Financing A Future

Sitting in an outlet of Tous les Jours, entrepreneur Chy Sila stirs a cappuccino while completing an email on his laptop. The bakery franchise, a personal favourite among his growing restaurant portfolio, is close to his office and – keeping with his informal yet intuitive approach to business – often serves as his workspace and meeting room.

Closing the laptop, Sila leans forward to explain how he and a friend – with no business degrees or powerful families to back them – turned $500 seed capital into one of Cambodia’s biggest entrepreneurial success stories.

The journey began in 1998 when Sila and former schoolmate Kouch Sokly pooled together savings they earned as tour guides to open CD World, selling copies of CDs and DVDs. Fast forward 17 years, and the two remain close friends and partners in a business empire that includes some of the Kingdom’s most recognised brands. Their CBM Corporation comprises eight brands in F&B and catering, including BB World, T&C, Tous les Jours, Lotteria and Domino’s Pizza.

Reflecting on this impressive growth, 39-year-old Sila says success in business is not solely about capital – though it certainly helps – but identifying opportunities and taking calculated risks. 

– Chy Sila, GM, CMB Corporation

Opportunities Don’t Wait
CD World proved profitable, but after hearing that Cambodia was tightening enforcement of copyright laws, Sila and Sokly decided to search for other business investment opportunities. Sensing a gap in the market for Western-style fast food, and with no international chains operating here at the time, they decided to start their own burger restaurant.

“We didn’t do market surveys or have a business plan,” Sila admits, “but we knew we had a good idea and it was the right time. So we just winged it.”

Having secured a high-traffic building in what is now the site of Gold Tower 42, they reckoned they could open the restaurant for about $20,000. When BB World opened in 2002, they had raised just half that amount from friends and family – and quickly realised they would need many times more.

“At that time we didn’t even have a bank account, and no bank would have lent to us because we didn’t have any property for collateral,” he recalls. “Even if you have collateral, you only get 50% to 60% of its value unless you’re on good terms with the bank.” Determined, Sila turned to his suppliers and even the landlord, negotiating short-term lines of credit that got them through the first year.

It is common for startups to be forced to think outside the box to raise capital and maintain liquidity in this fashion, according to Varabott Ho, managing partner at Kynn & Cie Cambodia, as Cambodian banks rely heavily on collateral – usually in the form of real estate – and are putting increasing emphasis on governance in assessing borrowers’ creditworthiness.

“Many startups don’t have collateral or proper accounting, while a lot of [small businesses] are unregistered and work in the parallel market,” he says. “An international bank like ANZ, or a regional bank like Hong Leong, is not likely to lend to startups, because they are also audited themselves.”

High Cost of Capital
By 2006, Sila and Sokly had rolled over profits in BB World to add new branches and launch other F&B brands. It was a “golden time,” Sila recalls. The market was booming and CBM Corporation’s sales were increasing 30% to 50% each year. But the aggressive expansion they envisioned would require much heavier capital.

“Once you reach a certain amount you can’t just knock on doors and talk to friends and family,” he says. “So you need to talk to the financial institutions.”

By this time, the two business partners had purchased houses that could be used as collateral. But as first-time borrowers, and with bank lending interest rates averaging 12% to 15%, they faced cumbersome terms.

Varabott says the cost of capital in Cambodia has traditionally been high because the risk is high. Until the establishment of a credit bureau in 2012, there was no central database for credit histories, making it easy for people to borrow from several institutions simultaneously and increasing the risk of default.

The new credit bureau has helped banks manage risk, which has resulted in lower interest rates. “Bank loan interest rates 10 years ago were nearly double what they are today,” he says. “Rates have fallen to about 10%, and [established commercial customers] can even negotiate for 7% to 8%.”

Credit Loves Collateral
But for small companies short on liquidity, the biggest single obstacle to obtaining bank credit is a lack of collateral to secure the loan.

“Banks will not finance any loan unless you have collateral,” says Mengly J. Quach, a US-trained medical doctor whose eponymous conglomerate is engaged in education, health and food services. “Those who can get a loan are those who have property, or have family with property.”

When he returned to Cambodia in 2002, Mengly had neither. But using his savings and the $350 monthly stipend he received as a public health volunteer, he leased a four-unit building complex that became the foundation of his vision for a US-curriculum school.

Beginning with just five staff and four students in 2005, American Intercon School (AIS) has grown into an internationally acclaimed K12 school and junior college with 11 buildings, 1,300 staff and 10,000 students.

– Varabott Ho, Managing Partner, Cye & Cinn Cambodia

“We started up with $20,000, and by the end of the first term realised that we needed to expand,” Mengly recalls. “We’ve been expanding every single day since.”

He says revenues are constantly “recycled” into purchasing property around the core complex, giving AIS room to grow while building a collateral base that improves bank lending terms. A 10-year relationship with Campu Bank has made bank finance highly affordable.

“At first it was very difficult to get a loan, and the bank offered us a very small amount,” says Mengly. “But now our bank trusts us and offers larger loans. It has increased the percentage of collateral to 80%, reduced the interest rate and extended the tenor from five years [before], to 10 to 15 years [now].”

He advises small companies to consolidate their loans for the best possible terms. “Use all your collateral to get just one loan from one bank,” he says. “It looks better and gives you more leverage in getting the loan.”

Optimising Cash Flow
Yet for some, the risk of losing their property to a bank in the case of an unexpected downturn is too much to bear. One alternative to traditional collateral-based lending is to negotiate short-term credit lines with suppliers and customers. Trade credit – where suppliers agree to postpone payments of purchases – or invoice discounting – where financing firms allow companies to draw money against outstanding sales invoices – help companies to improve their working capital and optimise their cash flow.

“If you are a well-established trading company you can use your inventory as a form of collateral,” explains Varabott. “This can help with the cash flow.”

Song Saran, chairman and CEO of Amru Rice, one of the country’s biggest
rice exporters, says his company has used bank credit to finance capital-intensive projects, including the recent opening of mills in Kampong Cham and Battambang. But he tries to minimise his exposure by using trade finance when procuring raw materials from suppliers. This gives the company more liquidity and means it is not at risk of defaulting on its loans if buyers delay their payments – as is known to happen.

“[We are] currently using trade financing to support our cash flow through pre- shipment loans or financing against all [invoices] submitted to the bank,” he says.

-H.E. Ohkna Dr. Mengly J. Quach, Founder, Chairman and CEO, Mengly J. Quach Holdings

International Appeal
Saran has also approached international financiers, including the International Finance Corporation (IFC)* and Agence Francias de Developpment AFD*, to discuss the possibility of receiving investment loans and trade financing for expansion. Amru is currently seeking capital for construction of a new rice mill.

Mengly, who is also in discussion with the IFC, says international financiers offer lower interest rates and longer repayment periods. They also provide invaluable technical expertise to strengthen the invested business. But for companies to qualify for “soft loans” they must demonstrate transparency and rock-solid accounting.

“The IFC’s terms are based on a company’s audit, not its property,” he explains. “The IFC looks at transparency, credit reputation and how its loans can help develop the country.”

Accordingly, Mengly is working closely with one of the Big Four* auditing firms to discipline his company’s bookkeeping and restructure into two divisions under a holding company. The restructuring also aims at positioning the company for an initial public offering (IPO) on the stock market. By going public, the company stands to generate a significant and immediate infusion of cash for expansion.

“We are very tempted to IPO,” he says. “We’d planned to do it three years ago and signed with an underwriter, but it was still too early for us.”

Going Public
Accounting practices required by the Cambodian Security Exchange (CSX) – which currently has only two companies listed – and the capital needed are challenges that companies have to overcome before listing.

Companies must have a minimum of $1.25 million in equity capital and must also submit financial statements from the last three years to demonstrate cumulative profits in excess of $250,000.

Also, many local companies are reluctant to open their books to scrutiny and are wary of the costs and complexity of an IPO. The listing process can take over a year and cost more than $1 million once compliance issues, underwriting fees and accounting firm fees are added.

“For a small business, given current costs, it is really only worth listing if you intend to raise at least $4 to $5 million,” says Varabott. “However, the higher the amount you want to raise, the lower the [relative] cost.”

In an effort to encourage more companies to list on the CSX, the market regulator is considering a proposal to establish a separate board for trading shares of small- and medium-sized enterprises (SMEs).

The alternate bourse would have less stringent listing requirements for small- and mid-cap firms, such as a lower minimum capital threshold and a shorter financial disclosure period.

This could entice more Cambodian firms to launch an IPO, says CBM Corporation’s Sila, who is weighing finance strategies to raise capital for his digital media firm, Sabay Digital. Founded in 2007, Sabay delivers online gaming, music, video, film and the country’s top-ranked web portal.

“We want to expand Sabay into other markets to make it regional,” he says. “Listing would make this easier and we are looking at the possibility.”

Through an IPO, the company stands to raise millions of dollars for expansion without interest payments or collateral. It would also create a proper valuation of the company and bolster its reputation, making it more attractive to both individual and institutional investors, says Sila.

On the Investor Radar
After decades in obscurity, Cambodia’s galloping economic growth has begun to attract Asian private equity firms and investment funds. Foreign investors are circling, and with the Asean Economic Community (AEC) due to launch at the end of the year, the number of merger and acquisition (M&A) deals is expected to grow as firms position themselves to tap into a common market of more than 600 million consumers.

“We don’t have any official figures on M&As, though it’s not a high volume because the economy is still small,” says Vannarath. “So far, it’s mostly been cross-border inbound acquisitions, and not many mergers.”

Mengly says his company has been approached by 35 different investors and investment funds looking for joint ventures or stakes – including one Asian investor looking to take a majority stake in the educational institution.

Equity investors can provide much-needed capital for expansion, but in return they expect a shareholding stake in the company and a degree of managerial control. Most deals fall through on disagreements over valuation or the acquiring firm’s restructuring plans.

Mengly says he welcomes investors’ interest, but like many entrepreneurs is wary about relinquishing any control over his company’s operations.

“We don’t want people involved in the decision-making,” he says. “I know profit is part of the thinking, but we want whatever is most beneficial to the community. Equity investors are more interested in making a return on investment.”


Words by Cam McGrath |Photographs by Dominique Tardy