quick note: don't forget our site has a comments function. With something as complex as banking and loans / many of the topics we cover there is a very good chance that you know more about some element of it than we do. Share your thoughts!! Comments are at the bottom.
Introduction - funding a startup
So here we have an interesting post detailing the last month and a half we've spent trying to get to a "happy spot" regarding startup capital. There are many ways to fund a startup (as this nice article explains) but for something brick and mortar like a BBQ restaurant many options aren't as available as they would be if, say we were starting a scaleable tech company. With that reality the most common way for people in the US to start a small business is by "bootstrapping" it with their own capital, either in the form of cash, a 2nd mortgage, personal credit or help from friends and family as loans or in exchange for equity. In our case we are a very "bootstrapped" company. We have our own assets on the table and have approached lots of friends and family for investment. All told this just isn't enough so we started looking to other options. This is when we began to investigate the possibility of a Moldovan bank loan.
What type of loan we need
Firstly, let me say that we are terrible loan candidates. The only tangible asset any of us has in Moldova that could be considered collateral is my 1986 Жигули (Lada - her name is Nadia) worth around $500 (less if you ask my partner Vlad who harbors a passionate hatred of my, admittedly intermittently-reliable, car). This combined with none of us having any side income and Moldova not having any interest in my US credit score puts us in a pickle. As such we are looking for an unsecured small business startup loan. In the US this would likely be a hard sell even with SBA backed loans.
What do you mean I don't seem serious? (source)
Please please please don't flash back to that fact when reading the following as the sole reason for our experience. It is certainly a factor but as I will explain it is only part of the story. The other part is that loans in Moldova are in general very difficult to get and subject to some pretty outrageous terms. Firstly though...
Why even look for loans in Moldova? 2 partners are Americans and we have a Virginia LLC, why no look in America?
Actually we are an even harder sell in the states. As any discerning reader probably already can guess the idea of having an LLC set up simply to manage a foreign entity doesn't generate love from a loan officer. No assets stateside means it's very hard for them to grasp our value and almost impossible for them to seize company assets in the case of trouble. Furthermore, Matt and I have lived overseas generating what we might call "almost zero" income as Peace Corps Volunteers for the last 2 years. This isn't to say that we didn't talk to our bank it's just to say that we never really approached this as a very realistic option (that's not to say that a business credit card in the states isn't a reasonable option for startups - credit cards are much easier).
So why are Moldovan banks a realistic option?
Good question. Our thinking was like this: 1) We had half the capital we were looking for in cash - proving we were serious. 2) we weren't looking for a huge sum (there are limits to transparency but let's say it was under $50k). Furthermore, most Moldovans just starting out 1) don't have any credit (complicated as to why but basically personal finance is quite a bit different here from the states) 2) there are numerous programs backed by the Moldovan Government, the EU and others to help startups and 3) we have personally worked with many people looking for startup loans with a whole lot less of their own skin in the game than we did who managed to figure something out. 4) while we don't have collateral personally or with company assets the company will be buying a lot of things that could be put into the loan collateral (like kitchen equipment).
So with that we began by...
Firstly, let me say that our strategy was "visit 3 banks and if we get more or less the same (negative) response take it as representative and move on." We didn't want to waste too much time on something that was literally just a waste of time. What we found though, while being a major waste of time, was so confusing and nuanced that we got sucked further and further into trying to figure it out.
Ok, so we first went to Mobias which is our company's bank. After talking to our account executive there it became clear that we didn't have any options there. The immediate focus of the conversation was on what collateral we could put up to secure the loan and when we said "none" / "a 28 year old Soviet car" (joke) she said that they had no unsecured loan options at all. We asked to see a loan officer and she said "it's a waste of time so no." Ok then, big thanks.
For brevity's sake I won't tell the next ~6 bank visits as a narrative and focus on the highlights:
- Unsecured loans were mostly not an option at all for a company. There was one lending institutions (MicroInvest) that had a program that could offer us $10k USD (150k MDL) but the utter indifference of their loan officer bordering on hostility made it clear he wasn't interested in our application at all.
- Unsecured personal loans were available to our Moldovan partner Vlad ranging from 50k MDL ($3.19k USD) to 150k MDL (~$10k USD)
- To get a business loan most banks required a minimum collateral amount ranging from 116% of the loan value to 150% of the loan value (150% being more normal).
- We were told that banks sometimes try and force a quick default as it is more profitable to take your stuff than have you pay for the loan
- land is valued in collateral at 100% of it's market value
- cash can be used as collateral in a CD (more on that below)
- cars and equipment (like kitchen equipment) is valued around 40%
- Loans can be given in USD or MDL
- Loans in USD are given at an interest rate between 4-8%
- Loans in MDL are given at a rate between 15-21% (I assume largely due to the inflation and instability risk in the currency)
- All loans are subject to a number of fees and commissions (more in the example below). We were told by friends who are local businessmen that in practice the lending rate between USD and MDL balances out due to commissions banks leverage on USD loans. This makes MDL loans more desirable.
- Loans can be secured with insurance on "financial risk"
- knowing little about banking this is how I assume banks in the US work. If you are a riskier loan then your rate is higher in part because they are insuring a part of your loan.
- In Moldova this works "differently" (see below)
Ok, with that technical bit aside let me share a few general impressions about how this whole process worked.
General Impression 1: Blank stares
This was our general reaction on walking into a bank and asking for the loan officer. Most employees at a given branch didn't know who / where this person was. Furthermore, when we first approached said person (interrupting their facebooking) we received a second round of blank stares. To say the least we got the impression that they didn't get a lot of business (could be because of the whopping 150% collateral mentioned above).
General Impression 2: Most were unwilling or unable to do their jobs
The reason we visited so many banks is that we began to realized that we were/are eligible for *something* but that getting them to give us the time of day much less try and figure out how to give a loan was like pulling teeth. In general we got "we need collateral" and then a slammed door. When we gave them more information about our business or any numbers they remained uninterested. This would be ok if there was some inescapable reality that only people with 150% collateral (aka who really don't need a loan at all) are the ones eligible. The reality though is that this is not true because...
Government non-government and international programs
- LOTS of these
- mostly focused on guaranteeing loans for the banks via putting up collateral
- for most of them you apply to the bank and the bank applies for the guarantees under these programs as part of evaluating you
The banks had literally no idea about any of these and never brought them up. When we brought them up the loan officers gave us a tired look and, after clicking through a few pages on their computer found that they literally had pages and pages of information about it. To this realization they continued to look bored and asked us which one we wanted to apply for. We said "we have no idea - all the information is on your computer on your company's intranet." This resulted in shrugs. We tried calling the loan programs themselves (e.g. ODIMM) and they were quite clear that only the bank deals with them. The only conclusion here is that the people at the banks (plural - this was ALL of them) just had no interest in doing their jobs.
After trying our best to research and call people who had no interest in talking to us because we weren't a bank we discovered that we weren't generally eligible to these programs anyhow because we are not involved in their target industries or locations (more on that below). Lots's of time wasted because the loan officer was unable to clarify literally anything.
A second example of this is insurance for loans. One bank mentioned that maybe we could insure the loan as part of the collateral. The thinking would be that we somehow come up with 50% of the needed collateral and then insure the rest. This seemed interesting to us so we asked how it was done. He said, he has no idea and that we need to talk to an insurance company. After visiting 4 and getting answers ranging from "the only person in our entire company who knows anything about that is on vacation for a while" to "never heard of that type of insurance before" to companies that are not licensed for that type of insurance we finally found one that did know. We waited patiently in the lobby of their building to be buzzed up because their office was closed. Instead they send down a confused manager to explain to us that we don't go to them to insure our loan - the bank does.
General Impression 3: No one cares
Following closely with General Impression 2 we never found anyone who actually cared. Not only were they uninterested in answering our questions or finding a way to give us a loan but many of them treated us like we were interrupting their facebooking / youtube watching time. Not every meeting was hostile or passive aggressive but literally no one was willing to work to try and figure something out.
I'm told that all the major banks in Moldova are having a really hard time and aren't being very profitable. Maybe that has something to do with turning people away based on one simple criteria vs. looking at what options are available to them. Anyone who's ever been to a US bank for any reason knows that they never miss an opportunity to try and sell you on something - another credit card, their latest awards opportunity, etc etc. These dudes in Moldova just couldn't care less.
this is what I assume a normal business planning meeting looks
like here. Off topic, very passionate and hilarious to outsiders
General Impression 4: How do you get real treatment? have a connection
So how do you get anything done? Same way as always here - know someone. We reached out to friends and contacts and found someone who knew a branch manager at Moldova Agroindbank. This got us a real sit down and a way to crunch through what opportunities might exist for us.
The best deal available
Let me preface this by saying that the deal following is so terrible that playing it out with the bank representative was largely an exercise in curiosity.
| assumptions (these are not our numbers but are a representative set to discuss terms - again limits to transparency):
have: $31k (51% of what's needed)
access to 11k in personal loans (an assumption tossed out by the bank guy to make numbers start to work)
= $18k still needed
* 100% collateral
* put $31k in CD for 5 yrs @ 5% annual (USD) (aka all our cash)
* Odimm agrees to guarantee this loan. (e.g. we put up $31k CD collateral meaning we need additional $18. Odimm covers 50% of this meaning we need $9k more)
* contract for rent signed > length of the loan (it must also be signed and fully official BEFORE the loan application is accepted)
* all purchases to be put into collateral are to be prepared and signed before submitting all documents. This equipment will be included at 62%-65% of value in collateral (this means that before knowing if we get the loan we would need to prepare a MASSIVE amount of documentation stipulating all of the equipment we would purchase).
* cosigner for remaining amount of loan with sufficient land or house assets to cover remaining (aka if we're still short after the equipment as collateral)
* get $60k loan (aka taking a loan to cover the whole cost because we put the 1/2 of the cash we had in a CD)
* interest will be 14.25% annual
* application fees will amount to ~1000 lei
* 1% fee on final early payback (charged on amounts over the stated monthly rate)
1) initial commission of 2% on entire credit amount ($60k)
2) 1% annual commission on remaining sum
3) 1% commission on amount removed at each withdraw from the credit line
has a ~2.5% commission on the remaining sum yearly starting after the first year
if anyone reading is a glutton for pain and / or really really bored feel free to try and calculate what the actual APR is after all of those commissions.
Here are some general lessons learned from the process. These are by no means comprehensive and some touch off some topics that might best be handled separately but here goes... (remember - leave comments below if you have anything to add :)
Collateral is king
In Moldova most families have land and a house / apartment. This is due to land redistribution when the country became independent and the fact that everyone just assumed ownership of where ever they were living when the Soviet Union fell. When they do not generally have is debt. This means that people are much more likely to have collateral than credit. This explains the focus on collateral. If you are not of the generation that reaped those benefits (and lived through the economic disaster of the 90s that came with it) then the banking system doesn't seem to know what to do with you.
The AgroindBank loan officer who helped us figure out that terrible deal above explained to us that one major barrier in lending here is that the laws that would assist the bank in getting their money back if you default or just take the money and run are weak. I can't independently verify this but would love to hear from someone who knows more about it (comments are below!)
Grants / seed capital
Most Moldovans don't look to loans as a first stop in loans. They look for grants (free money!). This and likely numerous other factors means that banks aren't really in the business of giving loans to a startup company. Some loan officers said that this entire process would be totally different if we had cashflow and an operating business which I believe (though they still implied collateral is king).
Target sectors and special treatment outside of Chisinau
The Moldovan Government and international organizations target certain areas and industries for growth which leads to our ineligibility from many programs. In particular rural development and agribusiness are big target areas. The ODIMM program mentioned in the above example is the only one that we are technically eligible for and they state a clear preference for agribusiness and things out of Chisinau. We were joking that if we wanted to become an apple exporter or startup a restaurant in a small village where no one will eat out we would be contenders.
To me this is all stupid. I understand that developing the agriculture sector is wise and will put the country on track for it's European ambitions. That said, what about the rest of the economy? Much is said about urbanization of Moldova (usually negative) but when compared to developed countries a much larger percentage of Moldovans still live in villages - where there are few, if any jobs. Developing entrepreneurial business shouldn't fear social change by trying only to bolster the status quo. If a developed economy means people go to cities for opportunity that can't be fought by only supporting startup businesses outside of the cities. It only retards the growth of startups.
Ok, I have that off my chest. Feel free to contest it if you like. I feel strongly that more planning = weaker economy. Imagine if SBA loans in the US were only for certain sectors as ODIMM programs are here? It assumes you know what will drive your economy in the future and excludes possibilities like a high-tech boom and more.
I never want to do any of that again.