How to build a business – Financing and Credit

August 30, 2011

I was always interested in running my own business. When I began in 1998 with what I later called “my only real job” at Shell, I had already started and sold several businesses. In 1999 I had no assets but was keen start a new business. I set my mind on buying a rand-cafe, where I had worked for years as a part-time bartender. With a friend that was also working there we decided to take the step, negotiated a price with the owner, and bought the business, which had a turn-over of seven hundred thousand guilders. Between the local Rabobank and a brewery we were able borrow, without any collateral, a million guilders. It was a brave decision, and a good investment, because within a year we doubled turnover, and within five years we repaid the loan.

A lot has changed in twelve years, and so have I. I bought some more bars, started a SAP R/3 consultancy business with others, sold it, had several interim assignments as a CIO, and founded Qhuba. We never sold that first Café, by the way, and it still doing well. The people at Rabobank have changed, or been exchanged, too. They used to know me, knew me by my first name, and if I had to make a urgent transfer, I could call the branch, and they would recognize my voice. Admittedly, electronic banking was not that big in those days. Meanwhile they have closed branches and opened a rather impressive head-office. But for whom?

Twelve years later, with a lot more assets to my name, I tried to borrow €400.000 to enable the growth of Qhuba. Turnover more than €6.000.000, with a three-year history of growth as well as profitability. I was prepared to provide a personal guarantee for the full amount of the loan requested. The account manager informed me this week that the risk managers refused because they considered the company a structure risk: part of the creditors are partners, so we are financing ourselves. I would argue that we could have hired the same people on the payroll, increasing our risk profile tremendously, while maybe making a bit more margin. I wonder what the risk managers would have called that.

Of course this is an issue in itself, but we will solve it another way. Probably between our internal partners, cash freed up by liquidating some assets and investments, and – who knows – an external investor. It will be an interesting process, and we will learn a few things.

Also interesting: why have banks changed, why do they not know there clients anymore, why don’t they advice on how to build a business, and why do account managers apologize for all the information they request (the systems asks for it) and hide behind risk managers when they cannot make deals, and why do they all wear suits and ties and pretend it is their money? It is the same decease that you can see all around you in business: it has become primarily transactional. There is limited knowledge about clients and there businesses, there is limited interest, and there is hardly any interaction.

The Rabobank is an interesting case because it is a cooperative bank. That sounds like working together, like shared interests, like common purpose. It sounds a bit like a network where some of the people have money, others have ideas or businesses, and by combining them, all benefit. Recently, I had a conversation with a guy responsible for innovation at this bank, and he asked if we had any ideas for him on how to build a community, how to get loyal and involved clients, how to have more interaction and participation. I guess he expected we would start talking about social networking, technology platforms, Twitter and Facebook. I told him that going back to the cooperative roots might be something to consider.

The roots of the Rabobank lie in the 19th century Germany, and had more to do with a charitable organization addressing the needs of an impoverished agricultural lower class than with a bank.

In the Netherlands the original of several local agricultural banks where the result of the involvement of three parties: the clergy, the local dignitaries, such as the mayor, the teacher and the entrepreneurs, and the farmers. Idealism played a role, but generally the entrepreneur wanted to invest money, the farmers needed money and the priest kept everyone honest. Running the bank was not a business in itself. It was clear that everyone had his role and that by working together there was a shared interest. It was obvious that the money belonged to the rich guy, and that he had an interest in the success of the small business men. The bank was the collective, but best represented by the priest or the teacher.

At some point the bank must have become an enterprise, the priest and the teacher must have been replaced by guys wearing suits, pretending to own the money, and the rich guy and the farmer were called clients, and could not talk to each other anymore.

Not all banks have similar histories of course. For instance the Swiss banking system was a direct result from the history of he Knights Templar or, as they were really called, the Poor Knights of Christ and the Temple of Solomon.

The Knights were established in Jerusalem in 1118 by nine French Knights, with the mission to protect pilgrims to the Holy Land. Most Knights were the sons of nobility and, as they joined the Knights Templar, they had to take a vow of poverty and donated their wealth to the Order. The Knights Templars’ financial power was significant, even more so because they would look after the valuables of the pilgrims, trusted as they were because of their relations with the Church and the Pope. At some point they started providing the people they would guard and escort to the Holy Land with letters of credit in exchange for their belongings, and a proper banking system was born, as the pilgrims could present these letters to other Templars along the way to withdraw funds from their account. The Knights, by having access and right of use of all this property (among them 9000 estates all over Europe and the Middle East, became wealthy and powerful and were eventually disbanded by King Philip IV of France. The Knights fled to Switzerland – they knew the Swiss because they were sent there by the Holy Roman Empire when the cantons opposed the Church. How they reconciled these roles is a mystery, but they did. It is remarkable how similar the Swiss flag and the one of the Templars is.

Templars flag on the left, Swiss flag on the right

And it is certain that when Switzerland was founded as a confederacy of the cantons in 1291, it rapidly rose to prominence as both a financial centre and temperate community that could tolerate opposing views.  The Holy Roman Empire saw something in the Swiss too, because until this day they hire them to protect the Pope.

It a side step, but also here banking started out of idealism, and cooperation.

Now if the Rabobank wants its cooperative roots to be the basis of their plans of bringing all the stakeholders together in a community with shared interests, they better hurry.

We are seeing new forms of banking, peer-to-peer lending, and microfinancing initiatives, some of which I described in an earlier blog, but we also see some former banker going back to what they now call “credit unions”. Nothing new here, of course: there even is a World Council of Credit Unions that goes back to the first credit unions 1850s in Germany to give those lacking access to financial services the opportunity to borrow from the savings of their fellow members. Friedrich Wilhelm Raiffeisen transported this cooperative financial concept to rural Germany a decade later, and indeed, this was to become the Raiffeissen bank that later became part of Rabobank. In the twentieth century the model was also adopted in the US, and from there spread across the developing countries with the help of a government agency USAID.

Now today in The Netherlands several bankers are working on plans to reintroduce the Credit Union system, specifically because small and medium size businesses, especially when they are starting have considerable difficulty obtaining access to credit.

It is not only back to the roots, but also back to the basics: the Bank collects funds from savers and entrepreneurs and lends it to entrepreneurs. The people providing the funds are co-owners, and have a say in to whom the money will be provided. There are no payment services, not even current accounts, and no complex structured investment products. The only product is the financing provided. The process is simple, the costs can be low, and the return for the saver and investors attractive. The bank is the platform, not the goal.

The credit unions can be organized by geography and by industry. It would make a lot of sense if successful business people in a certain industry were the ones providing the funds, but also assess the applications from and provide the support for the starters in that industry.

If a license is issued by the central bank, the first unions could start in 2012.

Pity we can’t wait that long, but we will be following these developments with interest and sympathy, same as all the other developments in the Financial industry