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Business Basics: 10 things you should know about funding your business

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Even starting a business from scratch needs capital to turn your business ideas into reality. The materials, electricity, lease of space, and even the registration of your business name require money. If you are like the many Filipinos who have no trust funds that can jumpstart their businesses, read what Cecille Chuapoco-Remedio has to say about financing your business in 10 questions.

Chuapoco-Remedio is a managing partner of the accounting firm Chuapoco, Remedio and De Leon, with eight years of experience in internal audit, finance and accounting in the manufacturing, and in construction industries.
 
Question: What are the best sources of capital for my start-up business?

Answer: Your personal savings are your best source of capital. If necessary, borrow money from family and relatives and offer to pay them interest (the lower the interest rate you negotiate with them, the better). Alternatively, invite them to invest in your business so they can share in the profits.
You may also borrow from banks and non-bank or non-financial institutions. The acceptable interest rate from non-bank or non-financial institutions is one that is higher than the time deposit rate or lower than the loan rate offered by banks. The prevailing annual interest rate for time deposits is 5 to 6 percent, and for loans 12 to 14 percent.

Q: How can I put together a budget that will give me a reliable picture of my start-up costs and expenses?

A: You determine your initial capitalization by coming up with a simple budget that forecasts your initial cash outlay. This will usually include pre-operating costs such as registration and business fees and expenses for your logos, fixed assets, improvements, office furniture, fixtures and equipment. You also budget for initial operating costs such as rental deposits and advances, inventories, salaries, utilities, and other expenses depending on the type of business that you are setting up. Your typical pre-operating expenses include your initial bank deposit (25 percent of your declared capitalization), SEC registration fee (P3,000), business permits (P5,000), company logo design (P10,000 to P30,000), and the printing cost of your initial set of business cards, letterheads, envelopes, invoices, receipts and other forms (P10,000 to P30,000).

Q: How much money should I hold in reserve?

A: An ideal reserve is equivalent to six months to one year of your working capital requirements. You decide how much it should be by determining when your projected revenues would start coming in and when your cash inflows would be enough to pay for current obligations. Your working capital requirement is the amount you need to run your business daily. It keeps your business going until the revenues start coming in.
 
Q: How much debt can my business afford to absorb?

A: An ideal debt-to-equity ratio would be 2:1. This means your assets cover one peso of every two pesos you owe. You get your debt-to-equity ratio by dividing your total liabilities by your total assets. The more assets you have to cover your debt, the better, since banks and prospective investors will look at them before deciding whether or not they’ll lend you money or invest in your business.

Q: How do I project my payback period?

A: Start by developing a feasibility study to forecast your required sales volume. Establish an average gross profit rate, expected annual expenses, and desired payback period. Then determine the amount you should recover (your initial cash outlay and total expenses) during the desired payback period. Next, evaluate how much sales you must make to establish your gross profit margin—then adjust the amount if you think it’s too optimistic or too conservative. When you have the figures down pat, determine your annual return on investment by making a three-year financial forecast. Your return on investment is your net income for the year divided by your total capital.
 
Q: Is it all right to use a credit card to raise money for my start-up business?

A: Credit cards usually charge 3.25 percent a month or 39 percent a year in interest rates. You may use your card to pay for bills or buy supplies and equipment, but if you can help it—don’t. It’s very expensive.

Q: Why do banks refuse to lend money to start-ups?

A: There’s a good reason for it. Banks consider a start-up as a high-risk debtor, and the reason is simple: it has no track record. They have nothing to go by in evaluating its performance. Banks lend only to businesses with a track record of at least three years. If you’re a start-up, you’ll have to deposit cash with the bank to get a loan, and the loan it gives you would be no more than 80 or 90 percent of your cash deposit or collateral.

Q: What do banks require in exchange for a loan?

A: Banks usually provide term loans of two to seven years. When applying for a term loan, you’ll be required to open an account with the bank of your choice if you don’t already have an account with it. The bank will then ask for a three-year audited financial statement, your SEC registration papers (if you’re a corporation), business permits, and proof of income such as the owners’ income tax payments. If you have no proof of income, ask family members to become co-obligors and submit their tax returns instead. Some banks also require collateral like cash deposits, land titles, and standby letters of credit.
The loan you receive with real estate collateral would be 50 to 70 percent of your property’s appraised value, but it could be higher depending on the size of your assets. Mind that it’s normal bank procedure to do a credit investigation and inspect your premises. You either get your loan or fail to do so depending on the evaluation results.

Q: How do I establish a banking relationship?

A: Keep an account with the bank. Then give the bank time to see how you handle your money. Always pay your bills promptly and have enough funds to cover your checks. Never give your bank any reason to suspect that you don’t keep track of your account properly.
It takes years to establish a relationship with any bank, but it’s worth it. Once you’ve established a good relationship with your bank, the manager will, for instance, call you up to say the check you issued yesterday will “bounce” when cashed due to some oversight.

Q: How do I obtain a credit line?

A: Simply apply for it. A regular credit line lasts a year and is renewable every year. Depending on what you have negotiated, the bank will charge you 12 to 14 percent interest with 30- to 180-day re-pricing. It’s best to shop around and compare. You get better rates if you have an account with the bank and have kept it for years.

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