in general, neutral. Maybe that's why they sleep peacefully. And many compatriots with insomnia. Will they know how they negatively impact the Chilean economy?
What are the harmful effects of financing your business projects with your own capital?

  • Overestimate the discount rate, making investment decisions in projects, - eventually -, not viable, or significantly delay the periods of return of capital.
  • Macroeconomic inefficiencies by producing restrictions to the full exploitation of investment opportunities, decreasing the overall growth of the economy.
  • Impact the development of the labor market , limiting or definitively suppressing legitimate expectations of workers.

How does the State solve this inefficiency?
There is a lot of talking about productivity in Chile. Of the productivity of the workforce. And what about the productivity of capital?. We should all be strategically concerned about that. And answer this question in passing. How to improve the productivity of Capital?
And with that we could expect that a few businessmen would sleep something uneasy, -not that with medical support can not be corrected-, and most of the Chileans with repairing dreams and full of hopes.

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