How to set up a micro lending business

There are now many lenders in the rural communities through out the country. In the Visayas for example, groups such as credit cooperatives, Sameco, Taytay, Afsico, the local Bombay, Surigaonon, JBC, Card, to mention a few – all these are lending organizations – and are competing for clients in rural communities. The sheer numbers of rural lenders probably suggest that this type of business is lucrative. It is hoped that the interest charges are reasonable – but, IMO, always much higher than what a bank offers.

Many people flock to these lending groups than commercial banks because these lending firms are lenient in their requirements and processes loan applications faster than banks but offer high interest rates. If you are an OFW, or a business person with a capital you can set up a lending business – I would suggest, a lending business with collateral.

A lending business can be set up as a single proprietorship, partnership, or corporation but you cannot 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. But if you organized a company into a lending corporation then you can use the words “lending” and “finance” in your business name. A corporation has many advantages compared to a single proprietorship or a partnership – ask your lawyer about this.

A micro lending business must raise the required minimum capital of 1 million pesos and must be registered with the Securities and Exchange Commission or SEC (www.sec.gov.ph). You will need to acquire the usual permits and documents in setting up a business such as Mayor’s permit, certification from the Bureau of Internal Revenue (BIR), and Social Security System, Philhealth, and Pag-IBIG coverage for the people working in your business.

Micro lending without quasi-banking activities may cater to private and government employees, farmers, fishermen, pensioners, sari-sari store owners, market stallholders, and OFWs. It is advisable for start ups to lend smaller amounts with short payment terms as this will make repayments faster and enable you to loan out money to more borrowers. Depending on the report of your credit investigator, or if you decide to be a community based lender, your community coordinator, you may offer loans from P 5,000 to P15, 000 with 1.5 to 5 percent interest per month. As is commonly practiced, payment schemes are daily or weekly for store and stall holders; 15/30 for employees and pensioners, however you may device a different system depending on your clients financial situation, for example if they are farmers, it could be once every two months (when copra is harvested), if piggery owners, once every three months (when pigs are big enough to be sold), if OFW once a month, and so on.

Although, micro lending usually doesn’t require collateral from the borrower you may ask for it (optional), you may require the borrower to have a co-maker to sign a promissory note and submit other documents. However, for loans of P50, 000 and higher collateral is a must, IMO. 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. As the owner of the lending business, it is advisable to meet your clients personally to assess them of their character/integrity – if you have a community coordinator- ask for a community recommendation verbally from the community.

This business can be started with two to three employees: one to take care of releasing loans, a second to collect payments, and a third either a bookkeeper or accountant on retainer. If you can, you can hold one of the positions mentioned. 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.

You may watch the video below. Good Luck.