Smart Company
By Mike Preston
17 April 2008
Serial finance entrepreneur Clive Isenberg’s latest venture, Octet,
is his answer to a question that has plagued many an entrepreneur: How
do you make money from China?
Octet, founded late last year, provides short-term credit to Australian
small and medium enterprises importing from China, without the need to
give personal guarantees or agree to charges over business assets or
property.
Isenberg first saw the potential in China when the
Australian manufacturing customers of his cash-flow finance company,
Scottish Pacific, started disappearing in the late 1980s and early
1990s.
Realising that manufacturing was shifting in a big way to
China, Isenberg shifted Scottish Pacific’s focus to the fast growing
services sector. Ticking away in the back of his head was another
business idea – lending to small and medium manufacturers in China.
After
selling Scottish Pacific in 2000 for $42 million and a four year stint
running St George Bank’s business customer division, Isenberg started
pursuing his China plan in earnest.
But there was a problem.
Entry to China can be difficult at the best of times, but a foreigner
seeking to establish an independent financial company there faces almost
insurmountable regulatory obstacles.
“You need a license to set
up a finance company there, and it is impossible to get – it is a very,
very restricted market. You can’t start a finance company there without
government approval and we just realised it would be impossible to
get.”
Instead, Isenberg decided to approach the Chinese market
from the other direction, establishing Octet to provide credit to
Australian importers to fund the purchase of goods from Chinese
manufacturers.
Isenberg believes there is an opening for a
credit provider in the segment because of the tough terms of trade
imposed by most Chinese exporters and the high cost of obtaining finance
for Australian small and medium businesses.
Most Chinese
manufacturers export on either an immediate payment, letter of credit or
cash on delivery basis, leaving the Australian importer out of pocket
until it on-sells to the consumer.
And smaller Australian
importers often have to pay through the nose to obtain finance to cover
the resulting hole in their cash-flow, with banks generally requiring a
guarantee or some form of security over business or personal assets
before they will provide credit to smaller businesses. Octet will
operate in space left vacant by the banks by providing unsecured import
finance of up to $1 million to businesses importing from China at rates
equivalent to overdraft rates charged by banks.
“It really works
like a credit card,” Isenberg says. “It’s a supplement to your main
source of finance designed to make purchasing easier and more efficient
that you repay and re-use on a short term basis.”
The system
also operates like a credit card in a literal sense – both the exporter
and the importer is issued with a smartcard and reader that allows them
to confirm the transfer of funds from Octet via the importer to the
exporter at the same time as the purchase order is processed. In the
place of security, Isenberg says he is backing the ability of himself
and his team to accurately assess the credit worthiness of borrowers in
order to minimise risk.
“It’s really no different to the way
businesses provide credit to their customers – when you have someone you
supply goods to, you assess if they will be worth the credit you give
them, so what we’re doing is no different from what every wholesaler or
manufacturer does. We’re just professionalising the credit risk
assessment process,” Isenberg says.
In recent months another,
unexpected, source of risk to the finance sector has emerged in the form
of the global credit squeeze, but Isenberg denies Octet will suffer in
the current market conditions.
He says because Octet’s capital
base is fully self-funded through its investors – all high net worth
individuals, including a 50% stake held by Isenberg himself – there is
no need for the business to pay high prices on wholesale funding
markets. “It’s a conservative situation; it means we won’t be
the biggest thing overnight so it will be steady-as-you-go growth. Our
funding was all pre-planned before all this [turmoil on financial
markets] happened and it’s set in stone, so we have no need to go to the
markets or banks.”
According to one independent banking analyst
from East & Partners, Alan Blake, Octet’s move into the
import/export finance space places it at the forefront of a growing an
increasingly lucrative market – if it is able to establish itself.
The
key challenge Octet faces in making that happen is building a customer
base in Australia and China.
Isenberg says that is where the
business is concentrating most of its resources in the short term, with
an office and four business development staff in China and 10 in
Australia.
Isenberg himself is also spending one in every four
weeks in China and learning Chinese – he says he can understand a fair
bit now after three years of informal study – in order to spearhead the
effort.
Although Isenberg says he doesn’t yet have any
meaningful revenue figures, Octet has already signed up 80 Australian
importers and 100 Chinese exporters.
And if the Australian
business performs as planned – Isenberg hopes Octet will have revenue of
between $70 million and $80 million in 12 months – the US beckons.
“If
it works and is accepted in Australia, it will definitely work in the
US. That is the biggest market for Chinese manufacturers and SME
importers there face similar issues to Australia; so it is one step at a
time but we are looking in that direction,” he says.
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