How to Finance Your Business

Determining Your Financial Requirements

Determine your financial needs and raise funds to meet these needs. You can begin a sari-sari store from your own personal savings. A garment factory, on the other hand, will require more elaborate arrangements for fund sourcing.

Generally speaking, the financial requirements of a business may be classified into Fixed Capital, Working Capital, and Pre-operating Capital.

•Fixed Capital includes cost of land and building, or lease deposits of them; cost of improving the land or remodeling the building; machinery and equipment; furniture, furnishings, and fixtures. These are usually one-time expenses, meaning they are generally good for the duration of your business.

•Working Capital is the reserve money you need to run the business until it becomes self-supporting. This may take about one to six months or even longer. You need working capital to purchase your raw materials, pay your workers, pay for transportation, telephone, electricity, and water bills.

•Pre-Operating Capital includes money that you spend to register your business, acquire licenses for franchises, or pay a lawyer or a consultant. In other words, this is money you spend before your business begins to operate.

It is advisable to prepare a forecast that outlines all these capital requirements. Be sure that no significant item has been overlooked. Be realistic and do not underestimate your requirements. Provide for contingencies and a margin of safety in estimating your capital requirements to avoid cost overruns later. Your capital should be enough to cover unexpected expenses. Observe the equipment and manpower requirements of other business establishments. If in doubt, ask a knowledgeable friend, an accountant or consultant to see if your estimates are realistic or not.



For simple business activities like small-scale trading or home-based industries, simple estimates or financial requirements, income and profit would be sufficient. However, larger, more complex undertakings require a more in-depth study; this is called the project feasibility study. Banks usually require this for long-term loans.

Seeking Sources of Capital
The small businessman usually meets his initial requirements by dipping into his own savings or investing his other assets. Loans from relatives and friends sometimes supplement his initial capital. Some of these loans are extended interest-free.

External sources of funds are available if you know where to look. Organizations such as banks, venture capital corporations, and savings and loan associations make lending money their business. In addition, some government institutions provide credit to small start-up enterprises at subsidized interest rates and liberal terms.

If you are looking for capital, you may first consider looking into your own resources and the loan offerings of possible creditors:

•Equity Capital is the amount of personal resources you - and possibly your partner put in, plus the portion of the profits you plow back into the business.It also includes resources invested by other people into your company.

Equity is a permanent part of your capital structure. As such, it does not have to be paid back. Nevertheless, as your company grows, you will need to put in more equity or permanent capital.

The small businessman may exhaust his own personal resources to get more equity funds for the business. Personal life insurance policies or other properties of value may be used in times of urgency. Friends, relatives, or other members of the community may also be persuaded to invest in the business.

• Creditors’ Equity. If you require financing from outside sources, you can avail of the loan packages of financial institutions. These are:

• Short-term loans. These loans are short-term financial obligations, usually lasting less than a year and normally self-liquidating. They are used to buy things that will generate funds for repayment of the loan. Some short-term loans (“clean loans”) are issued on an unsecured basis, which means they are made without collateral, since the bank relies on your credit reputation.

• Individual money lenders. Friends or relatives extend loans in the spirit of
pakikisama or camaraderie. There are also unlicensed money lenders but beware of
those who charge usurious rates of interest, like the so-called "five-six operators".

• Non Government Organizations (NGOs). NGOs are fast becoming popular sources of credit. Through enterprise development projects implemented by private and government finance institutions, these NGOs act as intermediary agents in various lending programs. Lending packages are available depending on the specific target beneficiaries of the individual programs. Their interest rates are usually lower than what banks offer. A review of your feasibility study and a credit investigation are customarily conducted. Most programs offer character loans and require minimum equity participation with little or no collateral. The organization closely monitors and evaluates each business project. Beneficiaries of these PVOs are commonly micro and small entrepreneurs.

• Special Lending Programs. Public and private agencies are confident of the strength of small entrepreneurs, and have thus created programs that would uplift their status.

Rules for Sound Financing

• A small businessman should know exactly what type of capital he needs and how he can obtain it at the best possible terms. If he borrows the capital, he must know exactly how to repay it. An entrepreneur must also know when to require financial expansion.

• The ideal debt-equity ratio of one’s capital structure must be 40:60. This means that the debt or borrowed portion of the total capital should be contributed by the owners’ equity.

A 40:60 ratio is considered ideal because it will allow the firm to acquire more credit in the future when it is ready to expand. Most banks and other financial institutions lend money only if the resulting debt-equity is 60:40 when the new (borrowed) money is infused into the business. Therefore, it makes sense to limit borrowing. Otherwise, one may be saddled with a heavy repayment burden.

• Fixed assets and working capital requirements during normal operations must be financed from long-term sources (one year or longer). These sources are the owner's equity and long-term loans or long-term liabilities.

• Short-term requirements, like additional working capital needed during peak seasons (Christmas, rainy season, school opening, etc.) should come from short-term sources, such as: trade credit (30 - 90 days); short-term bank loans (from two to three months); pawnshops (three months); and friends and relatives.

Source: dti.gov.ph

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