Last week’s article on Going Green generated many emails from small entrepreneurs. One of the most common dilemma was their inability to secure bank loans despite being in commercial farming of cash crops for a few years.
So what do you think went wrong for these entrepreneurs?
Perhaps they did not keep proper accounts and as such were unable to present a financial statement and projection. Or they awere unable to articulate their vision and valid reasons on why they needed the loan. Or they had no properties of substantial value to act as collateral for a secured loan. Or they went to the wrong bank.
Imagine a loan officer of a commercial bank evaluating the expansion of your commercial farming project. You need RM2mil to acquire an additional 10 acres of farming land next to your existing 15 acres, clear and prepare the land, buy seedlings and fertilizers, buy additional farming equipment and invest in buildings and equipment for processing and storage. It will be a full 12 months before you begin to harvest. That is assuming, there is no attacks from pests and diseases and the weather is kind to you. No drought and no excessive rainfall.
You are now at the mercy of the loan officer and God.
The loan officer who is used to financing property mortgages and occasional factory equipment or trade related facilities frowns at your proposal, mulls over the viability of your project and shakes his head from side to side and hums quietly to himself. If he decides to proceed with your application, he has to buy a pair of Wellington boots, drive two hours to your farm, ask many naive questions and later rush to the bookshop to get a copy of Farming for Dummies. Honestly, do you think you stand a chance in getting that loan?
Finding financing from the right source is everything. In Malaysia, we have Agro Bank, which is owned by the government and supposedly staffed by loan officers of considerable experience in funding agriculture businesses, from farming to trading to project financing. If you have a viable agriculture project, Agro Bank is able to provide you from micro financing of RM5,000 to entrepreneur loans up to RM20,000 to special government loans up to RM10mil. Reflective of the high risk nature of agri loans, interest rates charged is about 15% pa. Still 15%.
Here again, you are at the mercy of the loan officer and God.
Never mind that costs of doing business has gone through the roof over the last 10 years, our Agro Bank is only able to extend a RM5,000 loan, which is just enough to plant fruits and vegetables in your backyard, and a RM20,000 loan, which is enough for you to farm your neighbours backyard as well. If you are a typical small time entrepreneur without any connections or political backing, there is absolutely no chance for you to get that RM5mil or RM10mil special government loan.
But then again, you can be totally inexperienced in farming or animal breeding and without an iota of a track record, you are able to secure a soft loan 50 times the size of what you really need. You just have to be creative in articulating your vision, be thick skinned in self-denial and voluminous in dishing out excuses. And you will do just fine.
Ok, again, I might have exaggerated a wee bit just to make a point. If you want to be an entrepreneur, you have to worry about the viability of your project and your source of funds from day one. You need to be realistic in the assessment of your own financial capabilities in the new venture as you have to choose between a controlling owner role or a minority partner role.
Assuming the full potential of your business is RM100mil with a profit of 10% and you can only contribute 30% of the capital to achieve this turnover. You will need to bring in investors for the balance of the 70% capital plus the ability to raise bank loans and facilities. The other option is go on your own, no bank loans, achieve a turnover of RM10mil and make your million. Which route will you choose?
27 years ago, my heart yearned for 100%, my pockets told me that it was an impossible dream and my head accepted a minority stake of 23%. God was kind to me by pairing me with an angel of an investor.
He took the leap of faith, showered me with wisdom and patience and allowed me to run the business like a proud owner. All he wanted in return was integrity, friendship and a thriving business so that he could be proud of me.
Small bumiputra entrepreneurs should take advantage of the many financing schemes available. The Agro Bank and SME Bank are pretty helpful in processing your application, which must reflect a viable business plan and a healthy cash flow to repay the loans.
For non-bumiputra startups, you are advised to make a choice right from the beginning. If you have sufficient funding to be the controlling owner, by all means, stick to the plan and hopefully later, you can secure a bank loan to expand your business. If you do not have the means, then my advice would be to look for a financial investor, hopefully supportive and kind.
Either way, you are at the mercy of the loan officer and God.