You would normally think that business owners are equipped with a bank facility that they can tap for productive credit. This may be the case for larger organizations but it’s a totally different story for small and medium enterprises, of which only one in 10 have access to formal financing.
I vividly remember my first client meeting: Noemi, a third-generation shoemaker in Marikina, had been in the business for 30 years so trade credit was not new to her. She needed funds and knew her leverage. She had received a new project from a big local shoe store. The deal was four times bigger than her current output and time was of the essence. It had become difficult for her to rely on banks since they take time to make approvals and also require collateral.
As I asked her more questions, I couldn’t help but notice the systemic deficiencies of the financing sector that were hampering growth for business owners like Noemi. Credit is expensive, slow, and inaccessible to smaller players who need it most.
My colleagues and I have been advocating for more inclusive growth and have written quite extensively on how we can hurdle these challenges. Hence, it is also important to shed light on how SMEs can be part of this growth and get a foot up the credit ladder.
Be knowledgeable about your credit score
Some business owners do not even know their companies’ credit scores even though these numbers have a large impact. A credit score is a historical collection of transactions that are reported to credit bureaus. Knowing it is one thing and maintaining it is another. Records usually get tainted when bills become overdue. While this may only be a single instance, missed payments or blocked accounts can create serious dents to your status because of the tenure of data. Establish a credible history by making sure that you repay your debts and bills on time and update your records frequently.
Maintain verifiable data about your business performance
The difficulty of obtaining data about businesses has made it complex for lenders to assess borrowers. This makes accessing money costly, especially for SMEs whose trade relations have not been established. It is important to assess an enterprise’s value, not only because of risk and interest rates, but also because of the need to determine a business owner’s capacity to pay and to match a loan plan that they can fulfill based on that ability. Business data such as annual income tax declarations and sales performance can help borrowers realize whether they can meet their monthly repayments. Generally, I recommend SMEs to estimate that around 30% of their monthly net income be conservatively allocated for monthly loan amortization.
Familiarize yourself with your options
Ten to twenty per cent is the price that businesses pay whenever they choose to borrow from informal lenders. Aside from applying for a business loan, there are other ways in which you can fuel growth. Purchase order financing and invoice financing are just some of the options that enable cheaper and accessible lending. First Circle has contributed by extending these types of credit. We allow SMEs to convert their receivables and their purchase orders into cash. If you happen to have trading lines with established businesses, you can get funding for these orders and keep your finances on track while you fulfill these projects or as you wait for collection of payments. It pays to know the options that you have.
Being unable to climb the credit ladder has created a vicious cycle of debt for business owners since they are left with predatory options. This is why we have to lend a hand in making sure that everyone who has the capacity to grow deserves to be given equal opportunities to get ahead.
Rochelle Triguero is an alumna of De La Salle University. She is currently working as a business development manager for First Circle, a financial technology company providing funding to SMEs in the Philippines. To know more about how you can accelerate your business with First Circle, please visit www.firstcircle.ph or contact Rochelle directly at firstname.lastname@example.org.