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Starting a microfinance business

What you need to know before you start
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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 ideally 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.

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“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.  

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