When you can't pay, what makes people keep believing in you?
Originally written in Chinese. Translated with AI, reviewed by Gary. Read the Chinese original →
Imagine you owe someone a million US dollars. You go to the creditor and say: "Sorry, I can't pay you back. And I need to borrow another million." And in the end, the creditor actually keeps helping you, and even pays off your bank debt for you. Would you believe it?
It really happened.
Today's main character is Nike's founder, Phil Knight. The story is in his memoir, Shoe Dog. And it happened in 1975. A million dollars back then had nothing like the purchasing power of a million today. For a company still growing, it was an enormous sum.
The more you sell, the shorter the cash
His company was still called Blue Ribbon Sports then. It was selling more and more shoes, yet the money was less and less enough. Every time cash came in from selling shoes, it had to go out again to order the next batch. The more orders, the more inventory you had to fund up front. Anyone in business knows the feeling: the sales report keeps growing, and the boss spends every day hunting for money.
That spring, the company had a US$1 million payment due to the Japanese trading house Nissho Iwai, and when it came time to pay, it was about US$75,000 short. They pulled cash from their retail stores to make up the gap, and even the factory workers' paychecks bounced. Bank of California then decided to stop doing business with them and cut off their financing. Now the problem wasn't just the missing 75,000. There was no money left to keep things turning over.
Phil Knight had no choice but to go to Ito and Sumeragi at Nissho Iwai and come clean about the company's situation. In essence: I can't repay the million I owe you right now, and to keep the company alive I need another million. That same evening, the bank told him it had contacted the FBI because it suspected the company's handling of funds involved fraud. That was the bank's accusation at the time, not a finding that he had committed a crime. But for an entrepreneur, with staff unpaid, a creditor wanting money, the bank pulling its loans, and now even the FBI brought in, you can imagine the pressure.
Nissho Iwai didn't agree to give money right away. They audited the books first. And the audit turned up another problem: Phil Knight had used part of Nissho Iwai's funds to open a factory in Exeter, without telling them beforehand. He had held back on how the money was being used, putting trade financing into a factory where it was tied up, which of course made cash flow even harder.
Try putting yourself in the creditor's shoes. I lend you money to buy stock and do business. Now you tell me you can't pay, and when I check the books I find you secretly used the money to open a factory. Normally, wouldn't you be even angrier? Even basic trust might be gone.
Why the creditor still stepped in
What struck me is that Nissho Iwai still chose to support them in the end. My reading is that the factory he hadn't disclosed, besides exposing Phil Knight's problem, also showed them where these people were putting the money. They were still making shoes, solving production problems, trying to build the company. The feeling was: money is extremely tight, yet what these people are thinking about is still how to make good shoes and keep the company going. The money was used riskily and the disclosure wasn't transparent enough, but at least you could see what they had put into the business. The question then was whether that passion and commitment still had a chance of holding the company up.
There's another detail in the book. Sumeragi admitted he had sometimes kept invoices in his drawer, sending them only once Blue Ribbon was able to pay. He had spent time with these people, seen how they worked, and believed in the company's potential. That handling obviously had management problems, but it also shows this trust wasn't built at a first meeting after one polished pitch. Growing together is easy to promise when business is good. Trust is really tested when someone sees your problems and is still willing to sit down and find out what actually happened.
In the end, after the audit, Nissho Iwai decided to act. Ito personally went with Phil Knight to the bank and said Nissho would pay off the company's bank debt in full. According to Knight's account, the FBI threat went away after that. They later found First State Bank of Oregon and got a US$1 million line of credit, and the company made it through.
That one act of support led to a very long relationship. Nissho Iwai had been doing business with Nike's predecessor since 1971, later helped set up Nike Japan, and eventually became part of Sojitz. The partnership has lasted more than half a century. Nike's headquarters even has a garden named after the company, the Nissho Iwai Gardens, as a mark of that relationship. The small company that once needed rescuing never forgot who reached out in its hardest moment.
Banks and partners look at different things
Why can a bank and a business partner look at the same company and judge it so differently?
If I'm just a bank lending to you, my upside is mainly interest and fees. Even if you grow as big as Nike, I don't automatically share in your company's value. And the downside? If you fail, I could lose a large part of my principal, or never get it back. So the moment you can't pay, my first thought is likely to control risk, tighten the line, and stop lending if necessary. A bank might choose to restructure the loan, but it always has to answer one question: will lending more improve the chance of getting the money back?
But if I'm your long-term partner, or an investor with equity, I see one more layer. A partner may keep doing purchasing, supply chain and market work with you; an investor may share in the value of your future growth. The bigger the business gets, the bigger the return on the partnership can be. Of course, continuing to support you also means possibly putting in more and losing more. It's just that the upside they see can be far larger than the interest on a loan.
When we run a business, raise money or look for partners, do we ever think about in what capacity the other side is backing us? When you succeed, what do they get with you? That shapes how much risk they'll take when you hit trouble, and how much time they'll spend finding a way through with you.
I wouldn't say cutting someone off is always wrong, or that continuing to support them is always right. Every situation is different. We only see this decision as visionary because we know Nike came afterwards.
But at the time, sitting in front of them was just an entrepreneur who couldn't pay, who had been less than open about how the money was used, and who still wanted to keep the company going. He was able to make people he had worked with for years still believe in him and back him after seeing all those problems. That pull was made of passion, of how he had worked in the past, and of whether others could believe you'd carry the responsibility.
If the one who can't pay today is your partner, a company you invested in, or someone who borrowed from you, what would make you cut them off? And what would make you keep believing in them?