A business is a game of Catch-22; that is, it takes money to make money. Even if that’s what many of us don’t have, the fact remains that business begins with capital. So how do you get that first “push” in starting a business? How, and where, do you get capital?
The answers are pretty common: loans from your family, your friends, your office, your savings—or, if you had it, your former business. These sources of funds are recommended because these are easy to acquire, and require very little processing. Take, for example, a loan from your parents and relatives. The people involved are those that already know a great deal about you and can therefore lend (or give) you money based solely on your character. Plus, they know your background, and how to find you when they need to collect on the loan. (Your kin are, usually, also easier to talk to when you require an extension or consideration in your repayments.)
You may also try to avail of personal loans available to you, such as SSS (Social Security System) loans and company loans. The SSS can loan you up to two months of your salary, depending on how consistent your contributions (or your company’s remittances) are. The upside of this is that for as long as you are employed, your SSS loan will eventually get paid.
Companies sometimes offer loans with easy payment schemes (it varies from company to company), and lend up to a certain amount without collateral. You can borrow a bigger amount against collateral the company deems valuable, like jewelry or a parcel or land if you have it. Most company loans are based on a “guarantor” system, meaning you would need someone who trusts you—and is willing to make the loan with you (the so called “co-maker” of your loan).
Food entrepreneurs Michael Martinez and Jeffrey Palay started their tapsilog business in this manner, each getting fivedigit loans from their respective companies to finance their capitalization. This gamble paid off, as they were able to repay their companies within a year. Liquidating old investments to fi nance new ones is also a good strategy. Mae Supremo of Supreme Weddings sold off her Internet café to venture into an events-planning business that specializes in weddings—and it turned out to be a supremely good idea. It may seem very basic, but Professor Ricardo Palo of the Ateneo Graduate School of Business recommends clearly defining your business objectives as the basis for your capitalization. “It is really your objectives, and not your income bracket, nor the nature of your business venture that determines the initial capital that you’d need,” he says.
Prof. Palo does not label any source of financing as “good” or “bad.” Even the dreaded “5-6” (after the usurious lending practice of some people, whether foreigners or Filipinos themselves) could be a viable source of funds. The professor explains: “Even if the interest (on your loan) is 20 percent (as with 5-6 loans) but the return you get is 25 or 30 percent, then that’s okay.”
This article appeared on the March 2011 issue of Entrepreneur Philippines.