How to Raise Capital – Money with which to start and run your new small business can be raised in various ways.
Obviously, the money can come from your own pocket. This may be what you have saved for years. Or this may be proceeds from selling a car, a lot, jewelry or other prized personal belongings. Possibly, you have stock certificates or government bonds which you can readily convert into cash. Using your own money is, of course, the safest way to finance a business.
The next safest way is to borrow from close relatives and friends. You will have to pay them back, naturally, but they are usually prepared to be more flexible about when you repay them. Furthermore, you may also be able to get away with paying very low interest rates or none at all.
Sometimes, however, what can be raised from your personal resources and from relatives and friends are not enough to meet all the requirements of your business. Then you can start looking for outside sources.
EXTERNAL SOURCES OF CREDIT
You can consider the following sources of money:
1. Pawnshops – You can get quick cash by pawning jewelry and other valuables.
2. Credit cooperatives – These are a popular and easy source of credit especially in the rural areas. It may therefore be very useful for you, as entrepreneur, to join one. Usually a credit coop will lend an amount up to five times bigger than the money a member has deposited in it. Interest charges are often minimal.
3. Money lenders – These are people who lend quick money without collateral but charge exorbitant interest rates. They are otherwise known as “five-six” operators, because they usually charge about a peso interest per month for every five pesos they lend.
4. Lending investors – These are enterprises engaged in moneylending operations. Considered a cross between money lenders and banks, lending investors extend short-term loans quickly to individuals and businesses with or without collateral.
Interest rates are higher than bank rates but lower than those charged by money lenders – usually ranging from 3 to 5 per cent a month. Lending investors have proliferated all over the country and have become an important source of credit to small enterprises.
5. Formal sources of credit – These include banks, financial institutions and certain government development agencies and development-oriented non-government organizations. They are called formal sources of credit because they have the legal authority or mandate to lend money to individuals and businesses.
TYPES OF LOANS
There are various types of credit available from formal lending institutions.
1. Short-term loans – These are loans payable in one year or less. They are normally self-liquidating, meaning that they are used to buy raw materials and supplies, labor and other requirements that will generate funds and in turn be used for paying back the loan. Collateral is usually required. However, a bank may extend a collateral-free loan, otherwise known as a clean loan to a client with an excellent credit track record.
Short-term loans may come in the form of a revolving credit line – an agreement by the bank to extend a loan, not to exceed a specific amount, whenever needed by the borrower. A credit line is automatically renewable, as each loan transaction is paid by the borrower. Commercial banks are the most commonly-used sources of short-term loans.
2. Intermediate loans – Otherwise known as term loans, these are loans that provide capital repayable in one to three years. These are available from banks and other financing institutions. For a start-up entrepreneur, term loans may be very useful. It is backed up by collateral securities and paid back in installments.
3. Long-term loans – These are extended only if the lending institution is assured that the borrowing enterprises would still be in business – and making a profit – over the long-term period of the loan which is up to ten years. Thus, to qualify, your business must be seen to be stable and sustainable. These are usually extended by private and government banks.
SME-FRIENDLY BANKS
Most banks lend to small business. But it is also true that some banks are more SME-friendly than others, given the well-known risks and transaction costs which SME lending is associated with.
In its November 2000 issue, Entrepreneur Philippines short-listed the following banks as “best for small business”. These are: the Development Bank of the Philippines, the Land Bank of the Philippines, the Metropolitan Bank and Trust Company and the Planters Development Bank.
Other government institutions with specialized SME credit programs include the Department of Science and Technology and the Technology Resource Center with facilities for financing technology-oriented small business projects; the Philippine National Bank which implements the Pangkabuhayan Loan Program; and the Small Business Guarantee and Finance Corporation which, aside from its loan guarantee program, implements its own small business lending facility.
Source: Bureau of Micro, Small and Medium Enterprise Development
Website: www.dti.gov.ph