By: Loh Kok Choy
First published: 9 June 04, TODAY

Businesses in the United States are fortunate in having access to a healthy mix of equity and debt financing. European businesses are fed on a diet of largely debt financing. Asian businesses have neither.

Singaporean businesses complain they are starved for cash. Let's take a trip to the US to find out how American enterprises find the money they need.

First stop: The Small Business Administration (SBA) in Washington. Did you know that the SBA has operated a small business loan programme for more than 50 years?

We hear about the SBA's venture-capital programme, but few know about its loan programme - perhaps because here we are in love with high-tech businesses and the eye sees what it searches for.

The loan programme finances 10 times more businesses than the venture capital programme does. Indeed, from this loan programme, we can learn much about the ways that flexibility can be built into a government assistance programme.

Lenders in the SBA programme range from small community banks to giants such as Wells Fargo Bank and Citibank. Lenders are allowed to vary interest rates, depending on the nature of the loan. However, since there is sufficient variety of lenders, there is no over-escalation of financing costs.

The secret is variety. There is a financing solution to fit every conceivable need. Businesses can opt for equity or for debt. In each category, there are abundant choices.

Now let's visit two very different lenders in San Francisco - Silicon Valley Bank and Wells Fargo Bank.

Getting the loan you can't afford

I don't know of a Singapore bank that is like the Silicon Valley Bank. At Silicon Valley, there is no need to prove that you are generating enough income to repay debt.

Who qualifies for Silicon Valley Bank loans? Mostly start-ups that have received initial rounds of venture capital financing.

They need more money to see them through till the next round of venture-capital funding. Silicon Valley Bank provides debt-financing that will be repaid once new capital funds are raised. It does not assess whether a business can repay its debt. It assesses whether it will attract venture investors. Clearly, it lends to a very specific group of businesses.

Wells Fargo targets a different segment. It uses a different assessment technique. Most of its customers are neighbourhood stores. If you apply for a Wells Fargo loan, the information that you must provide fits into about a quarter the size of an A4-size sheet of paper. How does a bank assess a borrower based on such scant information?

The answer lies in credit-scoring.

The bank needs just enough information to learn who the borrower is. It gets the other details from credit-rating houses and various databases. In fact, it may have decided on a borrower's credit limit before the borrower applies for a loan.

Now, let's visit the credit-rating houses. You know the names: Standard & Poor's, Moody's, Dun & Bradstreet, Fitch. They perform an important role in financial risk management. If you have invested in bonds, your decision might have been guided by the ratings. Businesses are rated on the probability of default on their obligations.

The rating industry has become a pervasive part of the US financial market, though credit reports have been known to go wrong at times.

For high-tech firms only?

Back to the SBA to examine its venture capital programme. The SBA does not invest directly in businesses. Instead, it invests in Small Business Investment Companies (SBICs) which, in turn, invest in small businesses. This is a clever way to multiply its ability to reach and fund businesses.

The true beauty of the SBIC programme lies in the types of businesses these funds invest in. They range from dry-cleaners to restaurants, retail shops, garment manufacturers, software developers and genetic engineers. The investments have been wide-spread: A&W, Apple Computer, and Amgen have benefited from this programme.

There are two ways the SBA provides its funds, depending on the types of investment the SBICs make. With some SBICs, the SBA takes preferred stocks (equity).

This mode of funding is normal for SBICs that have an appetite for high-tech start-ups. The risk of losing it all is high, but the upside is phenomenal if things work out. With other SBICs, the SBA takes the debenture (debt) route. This is favoured for SBICs which prefer to invest in more stable businesses, which have the ability to generate a steady income stream.

Business finance is a great enterprise in the US. If you are shopping for funds there, call on the SBA. Check out the community banks, the SBICs, Wells Fargo Bank or the Silicon Valley Bank. If you still don't find the answer, you may find it among the pink sheets, the yellow sheets, the bulletin boards, securitised loans, high-yield bonds, buy-out funds ...