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Funding options for the start-up entrepreneur

Which one is safer? Which one is best?
By Entrepreneur Staff |

Entrepreneurs are known for going all the way to turn their business ideas into reality, but they are bound to lose momentum if they don’t have the money to bring those ideas into reality.

Some entrepreneurs therefore eagerly look for angel investors like relatives and friends to help fund their startup enterprise, while others decide to apply for a bank loan to provide the needed funding.

As much as entrepreneurs want to realize their dreams right away, however, they must ask themselves first if they need a loan for their startup business in the first place.

 

According to Adele Aquitaña, a Banco de Oro senior manager who has handled SME business mortgage loans for 11 years, it is usually advisable for an entrepreneur to use his or her own capital first in the initial stages of the business. She says that a business loan is best obtained when the business has already been established and is ready to expand.

Once you feel confident about getting a loan for your business, you can either seek an investor or a bank from whom to borrow money. There are advantages and disadvantages for each alternative.

Private investors may have less stringent rules, such as not asking for collateral or asking for less requirements in your business proposal. However, they may ask for higher interest rates than those of your bank, say 3 to 5 percent per month—that’s 36 percent to 60 percent per annum.

On the other hand, banks may offer more competitive interest rates at around 1 percent per month or 12 percent per annum. Also, the bank, as a corporate entity, is a more emotionally neutral institution than an investor; loans from friends or relatives, on the other hand, definitely can cause strains on personal relationships in case the entrepreneur is unable to pay them back.

Moreover, borrowing from a bank is notably safer in the Philippines because second mortgages, or mortgages taken out on a property that’s already mortgaged, are not allowed in this country. It makes banking here more secure because second mortgages—as a prime example—were a major cause of the current economic crisis in the United States, with people having been allowed to borrow more than they are capable of repaying.

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