TOKYO, 8 September 2003 — With just 77 employees, camera retailer Doi was a small Japanese company with big goals.
Capitalized at 415 million yen ($3.5 million) — miniscule when compared with larger peers like Yamada Denki Co, a retailer with 46 billion yen in capital — Doi hoped to broaden its business by expanding from a commercial hub in southern Japan to the nation’s capital, Tokyo.
But it also had 4.5 billion yen in outstanding debt and it struggled as banks choked it of the funds needed to stay afloat.
The company, known for its “Camera no Doi”, or Doi’s Camera, retail shops, filed for court protection last week.
“With ongoing deflation, sales kept sliding and the debt burden grew so much that we could no longer cope,” lamented Kimio Sato, a director at Doi.
Doi’s demise is a familiar tale among small- and medium-sized firms, which account for 99 percent of total Japanese companies.
“Doi is originally from Fukuoka and it had a local main bank, but when it shifted operations to Tokyo, the relationship with the bank deteriorated,” said Takatomo Nakagawa, analyst at independent research firm Teikoku Databank.
“Had it kept its relationship, it could have won some favors from the bank, including debt waivers or softer conditions on interest payments.”
In July, 1,384 companies went bust in Japan, according to Teikoku. That was down 23.7 percent from the year before, but Teikoku said the drop was “not due to an elimination of a potential crisis, but rather to a postponement of that crisis.”
The problem is a combination of a slow economic recovery, weak company demand and banks becoming more risk-averse after decades of reckless lending resulted in a mountain of bad loans.
Government efforts to deal with the problem have ranged from nurturing a securitization market to talks on allowing companies to diversify what can be used as collateral, such as inventory, equipment and intellectual property.
The idea is to make it easier for smaller companies to raise money directly from the market and to make it more attractive for banks to lend to smaller, and often riskier, borrowers.
But diversifying collateral faces legal hurdles, says Tsutomu Muramoto, an economics professor at Seijo University, while firms are reluctant to use credit receivables, another collateral option, because the practice tends to raise suspicions a company is in dire straits.
As a result, small firms still face an uphill battle in securing fresh funds.
“We are challenged to find ways to provide guarantees and create a market,” said Kazushige Nobutani, a financing division official at the government’s Small and Medium Enterprise Agency. “Our involvement could help remove psychological barriers, but there’s a lot more to do,” he said.
The Bank of Japan has pitched in by agreeing to buy paper backed by assets of small firms, although the initiative has yet to take off.
“The ideas are out there and all that’s left to do is to breathe life into them,” said Muramoto. Seventy-six percent of smaller firms, which Japan defines as those with capital below 300 million yen or with fewer than 300 employees, rely on loans compared with around 53 percent for larger firms.
But small firms have few avenues available to them for raising funds, partly because they fall short of meeting requirements for initial public offerings and bond issuances.
A number of banks and others, however, see opportunities among the troubled firms — provided they have a viable business.
Some banks have recently become more willing to lend to smaller companies that allow them to charge higher lending margins to reflect default risks.
New banks are also vying for a piece of the action.
A group of entrepreneurs, including a key government adviser on banking policy, plans to launch a bank dedicated to small-firm lending next year. The Tokyo Metropolitan Government is considering a similar scheme.
For those turned down by banks, three government-affiliated institutions function as safety nets. But even the government is selective: An index tracking government loans to smaller firms fell to 95.6 at the end of 2002 from 100 two years ago.
Turnaround funds are also helping businesses where banks cannot, but money is not always the main issue.
Flexibility and agility on the part of small-firm managers to respond to a customer’s changing needs is vital, said a manager at a corporate turnaround fund.
Successful turnaround stories resulting from creative management abound.
A Japanese “ryokan”, or hotel, at a popular hot springs resort responded to a drop in big group reservations by turning its banquet hall into a dancing room to take advantage of the rising popularity of social dancing. In the end, it may be a matter of self-reliance.
“I never rely on bank loans,” said the owner of a tiny cloth distributor founded in 1927 in downtown Tokyo, once a thriving center of textile commerce.
“The first thing I do every month is pay the suppliers and employees. I never force myself beyond what can be managed with whatever is left at hand each month.”
