The Reality Of Doing Business In Spain: A Personal Account
Thursday, March 14, 2013 at 2:33PM Contributed by Don Quijones, a freelance writer and translator based in Barcelona, Spain. His blog, Raging Bull-Shit, is a modest attempt to challenge some of the wishful thinking and scrub away the lathers of soft soap peddled by our political and business leaders and their loyal mainstream media.
Most of what is written these days about the struggling countries on the eurozone periphery is done so from an almost purely macro-economic perspective. Figures are bandied about and graphs exhibited to try to prove that one country or another is either on the road to recovery or the path to perdition.
The problem with this approach is that it completely ignores the human dimension of the economic depression in Southern Europe. The stark reality facing millions of Spaniards, Italians, Greeks and Portuguese is hidden, buried deep under a mountain of economic data, much of which is massaged to suit the purposes of the central planners-in-chief. The result is that we are often unable to see the trees for the wood.
For that reason, I’ve decided to devote this post to the story of a close acquaintance of mine–one of a dying breed of self-made entrepreneurs and small business owners here in Spain.
Although he is happy for me to tell his story, my friend would prefer it be done under the cloak of anonymity – as he says, you can never be too careful these days. For that reason, he will, for the duration of this article, go by the name of Francesc, or Cesc for short.
Cesc’s company has two lines of business: interior design (a sector which, as you can imagine, has been pretty anaemic since the collapse of Spain’s property bubble) and the design and construction of exhibition and trade fair stands, which until a few years ago, when Barcelona was the trade fair capital of Europe, was a thriving sector with enormous opportunities for enterprising businesses like Cesc’s.
For Cesc and his business partner, the heydays of the mid 2000s were a heady time indeed. Until, that is, his company took on a project to redo the interior of an upmarket restaurant in one of Barcelona’s most fashionable neighbourhoods.
All began well. The job was one of the biggest Cesc’s company had ever had and its small workforce was abuzz with excitement. However, the material and labor needed for such a job was immense, and with concerns mounting about the mounting costs, Cesc asked the restaurant owner to pony up half of the cash up front.
However, the restaurant owner’s cash flow was temporarily held up in other areas, so he proposed instead to give Cesc what in Spain is commonly called a “pagaré” (a promissory note – in other words, an official IOU) for close to 100,000 euros. Put simply, the restaurateur committed to pay the money in one month’s time, while his bank assured Cesc that, as a solvent, long-term client, the restaurateur could be relied on to make good on his obligations.
As Cesc recounts, “the bank told me that he was one of the richest restaurant owners in Barcelona, and even offered to extend us more credit than we needed – which we obviously declined.”
Duly reassured, Cesc cashed in the promissory note, using the funds to pay workers and buy materials. By the time the restaurant was ready, Cesc’s company had spent close to 180,000 euros on the job – all of it guaranteed by the restaurant owner.
However, when the time come to cash in the promissory note, Cesc was told by the banks that the funds were not there. One quick phone call later and Cesc was informed that his client was completely out of cash and almost certainly facing bankruptcy, leaving Cesc’s business on the tab for over 180,000 euros – money it neither had nor could dream of getting hold of.
That didn’t stop the bank, though, from immediately swooping into Cesc’s business account to remove all of the 40,000 euros sitting there, effectively stripping the company of all its cashflow. The rest of the debt was repackaged into a refinance deal, with exorbitant interest rates.
To make matters worse, that same month saw another of Cesc’s business clients close up shop, reneging on a 20,000 euro payment he owed the business.
“In the space of just a few days, our world was turned upside down,” says Cesc. “One minute, business was booming, the next we were in hock to the bank and completely out of cash. Our client is now completely broke and living with his parents, like so many people here in Spain.
“It has taken years for the lawyers to sift through the remnants of his (the restaurant owner’s) former business, and at the end of it almost all of his assets went to the banks or the government. We still haven’t seen a penny of our money.”
To keep their business ticking over, Cesc and his partner decided that their top priority would be to keep paying workers’ salaries and the company’s long-term providers. With the recession beginning to bite and business activity slowing to a crawl, the company’s revenues were so tight (especially after paying off its monthly debt obligations) that it couldn’t pay either social security – which in Spain, at 35 percent of each worker’s salary, is one of the highest rates in Europe – or corporation tax.
In the end, Cesc and his partner were forced to lay off most of the company’s workers.
“It was the hardest thing I’ve ever had to do and I never want to have to go through it again. I knew I was leaving my workers, many of whom had become close friends, in a very precarious situation. But there was nothing else we could do, we were broke.”
Shortly after that, Cesc and his partner declared bankruptcy. Yet whereas most people in their situation would have thrown in the towel, Cesc and his partner – both inveterate entrepreneurs – decided to give it another go, setting up a second business under a different name (this is, after all, Spain we’re talking about!).
“We know that we’re good at what we do, and we believe 100 percent in our product,” says Cesc. “We have some of the best designers as well as a team of great builders. Our clients, both big and small, are always satisfied with what they get.”
Despite a backdrop of one of the worst recessions in living memory – not to mention a ballooning debt of over 200,000 euros – the new company somehow continues to survive. But it’s getting harder and harder.
As Cesc says, “The economic situation in Spain is absolutely dire. More and more businesses – especially small, family-run ones – are closing down. And those that are left standing are now paying less and less for the services they need.
“Companies are cannibalising each other, with many being forced to take on jobs for little or no margin. Everything is getting devalued: not just the amount of money you can charge for your services, but also the meaning and quality of our profession.”
Instead of just competing for the meager scraps available in the Spanish market, Cesc has begun looking overseas for opportunities. As he has learnt, in Northern Europe, the company can make two or three times as much money for the same job as it does in Spain.
But Cesc’s sights are set not just on Europe. He’s also marketing his company’s services in the booming markets of China, Russia and the Middle East, and with a fair degree of success: his company was recently awarded contracts to design and build stands for trade fairs in Dubai and Shanghai.
But all the while, the shadow of debt continues to loom over the company and, with interest of up to 10 percent per annum, is growing at an alarming rate.
“We’re trying to pay it down as fast as we can, but it just keeps growing,” says Cesc. “For instance, the amount we owe social security has gone up from 50,000 euros a couple of years ago to almost 70,000 today. And all of that is interest.”
Cesc is not alone. In fact, his experiences embody what is happening to small and medium-size companies across Spain. According to the Spanish publication 80 Dias, 90 percent of companies are suffering late payment of invoices, with as many as 65 percent of Spanish SMEs at high risk of insolvency as a result.
In the most perverse of ironies, it’s the Spanish government itself, in particular at the local and regional level, that is arguably the worst culprit when it comes to late payment for products or services. For large companies, having to wait many months, or even years, to receive payment for services rendered can create serious cash-flow pressures. But for smaller entities, it can quite literally mean the difference between sinking or swimming. And each time a company goes under, a vital link in the business food chain is permanently severed.
Cesc speaks for hundreds of thousands of Spanish business owners when he expresses his frustration at the government’s refusal to support small businesses:
“The government seems oblivious to what small businesses are going through. All we would need is a temporary freeze on our debts so that we could have a little breathing space and concentrate on trying to expand our businesses. That way, we might actually be able to create new jobs.”
In Spain, as in pretty much all developed economies, most well-paid, full-time jobs are created by small start-up companies like Cesc’s – not the blue-chip multinationals in whose favour most economic legislation and policy are passed.
However, the Spanish government, filled to the rafters with professional politicians and economic advisors with zero experience of running a business, merely plays lip service to the needs of “never say die” entrepreneurs like Cesc. Perhaps that explains why the World Bank currently ranks Spain 136th out of 185 economies for ease of starting a business - behind the likes, I kid you not, of Nicaragua, Kosovo, Uzbekistan and Iran.
“In some places, like the U.S. and the U.K., they respect, even encourage, failure. Because that’s how people learn,” says Cesc. “Here in Spain, they punish you, brand you for life as a loser and make sure you never run a business again.” Contributed by Don Quijones, of RagingBullshit.com
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