Microfinance to help grow your small business

For those in the Philippines, microfinance is available to help you start or grow your business. Microfinance helps in the growth of “small or micro enterprises” because it lends relatively small amounts to small businessmen. In truth, an important way to grow a business is to use leverage properly. Thanks to the support of the Bangko Sentral ng Pilipinas (BSP), your small business now has a source for borrowing to support your cash flow needs. The key rules and features in using microfinance are: 1) You should clearly understand and accept that a loan is actually using other people’s money. Therefore, it is important to pay back in accordance with the loan agreement. 2) Properly analyze your business’ capability to pay back the loan principal and interest. 3) Carefully study and manage your business cash flow to ensure that your cash inflow can really cover your loan repayment schedule and still leave some cash for your other operational needs. 4) When you meet the terms of agreement on your loan by paying on time, you establish good credit standing. This allows you to be able to borrow more in the future should you need to grow your business further. 5) In the very successful microfinance operations, borrowers in good standing are able to accumulate forced savings and earn insurance coverage, all coming from their loan repayments. Microfinancing does not require collateral. However, in most cases, aside from your signature, you need the endorsement and guarantee of four of your friends. In this way, the loan is really not just yours alone but your guarantors as well. If you cannot pay, your guarantors will have to answer for your debt. Thus, your guarantors will be sure to support you and pressure you to ensure payment. According to Monetary Board Resolution No. 40, microfinancing loans are small unsecured loans with no need for collateral. The amounts are normally Php2,000 to Php5,000 and could be more but not higher than Php 150,000. The loan can be paid daily, weekly, bi-monthly or monthly. The interest cannot be lower than market rate and should be fair. This is unlike the “five-six” lenders where the interest rate is exorbitantly high. Thus, Microfinancing can really help you if you are starting a business or if you need more capital. You just have to be able to repay the loan with your regular earnings. The microfinance loan can be used as the start-up capital for different businesses. It can be used as equity for sari-sari stores, different “buy and sell” businesses, handicrafts or small manufacturing (rug-making, basket-making, etc.); services like tricycle operation, barber/parlor shop, repair shop; or food production/processing like meat processing, candy-making, bakery and any other types of small business. You could say in fact that it can apply to any kind of business you can think of. How to start on microfinance The first decision you have to make before even thinking of microfinancing is the business that you will put up. Remember, your business should be dependent on what your “passion” is, meaning something that you are have the expertise for and enjoy doing. It should be an activity that, as you work, you are actually having fun. Your business should be something that fits your environment. It must clearly address a regular need in the community you are in. For example, if your community does not have a place for having a haircut and you know how to give haircuts, you could put up a barber/parlor shop. Or if your village does not have a “convenience store”, you might consider putting one up. Once your have your business, you need to understand the various conditions for borrowing from a microfinancing institution. Study the terms and analyze if these can support the operational and financial needs of the business and more importantly, if the loan can be paid back by your business. • loan amount (for example: Php 3,000 or Php 15,000) • program beneficiaries (for example: housing, small trading/buy and sell, agri-business, services; existing business over one year or group of businessmen) • interest rate and fees terms of payment (how long? 4 months or 6 months. when payable: weekly o or monthly) • collateral/security (to be guaranteed by a friend, associate, relative or contract of payment commitment, etc) Because of microfinance, small businesses are given the opportunity to start. Used properly, it can make your business grow and provide livelihood to many. If you think about it, microfinancing is not new. There have been many people and companies in the past who went out of their way to lend small businesses and yet, most of them failed to collect and ended up closing down the lending window. So why is microfinancing successful today? What changed? There are three main changes as I see it and not necessarily in this order. 1) There is always at least one co-borrower involved in any microfinance loan. There is pressure on the borrower to make good on his re-payment because his co-borrower will be penalized just as much as he will be if he doesn’t. The co-borrower will also exert all his effort to make sure the main borrower pays so that he will not be financially affected. This co-borrower approach capitalizes on “peer pressure” such that there is that additional “moral” or relationship pressure on the borrower to make good in paying his debt obligation. In the Asian setting, particularly among underdeveloped economies, “face value” is a very strong influence on individuals to live up to their responsibilities. 2) The seminar on values formation before the funds are released is a very important factor too. It is normal for a borrower to think that borrowed money is his money. Thus the motivation to pay is somewhat negated. Others have a worse mindset. They rationalize that the lender is rich precisely because he can afford to lend. The thinking extends further that if he is rich, he can also afford not to be paid. Values formation makes the borrower realize that regardless of the financial situation of the lender, paying back a loan according to the agreement is an obligation that must be fulfilled. Otherwise, the lender may not be able to continue lending and thus no longer able to help many others. 3) The involvement of the Bangko Sentral ng Pilipinas helps to increase the number of lenders and thus increase the funds available for microfinance loans. Because of these developments, billions of pesos have been made available to all regions of our society. The experience has been outstanding! Collection rate has registered to almost 98%, proving that, given ample planning and training, the ordinary Filipino is a responsible entrepreneur. Come to our free seminars from 4-6pm on Saturdays sponsored by CFE, SM Malls, PLDT, Universal Motors UrVan, KSK Coop and others. The participation and feedback are impressive. For July: July 4 – SM Batangas City July 18 – SM Molino July 25 – SM Dasmariñas