|Your New Business Doesn't Have to Fail!|
MicSem Monthly Discussion Topic #22
C.L. Cheshire, working with the University of Hawaii Business Center Program, led a discussion on business development–and its pitfalls–in Micronesia. Twenty-one people attended the discussion, which was held on Saturday morning, 9-12, April 1, 2000, in the Micronesian Seminar conference room.
Financing Your Business
In the past financing a new business wasn't too much of a problem. There were easy loans available, such as those financed by the old Economic Development Loan Fund and other start-up programs. Today it is getting harder to access funds for small businesses, everyone agreed. The large government funds that once provided loans for new businesses have generally dried up. Commercial banks in Micronesia don't do loans for start-up businesses. Both Bank of Haawaii and Bank of Guam prefer to lend money to those with well-established businesses, businesses that have proven track records that might require expansion. To protect themselves against defaults, commercial banks only offer loans to people with collateral. Since land still cannot be accepted as collateral (although the banks are working with the government to change this), banks will usually restrict loans to those with a cash income or those who have other business interests that can be used as collateral. Hence, it is those from well-established families or those with a substantial income who can qualify for business loans. Another way to put it is that in the present system only the wealthy are extended the opportunity to become more wealthy.
How, then, do the little people go about getting loans to start up their businesses? The FSM Development Bank was established to give citizens, regardless of their status and business background, a chance to get a business started. Anyone who has a reasonably sound business plan can apply for a loan from FSM Development Bank. In the event that the borrower defaults on the loan, the government suffers, for the government subsidizes these loans. Although government subsidized loans are the very thing that FSM is trying to distance itself from, such loans are thought to fill a need in getting start-up money to those who would not qualify for ordinary commercial loans. One of the participants reported that he had his loan application for $45,000 with a commercial bank for six years without any action, but it only took him three weeks to get a loan for $65,000 from FSM Development Bank. Someone who wanted to put up a gas station in Chuuk right next to another gas station had no problem getting financial assistance from FSM Development Bank as well as from Mobil. The fact that he was from a prominent island family helped him greatly, it seems. On the other hand, there are examples of the opposite happening. A man who was formerly a member of the Pohnpei State Legislature was turned down for a loan he requested to set up a cold storage facility and ice plant. Although the plan was viable, he felt that he was on the wrong side of the political fence. All FSM Development Bank loans must be approved by its board, which may have its own political agenda, he felt.
A new program has been started to provide loans for small business start-up to people who might not otherwise be able to qualify for loans. This loan program, operating in Yap and Pohnpei, is known as the Small Business Guarantee Program. Although the loans must be approved by a commercial bank, the bank will not incur the risks associated with default on the loan since the government is the guarantor of the loan. This program is financed entirely by the government. In Yap, the government is even prepared to stake those who don't have the cash to put up the 15 percent equity that is demanded in this program. This program addresses the question of how to ensure that "little people" have access to business loans, but it is a step backward insofar as the government is once again in the loan business. Furthermore, the word from some of the participants who could be expected to know these things is that the success rate of business ventures sponsored by this program has been poor.
Capital may be needed to get the business started, but it is certainly not the only thing needed. Nor perhaps the most important thing. Dr. Cheshire suggested out in a recent article he wrote that too much energy may go into helping the entrepreneur produce a business plan and too little thought given to whether the business ought to apply for a loan at all. In his own metaphorical terms, if the seeds (business prospects) are bad, drowning the garden in water (money) isn't going to help at all. Another participant expanded on this comparison in suggesting that too much water will simply erode the topsoil in the garden and make it unproductive when it is replanted later on. He was suggesting that there is such a thing as too much money coming in from the outside. Easy money made available to people with no risk on their part is an invitation to business failure. Why should they care whether the business succeeds or not, since they are not the ones to lose in the end? Businesses are difficult enough to nurture; they are all the more difficult when the entrepreneur has little of his own invested in the business. We were reminded that a long list of projects started by the government have failed. This is not surprising when we consider that people have little concern for such projects, which are seen as belonging to the government. People themselves have no vested interested in them.
One participant thought that the government's responsibility ought to be to create a favorable climate for investment and nothing else. The government, in his opinion, ought to help prepare people to accept the element of personal risk in business–not just by persuading them to put up their own money to start their business, but to leave the well-beaten path of retail stores and other non-productive businesses to explore new types of commercial activity that are more in line with FSM's economic development needs.today. Someone else, however, noted how long it took the FSM government to put into place the import duties necessary to protect its own fledgling soap industry. By the time the measures were in place, the industry had almost expired. The participant also felt that government funds should be entrusted to non-government entities so that political interests don't override development prospects. Yet, even if this were to happen, the government would still remain in the business of subsidizing loans–perhaps as much so today as ever.
In his article Dr. Cheshire proposed that people with ideas for businesses consider financing these businesses with their own money, even if they have to do so more slowly than they would like. He cited as an example a young man from Yap who could earn ten dollars a day by selling tuba from three coconut trees. This would give him $300 a month, $3600 a year, and $36,000 over ten years. Some of this money could be easily used to expand his business into the production of fruit juices for local consumption. Likewise, the Chuukese who can clear two dollars profit on each pound of fish he sells on Guam, earning possibly $500 on a single weekend, is in a good position to invest his profits in business expansion. A woman living in rural Pohnpei told how she established several different small businesses–a gas station, a car repair shop, a sakau market, and a couple of rooms for rental to weekend tourists–by first setting up a line of credit for $2,000 at local hardware stores and then expanding slowly, as her finances permitted.
Yet, there are some worthy candidates for external financing. One man, for instance, planned on opening a medical clinic in Chuuk, for which he plans to hire one or two Filipino doctors and a medical technician, rent office space, and invest in equipment. Since medical insurance will soon be available to a wider segment of the Chuukese population and they will have an option to make use of private services, the clinic is timely and probably should be opened soon, even if this requires sizeable external funding.
Can start up funding be made available to those with little business experience as well as those from well-known and well-heeled families? Can the funding be regulated so that it does not replace, but only supplements personal investment of the businessman? Can the government yield to private business, including the commercial banks, most of the roles that it was once accustomed to take on itself? Can it encourage business development without doing the actual financing? Business vs Culture
Cultural practices and values in Micronesia seem entirely opposed to good business sense. In beginning the second half of the discussion, participants identified many of the obstacles that culture presents.
Somebody noted that people in Micronesia, like people in many traditional societies, seem to be unwilling to "overproduce". Farmers, for instance, will put just enough produce on the market to provide the cash that they need at the time. Their production is based on their personal needs rather than the market demand for what they grow. They seem less interested in accumulating wealth than in satisfying their short-term needs. This is why production seems to increase before Christmas, when farmers need cash for presents for their family, and at certain other times, depending on what's going on in the community. If there is a community event that will require a cash contribution, people will increase their production to the point that they can cover anticipated expenses.
This is one reason for the inconsistent production that buyers often complain about. Hotels and restaurants in Chuuk, as in other places, cannot depend on a steady supply of produce adequate to meet the needs of these businesses. A few participants observed that in some cases, however, the unwillingness to overproduce stems from their failure to find buyers. The gradual shift in diet and the growing preference of people for imported foods sometimes discourages farmers from bringing their goods to the market.
In a traditional society rooted in the subsistence economy people generally produced only what they needed. Any surplus was normally distributed and shared with kin and other community members. In sharing this surplus, individuals showed their regard for others in their social circle, often in the process acquiring a reputation for generosity and the prestige associated with gift-giving. Sometimes the sharing of surpluses was institutionalized, as when people contributed to formal feasts in Pohnpei. The surplus food they produced and offered at such feasts was redistributed by chiefs, thus bringing prestige to those who produced the surplus.
Yet, the point of business is precisely to produce a surplus in the form of cash, which can be reinvested in the business or stored for future needs. This is bound to create a clash with traditional attitudes toward wealth. An anthropologist once wrote that Pohnpeians invest in Mom and Pop stores, half expecting to go out of business when they are unable to reclaim the credit they have extended. Even so, they gain in social capital and prestige what they have lost in money, the anthropologist observes.
How does the businessman maintain the cash surplus needed to provide for his business in the face of this attitude? One way is to try to conceal it. Since businessmen and employees alike often find it difficult to keep their savings accounts out of sight of the prying eyes of kinfolk, some have attempted to set up hidden accounts in distant banks. Others have opted to invest their money in land purchases in places like Hawaii or Guam. But the easiest way for most people is to deal with the problem is simply to forego any cash savings at all. By maintaining a zero balance, a person will be make himself less a target for others with requests, but when needs arise he will have to be able to arrange for quick loans to provide what he needs for the special occasion.
The notion of the "limited good," as presented in the work of George Foster, is something that Pacific Islanders have always lived by. This philosophy carries an attitude of "spend it when you have it since you can't save it anyway." The premise here is that anyone who has a surplus must have it at the expense of somebody else, for the size of the total resource pie is limited. To share widely is to earn the respect and good will of all. To refuse to do so is to invite being labeled stingy or greedy. This is embodied in the motto: "What I gave, I have. What I spent, I had. What I saved, I lost."
A store owner who has shelves stocked with food and goods is expected to be openhanded in his generosity towards his relatives and others in the community. It makes no difference that the rules of business are very different from the code that operates in the traditional village. Store owners are frequently assaulted by acquaintances who pick their shelves clean without bothering to pay, usually asking that the "sale" be put on credit. How does the store owner control this to preserve his business? Some of the owners of the largest stores in Chuuk began hiring foreign managers to put an end to such practices. The manager, usually American, acted as a buffer between the store owner and his family. He could say no to the family when the store owner might have been culturally speechless.
The decision as to whether to extend credit and for how long is never easy. Most Micronesian entrepreneurs feel that they must offer credit, at least initially, to closer relatives and friends. Some feel obliged to extend it to customers who would not otherwise shop in their store. One woman offers credit only to people she knows need help and are hardworking. Others will allow credit up to a point, but cut off the line of credit if there has been no attempt to repay past debts. All claimed that they had to be vigorous in their pursuit of people who had money. One person reminded us of a larger company on island that announces on the radio the names of those with outstanding debts. Other places, notably video rental shops, post lists of customers who owe them along with the size of the debt. One participant suggested that if communities share the goods and services, they have also share in the debt. They might be persuaded to help pay off a debt that comes from extending credit.
If sharing is one point of conflict between traditional society and modern business, time represents another. Community events and rituals–feasts, funerals and everything else that goes on in the village–make extensive demands on people's time. Wage employees are often obliged to attend such events even if they this requires that they miss showing up for their job. No offer of salary increase seems to be able to buy the loyalty of the employee for the business in such conflict situations. One hotel has its workers paired so that one is supposed to cover automatically for the other in the event that he cannot make it to work. Others allow liberal time off their job in case of need, but without pay. Interestingly, Seinwar Elementary School has instituted a policy of allowing no more than three unexcused absences before termination of the employee. This entirely Pohnpeian school has adopted the radical policy of allowing people off from work only for funerals within their immediate nuclear family.
Given the sharp conflicts between traditional values and those hospital to a business climate, we might ask whether business could ever flourish in Micronesia? Is it possible for anyone to protect his business investment and keep it separate from his family finances? Isn't this asking for a great deal in a society in which love has always been measured in the willingness of one to provide material support for another? If the measure of personal regard is willingness to provide resources for others, how does a Micronesian deny medical referral to a relative on the grounds that the money for his sick relative's plane fare to Hawaii or Manila is earmarked to repay the business loan? If there is destined to be a hopelessly intertwined relationship between business and family, how could the business ever come off anything but a poor second best?
But islanders are as much creators of their culture as they are defined by it. People are continually reshaping their culture and stretching its boundaries. Culture is clearly elastic, as we have seen repeatedly during the last fifty years of intense social change. When Chuukese men began finding employment with the government during the early 1950s, the rules governing personal income changed. Men who at one time would have been obliged to share their cash with the lineage were permitted to keep their own earnings. This eventually led to more substantial changes in the structure of the family. If islanders could make space for alien institutions in their culture again and again in the past, they can do so again with business.