Looking to start a business during a financial crunch? Try this venture- Published in Enterpreneur Magazine April 2009 issue page 26.
I own an Internet shop and a small printing business, both running for more than a year now. Due to the increasing number of Internet shops and the tough competition in the printing business, I believe its about time for me to have another source of income while still managing my existing businesses. So Im thinking of starting a lending business. I would like to know where I could possibly train or study the money-lending business before I actually engage in it.
We referred your inquiry to Mr. Edgardo Tipa, a financial trainer formerly with Business Coach Inc.who has been conducting seminars for four years now. He has 20 years of extensive experience in banking financing and lensing business Here’s his advice:
The lending industry thrives better in times of financial crunch. To cope with the crisis, people try to stretch their budged and augment their income. Many Households put up sari-sari stores; family members look for sidelines, try working abroad, or simply try to borrow money. To raise the money to finance these activities, many of them go to lending firms instead of the commercial banks. This is because lending offer lower interest rates, and process loan applications faster. Entrepreneurs can set up a lending business to take advantage of this demand for easier credit.
In setting up a microlending business, you need to raise the required minimum capital of P1 million and then register your business with the Securities and Exchange Commission or SEC (www.sec.gov.ph). The usual permits and documents required in setting up a business will be required, like the Mayor’s permit, certification from the Bureau of Internal Revenue (BIR), and Social Security System, Philhealth, and Pag-IBIG coverage for the people you will be employing in the business.
In microlending without quasi-banking activities, you may cater to employees, pensioners, sari-sari storeowners, market stallholders, and OFWs. OFWs usually require bigger loan amounts that start at P50,000, but it is advisable for startups to lend smaller amounts with short payments terms. This will make repayments faster and enable you to loan out money to more borrowers. Loans could start from P5,00 to P15,000, with 3 to 5 percent interest per month. Payment terms can be from two months to six months. The advisable payment schemes are daily or weekly; for employees and pensioners, though, payments can be scheduled every payday or once a month.
To build a client base, you could partner with the human resources and accounting departments of your target companies. As an incentive to endorse you to their employees, you could also offer to the client company a commission of a certain percentage of the loan interest you will be charging. If you will be charging 5 percent, for example, you might want to give 1 percent to the company as a commission.
Microlending usually doesn’t require collateral from the borrower. It only requires the borrower and the comaker to sign a promissory note and submit other documents. However, for loans of P50,000 and higher, you should ask for collateral from the borrower. Any item that is of value can be used as collateral, such as jewelry, real estate, or vehicle, for as long as the borrower owns it. If the borrower doesn’t own the item put up as collateral, you have to ask him or her to submit an authorization letter or special power of attorney from the owner consenting to the use of the item as collateral.
You can start this business with three employees: one to take care of releasing loans, a second to collect payments, and a third either a bookkeeper or accountant or retainer. It is advisable for the owner of the lending business to talk to potential borrowers directly to make a good assessment of their character and integrity. It is also advisable to build an internal security system and a clear accounting system that can track each borrower’s account and the flow of money in the business.
Aside from the interest, you should also charge another 5 percent as a service fee to borrowers to cover your overhead accosts. You may automatically deduct his from the loan amount upon release of the loan, or you may just add this to the interest rate. A penalty charge should also be imposed on delinquent borrowers.
The longer it takes the borrower to pay his outstanding balance, the smaller is your chance of getting him to pay it back. You therefore need to allot a 1 percent provision for bad debts.
- Interview by Mishell M. Malabaguio
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Set up a microfinance business
THE IDEAL LOCATION for this type of business, says Edgardo Tipa of PEMSI LENDING INVESTOR INC., depends entirely on the owner. If he wants to service stallholders and vendors, for example, the best location is near a public market. If the business targets employees, it is good to put up the business near factories or a place where there is a concentration of offices.
Security is a major consideration in buying office equipment. A vault that can withstand theft and fire is a good investment in storing cash and other valuables. But to be more secure, it is recommended to deposit cash collections immediately to a bank account. “A system capable of monitoring the loan accounts of clients is a good buy as well. Systems like this can generate accounting reports and data on individual balances of clients that can help the owner in planning and making better decisions,” says Tipa.
Before a lending operation can start, there are certain documents that must be prepared. Tipa recommends business owners to prepare documents such as a loan application form, credit advice, loan agreement/ promissory note and loan release form. However, the loan application process is simple and fast, so it is best to keep the required documentation at a minimum, but sufficient enough to protect both the borrower and the business.
As a starting entrepreneur, you need not hire a big band of employees right away. “Initially, you would only need a loan processor to screen applicants and conduct credit/ background investigation, a collector, and a manager to supervise and do the marketing. You will also need a part-time accountant and probably a lawyer on a retainer basis,” shares Tipa. To save on costs, you could idea of get sales agents on commission. When scouting for staff, it is important to look for shared values such as honesty, integrity and the ability to interact with people from different backgrounds, especially from the lower social strata.
“With regard to training employees, a credit-management course covering the topics on credit and background investigation, cash-flow analysis, and delinquency management is the basic need, “says Alan Orogo of Punla sa Tao Foundation. “In addition, training on product development and marketing, signature verification, forgery detection, and good customer service are advantages,” A seminar on cash-flow analysis, for example, would help MFIs determine how much should be given as loan to a borrower. You don’t want to give out loans that could either be too small for your borrowers’ requirements or too big, which would make repayment of the loan difficult for them.-J.R.C.
Collect and Select
KNOW YOUR FEES
A microfinance business generates income from the interest payments and service fees.
· Interest charged by MFIs range from 3 to 5 percent per month, while informal moneylenders (popularly known as “5-6” for the 20-percent interest rate they charge borrowers) charge much higher. In computing the monthly amortization charged to borrowers, the straight method (principal multiplied by interest rate per month, multiplied by the number of months, plus principal over the number of months) is normally used especially for loans with payment terms of not more than 12 months.
· The service fee, on the other hand, ranges from 3 to 5 percent of the loan amount and is deducted upfront. This covers the expenses incurred in processing the loan, including the conduct of background checks and credit investigation.
MINIMIZE BAD DEBTS
Interview loan applicants in person to verify information provided in the application form and to assess their character. Conduct a Credit or background check on the applicants by talking to reliable character references such as a human resource officer (if applicant is employed) or trade suppliers and customers (if applicant is engaged in a business).
“Before releasing loans, the golden rule is to know the borrowers completely through background and credit investigations,” says Tipa.
It is advisable for startups to lend smaller amounts with short payment terms. This will make repayments faster and enable you to loan out money to more borrowers. A payment term of two to six months is desirable because the longer the payment term, the more likely that borrowers won’t pay fully. Invest in loan systems that can monitor each borrower’s account. Penalty charge should be imposed on delinquent borrowers. – J.R.C.
Ready to set up a remittance or microlending business? Go to our www.entrepreneur.com.ph/suppliers-directoryto find the training, equipment, and other resources you will need to jumpstart your new venture.