You Got to Have Debt

 

Copyright – Entreprenuer.com

Reading about the recent take over of Credit Suisse by UBS and the collapse of Silicon Valley Bank (“SVB”) brought back memories to the time when I was doing some work for GE Commercial Finance (“GECF”), which was in the business of trade credit financing, which is better known as factoring.

GECF were clear that their main customers were SME’s. It was, on paper, a very viable partnership. GECF was part of the GE empire, and it argued that it understood the needs of business (specifically manufacturing) and helped finance other business from that view. GECF also argued that it didn’t just sell financial products but also provided knowledge of best practices based on its experiences (GE, was at the time consistently ranked as one of the best run companies in the world)

There were however, some cultural clashes between GECF with its roots in the USA and our local, predominantly Chinese-run, SMEs. This was summed up by GECF’s commercial director who told me, “We check their books – there’s no debt – you got to have debt to do business.” If my former father-in-law was anything to go by, traditional Chinese businessmen detest debt. His biggest issue with me when I took the PPO out against his daughter, was that made it look like he owed people money.

When I look back at this moment, I realise that there is a clear difference in culture. In the American system, debt is part and parcel of the game of doing business. It should be no surprise to anyone that America, which remains the favourite place for the world’s entrepreneurs, has also been the birthplace of the most creative forms of financing and American bankruptcy laws were at one stage considered among the more lenient in the developed world.

The rational behind this, is fairly simple. If you want your business to make a big mark, you to expand quickly and this would require capital, which more often than not would be at a quantum beyond your current turnover. Hence, an entire industry was born to take care of this need.

American bankruptcy laws were, to extent, based on the premise that one might have run into a spell of bad luck and should not be condemned for it. Back when the Old Rogue first entered my life, he would consistently point out that one could be making money but then run into a spate of bad luck or make a bad decision. Bankruptcy was designed to help you get through that period rather than to punish you.

By contrast, the local SMEs in Singapore and the widder Southeast Asian region came from a different culture. Small businesses struggled to get loans from banks, which more often than not, were pushed to loan to politically connected competitors. The only funding available to traditional SMEs was through informal channels, and while legal contracts regarding loans were opaque, there were informal understandings to ensure that the said loans for repaid.

Furthermore, an SME business in the region didn’t just face financial risk. With the exception of Singapore, Southeast Asia’s SME sector has been dominated by the ethnic Chinese minority, which has, as the 1997 riots in Indonesia showed, been part of the wrong end of angry mobs. Hence, you operate in such circumstances, you do so with the understanding that a business failure is not just a financial failure but potentially deadly for you and your family.

If doing business in America is about getting a passion to market and getting rich, doing business in Southeast Asia was the most part all about having enough money so that you would always have a survival route in case your homeland turned nasty. You avoided things like unnecessary debt because it could cost your business and by extension you.

In a way, both sides have a point. Southeast Asia’s SMEs generally don’t expand beyond the region. Local businesses play things close to their chest.

However, as the collapse of the various American banks has shown, there is also the other extreme. While America remains the place where minnows like Apple and Microsoft grew into trillion-dollar whales, there have been several periods where things went overboard. Lenders got greedy and thought the basic laws of economics didn’t exist and businesses made marketing gimmicks to attract venture capital instead of producing a product or service. Hence, when crashes came, they really crashed.

So, one has to find the equilibrium. Yes, one should aim to grow one’s business. Sometimes it is necessary to take on debt. Reality is that bills do need to get paid even when customers take their own time (trust me, I’ve seen it happen in the construction industry).  

However, one does need to understand that loans need to be repaid and that there needs to be a delivery of sorts. Markets do go south as much as they do go north. We should not, as a society reward greed when things go wrong. If you don’t punish greed, you allow people to get away with the same mistake and that has never benefited anyone other than to live the definition of insanity of doing the same thing over and over again and expecting different results.