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Debt or Glory

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In the dark days of the Asian financial crisis that began with the fall of the Thai baht in the middle of 1997, companies in debt suddenly found themselves in a quandary over their liquidity positions. Those in the real estate business and stock market were particularly affected.

Despite the dire forecasts of economic experts here and abroad, not a few entrepreneurs with liabilities were able to soldier on and meet their obligations. Those who did are now reaping the fruits of their labor.

After all, a company that maintains fiscal responsibility in the face of extreme difficulty earns the respect of the business community.

Which brings us to the question: how do entrepreneurs keep their good credit standing? Ms. Elizabeth C. Umali, First Vice President for Special Accounts Management at Plantersbank dispenses the following helpful hints:

  1. Do not alter your lifestyle. She relates that “temptation comes in with huge sums of money. Unfortunately, some borrowers undergo a transformation when their products become successful. They start getting high profile coverage in newspapers” and they begin to think that they, too, are to the manor born and entitled to lavish perks of the high life. Indulging in expensive restaurants, cars and hobbies is very dangerous and can have a disastrous effect on your cash flow.

Besides, banks and other institutions like credit card companies, leisure and country clubs have a way of checking with each other with regard to your financial records and credit standing. Thus, keeping to your usual haunts and habits will go a long way towards helping you repay the loan.

Her advice: “Don’t let it get to your head. Use the loan proceeds for what it was originally intended and live within your means."

  1. Stick to your niche. Some entrepreneurs display a lack of focus, venturing into other business concerns that may be in vogue but outside their area of expertise.

Take the case of a food and beverage company. The rise of strong household brands was attributed to them during decades of experience in the manufacture of consumer goods. In the late 80s, they went through an acquisition binge and were able to beef up their product lineup with other consumer products.

Flushed with success, the company made the decision to ride the property development boom to expand their business interests.

Unfortunately, property deals turned sour with the onset of the Asian contagion, leading to massive loan default for the company.

Asserts Ms. Umali, “My advice is that you exercise prudence at all times.”

  1. Plan ahead. She also emphasizes the need to be prepared for all sorts of external threats. For instance, the sudden plunge of local currencies during the economic slow down of ’97 saw higher interest rates that made it harder for exporters to borrow and import raw materials for their products. This, in turn, led to unexpected shortfalls in revenue.

And to tie that with what is happening now, local manufacturing is likewise undergoing a major shake up with the emergence of the Chinese economic juggernaut. Cheap imports are flooding the market, and companies with no fallback positions in the face of globalization are in danger of falling by the wayside.

Your blueprint for success, in other words, should always have a contingency plan for emergency situations.

  1. Hire professionals. Most small and medium companies start as single proprietorships or family corporations. “The danger is for entrepreneurs to use company resources for their personal expenses.” Explains Ms. Umali.

She adds, “What we do at the bank is to guide our clients into applying proper accounting and bookkeeping practices so that financials are treated separately. This way, we can help ensure that the numbers remain healthy.”

Likewise, she contends that “We also look into succession. If there is no family member willing to step up and take over, you should be open to letting in outsiders with the skills and know-how to handle and grow your business. This way, expansion plans can be easier to execute.”

  1. Follow rules religiously. Ms. Umali describes a good borrower as having both the capacity as well as the responsibility to pay. She cautions borrowers to carefully go through the fine print written on documents that they will sign, and to strictly adhere to the terms and conditions of the loan.

This would generally entail paying on time, providing the bank with sufficient information like financial projections and submitting annual documents such as financial statements, income tax returns, real estates tax receipts and insurance premiums.

Simply put, what you agree to should b personally cast in stone. This way, you avoid fines and other penalties.

Through it all, Ms. Umali explains the role of bank offices and employees in supervising and ensuring the success of the lending process. “At Plantersbank, we explain the intricacies of getting a loan every step of the way. We have to act as counselors so that those unfamiliar with the process are given the requisite attention and proper service. This entails a lot of handholding. It requires lending a touch, using the heart as well as the mind.”

So to uphold your entrepreneurial integrity, look to your bank. It may seem the ultimate paradox but credit is in the same league as track record, market acceptance of products, profitability and management style in building your company’s image in the business community.

Source: Business Line Vol. 1 No. 3 2003

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