Clients usually say that banks only lend money to companies who don’t really need it. As a former banker, I can relate. It’s true that most bankers would want a company who has strong fundamentals as a client. The more cash they have, the better. But then again, they won’t be borrowing in the first place if they had all that cash.
Borrowing money from banks is even harder for small and medium enterprises. For small enterprises, most of your access to financing would be limited to government institutions.
Medium enterprises have more options with financing institutions, though the funding available to them is still not as flexible as those available to larger corporates.
There was this client of mine who was engaged in the supply of electrical equipment and generators to the largest names in this sector. They haven’t borrowed from banks before. With their business starting to get bigger, they needed more financing to help with the increased demand. They were a bit nervous and confused at the start.
We sat down to strategize for both their long term and short term financing requirements. Here, I broadly outline what we discussed.
1. Craft a financing plan for your business
The first component of the strategy was creating a financing plan for them. While this was part of their larger business plan, we had to develop objectives and targets for financing so they could execute their plans.
Your financing plan should be comprehensive, especially if you are borrowing money for the first time. In general, you need to plan for:
a. When you plan to borrow
b. How much should be borrowed
c. How and when you would repay the loans
In the case of my client, he was concerned about the timing of when the loan would come in. They had a lot of projects lined up for the next year, so we had to plan for all of these.
2. Invest in real estate
Banks really love real estate, especially here in the Philippines. As a collateral, it’s the top of mind of solution for most bankers here in the Philippines. This client didn’t have real estate properties available to be used as collateral. We had to approach it differently. It was a harder approach, too, and one I won’t recommend if you can do it the easier way.
We planned that they should start investing and purchasing real estate properties in good locations. If you do it well, you can position yourself with a lot of collateral value in the future.
For example, those who invested in property 5 years ago now enjoy having banks lend them money at almost 1.5x the amount of what they bought it for. Imagine those who started investing in properties for longer than that.
This is a long term plan, but a plan that pays for itself if you do it correctly.
3. Prepare the right documentation for your loans
Some businesses never planned to borrow money from institutions. They thought that they could just borrow from their suppliers, family members, and business associates forever. It’s only when getting larger project do they realize that they can’t rely on those sources forever.
Then begins the mad-crazy rush to get financing. Unfortunately, they were not prepared with the documentation requirements for the bank. Lots of missed opportunities later, translating to millions of pesos, they learn their lesson.
Fortunately, my client was not like that. Mostly because of the documentation requirements of their customers and the good management skills of its leaders, they were ready with the right documents.
These documents vary from company to company, but in general, I recommend preparing good records of:
a. Bank Statements
b. Customer data on order volumes, credit terms, contact details
c. Supplier data similar to customer data requirements
d. Aging of receivables
e. Customer testimonials
CONCLUSION
SME lending in the Philippines is still a tough place to work with. You have to work hard to get the funding you need at the price you can afford.
Most of the time, you won’t be able to have the time, energy and resources to seriously create a workable plan to get the right funding. Not dedicating time to this though could mean that you can lose a lot of money from paying high interests. Worst, it could mean that you lose millions of pesos worth of opportunities, simply because you don’t have the right financing at the right time.
If you feel that you want to get faster and simpler financing to take your business to the next level, subscribe to my email list and get my free ebook. There I provide a more comprehensive guide on how to prepare yourself and your business to get the financing you need when you need it.
Till next time!