Microlending Business Guide

The lending industry thrives better in times of financial crunch. To cope with the crisis, people try to stretch their budget and augment their income. Many households put up sari-sari stores; family members look for sidelines, try working abroad, or simply try to borrow money. To raise the money to finance these activities, many of them go to lending firms instead of the commercial banks. This is because lending firms are more lenient in their requirements, offer lower interest rates, and process loan applications faster. Entrepreneurs can set up a lending business to take advantage of this demand for easier credit.

A lending business can be set up as a single proprietorship, partnership, or  corporation. Per Republic Act no. 9474 or the Lending Act of 2007 lending business should be set-up or organize under a 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.

In setting up a microlending business, you need to raise the required minimum capital of P1 million and then register your business 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, Philhealth, and Pag-IBIG coverage for the people you will be employing in the business.

In microlending without quasi-banking activities, you may cater to employees, pensioners, sari-sari store owners, market stallholders, and OFWs. OFWs usually require bigger loan amounts that start at P50,000, but it is advisable for startups to lend smaller amounts with short payment terms. This will make repayments faster and enable you to loan out money to more borrowers. Loans could start from P5,000 to P15,000, with 3 to 5 percent interest per month. Payment terms can be from two months to six months. The advisable payment schemes are daily or weekly; for employees and pensioners, though, payments can be scheduled every payday or once a month.

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.

Microlending usually doesn’t require co lateral from the borrower. It only requires the borrower and the comaker to sign a promissory note and submit other documents. However, for loans of P50,000 and higher, you should ask for collateral from the borrower. Any item that is of value can be used as collateral, such as jewelry, 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.

You can start this business with three employees: 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.

This article is the advice of Mr. Edgardo Tipa, a financial trainer with BusinessCoach Inc. (www.businesscoachphil.com) who has been conducting seminars for four years now. He has 20 years of extensive experience in banking and corporate finance, as interviewed by Mishell M. Malabaguio, entrepreneur.com.ph. photo from pro.corbis.com. In case of further information in setting up your lending business, you may contact him at edttipa2001@yahoo.com or cell no. 0927-9077-879.