It is a truism that banks—commercial banks, in this particular context—will only lend to those who don’t actually have a need to borrow; and even when they do the collateralization requirements are greater than many can provide. They give you an umbrella and take it back when it starts to rain. So if banks only lend to those who don’t really need to borrow, then where do those who do need to borrow get the loan? The answer is, its really difficult.
The system would have people believe that investment banks “have an appetite for and understand risk.” Really? I find it hard to see the difference albeit if I was the entrepreneur behind one of the modern day success stories such as Uber or Facebook I have little doubt that investment banks would be tripping over themselves to look after my financial needs so that the business could grow—and grow they do.
There are not however too many good and universally popular business concepts built on the use of technology to make people’s lives more convenient or socially interesting or for that matter keep people’s attention focused on small hand-held screens to the exclusion of everything going on around them.
The vast majority of new business ideas are much more pedestrian than these. A good mechanic might want to start a vehicle repair shop, a hairdresser a salon, somebody with trading skills an internet based buy and sell business, an architect may want to start constructing buildings, a newly qualified dentist a dental surgery, some would see a restaurant as a good idea. For those without any particular vocational or professional skills a sari-sari store, bicycle repairs, collecting stuff for recycling, getting a food cart, or doing a house-help business, or even a market stall may appeal. Where do people go to get the money to fund these sorts of ventures? To set up a reasonably equipped vehicle repair shop, a salon, a dental surgery or a restaurant requires quite a bit of investment, even a sari-sari store needs a place from which to operate and money to buy stock. For sure it will be very hard to persuade the banks to come up with a small business loan in the Philippines mega untrusting society. And because it is such an untrusting society it would also be difficult to raise capital from other people. So, much of the capital requirement for any new business is swallowed by the massive permitting needs which often bring about fatality before the idea even has chance to get off the ground.
In the Philippines many business ideas are borne out of desperation due to a lack of decent job opportunities thus the ideas are often not well thought through and the new startup fails or at best produces only a minimal income, let alone any sort of return on the investment. Worldwide, well over 80% of new startup businesses fail and for sure the proportion in the Philippines is higher. The reasons for the failure are well known and much studied—poor management, insufficient capital, lack of commercial nous, inadequate market evaluation and a few other regular reasons for failure.
Microfinance is well established and understood and in the Philippines, the ubiquitous five-ix along with the credit cooperatives and formal microfinance organizations meet a big need for lower levels of capital requirement. To my knowledge there does not exist any formal means of satisfying larger capital provision. There is a government requirement for the banks to use a certain amount of their “loan book” for small and medium sized businesses—even if they do I can imagine that the requirements not least the provision of collateral are enough to ensure that not many business start up or that many expansion loans are made.
There is a case for establishing an entrepreneurial finance facility along the lines of Crowdfunding but with a more personal touch, through which loans or even investment can be made and mentoring provided by those with much business experience to the small developing businesses. Banks even if they were happy to lend money to this type of need are not equipped with business advisory skills nor for that matter are accountants.
The Philippines is full of latent entrepreneurs who need not only money but also a bit of knowledgeable steering to successfully realize their ambitions. And of course it is a fact that the development of small and medium sized business is the main engine for national industrial growth, so let’s get it on. . . .
Mike can be contacted at email@example.com