The lending industry is a business that thrives in recession. Not only because people are needing money but often they become more diverse opening things like sari-sari stores that can be operated from the home. People try to stretch they’re incomes as far as they can aswell as trying to generate more income from it. This is partly why micro-lending is a business that although risky can also be very financially enriching. Why don’t people go to the banks? One of the biggest reasons is the banks wont lend them any money without security. Micro-lending is small loans but also little or no guaranteed items are needed on the debt.
A lending business can be set up as a single proprietorship, partnership, or corporation. However, you can’t use the word “lending” or “finance” in your business name if you choose to set up your lending business as a single proprietorship or partnership. You can only use those words if your company is a corporation. In fact, a corporation has advantages that a single proprietorship or a partnership doesn’t have.
To setup an “official” micro lending business you need a minimum capital of P1 million and to register 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, Phil health, and Pag-IBIG coverage for the people you will be employing in the business.
Your targeted customers are likely to be market stall owners, sari-sari owners, business employees, pensioners and also OFWs. The one thing I would say with OFWs is to try and get the loan guaranteed because of the obvious.. they may never come back! aswell as the fact they will generally need bigger funds around P50,000 upwards. Personally I would advise especially when starting up to pick your customers wisely and max the loans at P10,000 but like any banking you have to get an idea of your customers and they’re ability to make regular payments. Loans should be on short-term at one month to six months. Also collections should be based on peoples payments. E.g if they are a market trader and they are receiving payments daily then your collections should be made daily. It stops the money being spent aswell as increasing your cash flow to lend it out again. If they are an employee for example you should look at when they get paid and make collections on those dates. Often its either weekly,fortnightly or monthly but collecting the money on those dates are important not only to get your money but to also stop your customers getting into more debt by falling behind on payments.
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.
When it comes to collateral in the majority of cases you wont need it but if on larger loans for example you should look for some kind of guarantee from the borrower. This can be jewellery, 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. On all loans i advise having a promissory note written up and agreed between parties involved. Aswell as submitting other documents such as proof of who the borrower is.
In most cases this type of business can operate with three people one to take care of releasing loans, a second to collect payments, and a third either a bookkeeper or accountant on 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 costs. You may automatically deduct this 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.
You may think having three people dealing with loans is excessive but the reason you do this is partly down to security as they can monitor each other and hopefully reduce the risk of theft from staff.
Now one of the biggest micro lenders in the Philippines are the “Bombays” they are also the same families that carry out micro lending in India for example and have been doing it for decades if not longer. They have worked out the best way to operate in an area and copying the setup is the way to go where possible. E.g. they will have someone who only operates in a certain market then someone else who operates in the market in the next town etc. They meet up regular and keep the information upto date on the lending. They mainly operate on a 20% interest per month in Cebu but not sure if its the same in other regions. They have a zero tolerance approach to lending and in many cases they are unpopular with the local traders. If your a foreigner looking to get into this business be aware there is an odd stigma with especially Western foreigners that people wont pay because they “believe” you can afford to lose the money. Sounds strange but its true if operating this type of business you are better to be shadowing and not directly involved getting people you can trust will be a major issue for many but it is achievable. There is the next step up from micro lending which is the Pawn shop which takes guaranteed collateral and we will discuss that in another topic. The other issue with the pawnshop is its different clients because the majority of people such as market traders and sari-sari owners dont have any jewellery or items they can pawn.
One thing I do advise is doing your home work. Operating a business in the Philippines can be dangerous and lending is one of the more high risk operations but then again thats why its rewards are also high.