FINANCIAL FLEXIBILITY
FINANCIAL FLEXIBILITY – BASIL SPRINGER COLUMN WHICH APPEARED IN THE BARBADOS ADVOCATE’S BUSINESS MONDAY ON MAY 27, 2013
“You should rather open your hand, willingly lending enough to meet the need, whatever it may be.” – Deuteronomy 15:8
Each country in the world strives for sustainable development. One element of sustainable development is sustainable economic growth. Sustainable economic growth in any given country can only take place, one successful enterprise after another.
Each enterprise must be blessed with three basic factors to increase its probability to contribute to sustainable economic growth. Firstly, it must have the “DNA of an Elephant” which defines its potential to export beyond the market footprint of the consumer demand in that country; secondly, it must adopt a Shepherding culture which embodies the discipline of the management of business systems which is necessary to mitigate the risk of business failure; and thirdly, there must be timely access to appropriate financial capital investment which is adequate to meet its corporate governance, marketing, working capital, equipment, training and Shepherding and business advisory needs (both pre- and post- investment).
Each of these basic factors is important. If an enterprise has little export potential then it cannot contribute significantly to sustainable economic growth except in the case of support to enterprises in an export industry. If the discipline of the management of business systems is not well entrenched, high rates of business failure will be the order of the day. If there is not timely and uninterrupted access to appropriate financial capital then the probability of the enterprise withering and dying, at some point on its journey to sustainable success, is significantly increased.
My experience has been that there is no shortage of “DNA of an Elephant” ideas, innovations and enterprises in the Caribbean. This has been borne out by the many high quality responses to the several innovation competitions that have been mounted throughout the Caribbean.
The basic stock of qualified and experienced potential Shepherds and business advisers to these emerging enterprises is secure given the plethora of management consultants that exist and the relatively recent advent of the Caribbean Institute of Certified Management Consultants in support of the development of this expertise. However, these Shepherds and business advisers must enter into a professional relationship with the enterprises and hence their costs must be provided for in the capitalization of the business in the same way as the costs associated with corporate governance, marketing, working capital, equipment and training.
In my opinion, the weakest link in the chain in this journey to sustainable success is the weak access to appropriate financial capital. Lip service is continually being paid to this important inhibiting factor although a sustainable solution has emerged in the form of a quick response composite benevolent seed/venture capital instrument, as has been reported in the pilot project to test the efficacy of the CBET Shepherding Modelâ„¢.
The market is still flirting with modified forms of loan instruments as the solution to the problem. These solutions are inadequate and enterprises continue to fail because of lack of financial flexibility and the need to migrate to a benevolent seed/venture capital instrument. The financial sector fiddles while “Rome is burning”.
In this column, I posit that financial flexibility is paramount if emerging enterprises are to take root, take off and flourish. Financial institutions have to be innovative and diversify their financial instruments. We must shift from loan instruments to benevolent venture capital instruments if we are to serve emerging enterprises well so that they can successfully contribute to economic growth. When the rate of economic growth increases then we all benefit.
Institutions offering loans have to protect their depositors’ money. In this context, their practice is to minimize the risk they take, insist on holding hard collateral and stipulate amortized principal and interest payments, usually of equal monthly installments over a fixed period of time, based sometimes on draconian interest rates depending on the risk management experts’ perception of the risk involved.
Many innovative enterprises with “DNA of an Elephant” potential have no historical performance profile, are deemed to be of high risk and hence are not eligible for loans. Many emerging start-up, spin-out and scale-up enterprises, maybe intellectual capital focused, do not have access to hard collateral and hence are not eligible for loans. It sometimes takes at least two years to get the cash flow of a start-up enterprise stabilized. This type of enterprise may not be able to meet monthly amortized payments over a fixed period of time hence cannot service loans efficiently. These financial institutions still make a non-zero provision for non-performing loans on their balance sheets even after diligently applying risk management systems to each loan application and making a decision to invest in an enterprise. It is not a perfect system.
There is no shortage of financial capital in the Caribbean – the problem is to determine the strategy to access the capital to strengthen the weakest link in the chain in this journey to sustainable success. The answer is to adopt the financially flexible process of the quick response composite benevolent seed/venture capital fund of the CBET Shepherding Modelâ„¢.
What is the difference between loan investment and benevolent venture capital equity investment? The jargon is different. No loans, just equity. No hard collateral, just Shepherding. No interest, just dividends. No monthly payments, just an exit strategy in the form of a buy-back clause in the equity agreement to give a fair return to the institution and allow the enterprise to own 100% of its shares when the cash flows are strong enough. Venture capital addresses all the needs of the enterprise. What is needed is the belief by financial institutions that “Shepherding as collateral mitigates the risk of business failure”.
(Dr. Basil Springer GCM is Change-Engine Consultant, Caribbean Business Enterprise Trust Inc. – CBET – Columns are archived at www.cbetmodel.org).