Finance innovator takes the fast road to China

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? By MIKE PRESTON.

By Mike Preston

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 cashflow 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 cashflow, 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.