It takes more than having a “better mousetrap” to get clients beating a path to your business. Without capital, how do you expect to build your product or service, and roll it out to your projected clients? If you’ve been in business for a while, how do you finance expansion? How do you pay for business costs like registration and rentals if all you have is a plan and little else?
If you’re looking to finance your business plan, fret not. External sources of funding are actually quite commonplace, but getting their help depends on your business and the conditions you’re willing to endure.
You’ll find two kinds of financing out there that can help fund your business: debt financing and equity financing. Equity financing entails accepting funds in exchange for a piece of the company. Debt financing is just what it means: you borrow the money, pay it back in the future with interest, but retain full ownership of your business.
First, equity financing. When trading capital for equity, you give up part of your ownership, and a little bit of control, over your business. Certain types of start-up are traditionally dependent on equity financing for their first few months, like I.T. companies, which need a significant incubation time.
Venture capitalists, or VCs, are a mainstay of equity financing—these firms provide capital to high-potential and high-risk start-ups. Commonly, they invest in I.T. and other sectors (tourism is being pushed as a major beneficiary of VC largesse) in the hopes of significant growth after a little bit of waiting.
VCs also offer other side benefits, like technical assistance and access to an informal network of contacts. Some examples of VCs in the Philippines are Narra Venture Capital (tel: +63 2 552-1175, www.narravc.com) and ICCP Venture Partners (tel: +632 811-4656, www.iccpventurepartners.com). Before calling them, though, you need to ask if you’re ready to partner with a stranger who may have different ideas for your business; there’s the potential for significant friction ahead.
On the other hand, if you want to hang onto your business (and maintain your vision for it), you can choose to resort to debt financing—borrowing your shortfall.
Debt financing works best with existing companies, although some financial institutions offer SME (small and medium-scale enterprises) loans to start-ups under very special circumstances. BPI Ka-Negosyo (kanegosyo.com.ph), for example, will offer loans to new franchisees of selected franchise companies.
Banks are your most ready source of debt financing, although banks tend to exercise plenty of caution lending to borrowers with no track record in business. They may require collateral as a precondition to lending. On the other hand, banks will most willingly lend to borrowers who they already have an existing relationship with.
Apart from banks, you can run to a number of government financial institutions that provide lending to SMEs. The Philippine Export-Import Credit Agency (tel: +632 848-1900, www.philexim.gov.ph) provides a suite of loan and guarantee services to businesses operating in the export sector and the I.T. industry. OFWs can borrow from the Livelihood Development Program for Overseas Filipino Workers (LDPO; tel: +632 914 7290).
If your loan gets approved, you need to prepare yourself for a long commitment towards paying off the loan—which means you need to have a reasonable assurance of success within the time you need to pay it off. In the worst case scenario (i.e. your business goes under), you should be willing to kiss the collateral you’ve put up for the loan goodbye.