Upgrading Financial Services for the Rural Folk

In the remote areas of this country where there are no commercial banks, or even rural banks, you will find cooperatives to be the catalysts of local economies. It is from them that financing for micro and small businesses are sourced and where people can keep and save their hard earned money.

Go to the countryside and you will find many of them serving the needs of the rural folks --- enabling the common folk and starting them off to become entrepreneurs, and for those already running their sari-sari store, or copra trading business, financing the sustenance and growth of their micro and small businesses.

But most of these cooperatives, with their modest successes, have arrived at the crossroads where they need a stimulus and the capacity for further growth. It would seem that these institutions have reached their limits in terms of their capacity for development or would need a push to accelerate growth.

It is the cooperative of this kind, in this environment, that Small Business Corporation’s Capacity Building Program for Pre-MFIs (micro-finance institutions) was envisioned to help. To prepare and make Pre-MFIs fit for growth and expansion and eventually become a stable, viable institution accredited with SB Corp.

“Pre-MFIs” are MFIs that fail to pass the accreditation criteria of SB Corp. Hence “pre” connotes their failure to perform at par with the standards of established MFIs.

The bottom line is to help develop MFIs to create the environment that will provide greater financing access to micro-enterprises.

A component of the Rural Micro Enterprise Promotions Program (RuMEPP) and funded by a grant from the International Fund for Agricultural Development (IFAD), the SB Corp. has implemented this program in the poorest provinces of the country where cooperatives in their fledgling stage abound, and where there are no accredited MFIs under RuMEPP that can avail of SB Corp.’s wholesale funding.

RuMEPP has a financing component for micro-enterprises that is channeled through SB Corp. under its Microfinance Wholesale Lending Program. The program through SB Corp. lends to MFIs, which in turn relends to micro enterprises. However, this is hampered by the lack of qualified MFIs able to pass the eligibility criteria and risk rating process of SB Corp.

Rationale

“We are helping MFIs located in the poorest provinces of the country where there are no  SB Corp.- accredited MFIs. The program will help Pre-MFIs comply with the requirements and pass the accreditation criteria of RuMEPP and SB Corp.,” explained Ms. Josefina Vengco, Program Manager of the MFI Capacity Building Program of SB Corp.

“Such is the case of the Cordillera Autonomous Region and the province of Saranggani.  Since the beginning of RuMEPP in 2006 up to the present, the provinces in the CAR and Saranggani province have had no SB Corp.- accredited MFIs, she added.

While there are active cooperatives in these areas that have shown success in membership growth, loan portfolio quality, and business development, they are not operating at their optimum and not at par with established micro finance standards. The Capacity Building Program of SB Corp. for Pre-MFIs have identified cooperatives in these areas that will undergo capacity building to address gaps in their lending operations, portfolio and risk management, and good governance.

“Ultimately, the end result after capacity building is that these MFIs will be enabled to improve their performance and pass the standards for accreditation and avail of RuMEPP financing from SB Corp. They will be financially stronger and better managed MFIs,” Vengco emphasized.

“All these will redound to micro and small enterprises having better access to financing which over the long term will stimulate growth in the local economy and improve living standards,” added Vengco.

Capacity Building Program

Located at the opposite ends of Saranggani Province, the first two MFIs that have undergone the capacity building program are the Malapatan Multi-Purpose Cooperative (MMPC) and the Kiamba Municipal Employees Cooperative (KiMECO). both are municipalities in Saranggani Province. Capacity Building was conducted by the Microfinance Innovation Center for Resource and Alternatives Philippines Foundation, Inc (MICRA) as the business delivery services (BDS) provider chosen through a rigorous selection process.

Initially, the program involves a diagnostic phase which will cover an assessment of business strategy, policy, manpower, organizational structure, operations and financial position of the cooperative.  In the diagnostic phase, the BDS provider will also analyze the MFI’s market position and strategy.

“By the end of this phase, the BDS provider would have formulated, based on the assessment, a customized capacity building program designed so the program will yield a strengthened institution, capable of servicing the credit needs of the mSMEs,” Vengco pointed out.

“Phase two of the program will be the implementation of the action plan recommended in phase one. The BDS provider will conduct either of several modes of intervention such as trainings, workshops, consultancy, mentoring, and/or coaching. Towards the end would be an evaluation of the results of the intervention, and afterwards, monitoring to determine the MFI’s adherence to the changes introduced by the program,” explained Vengco.

Problems of Coops

Based on the diagnostics, and typical of most Pre-MFIs, the problems of the cooperatives are in the areas of portfolio growth and quality, lack of credit and admin policies and guidelines, organizational structure, product development, and funds management.

For example, while MMPC has considerably grown in assets, membership, and portfolio size, it was overwhelmed by such growth because it was not prepared to manage it. Being so, it was difficult for MMPC to sustain the rapid growth and to meet performance standards.

“Without the needed policies, systems and procedures, and governance structures and principles in place and institutionalized, it would be difficult for MMPC to sustain its growth and be profitable,” explained Vengco.

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In the case of KiMECO, their growth is being hampered by their lack of capability to do accounts and portfolio management, and risk management. They are also unable to leverage their assets to spur growth being too dependent on internal funds for lending operations.

“The ability to manage risks and tap other fund sources would go a long way to achieve a sustainable and balanced growth in its loan portfolio and asset size,” Vengco said.

“KiMECO would also need to improve their organizational structure, to clarify roles and responsibilities so that proper accountability can be established,” she added.

Intervention

To address these problems and concerns of the cooperatives, the program through its BDS, MICRA proposed a customized action plan of capacity building interventions for each cooperative which were to be conducted over a period of about four months. Once the proposed interventions are approved by the cooperatives’ respective Board of Trustees, then they are slated for implementation.

MMPC underwent capacity building in Strategic Development Planning, Financial Portfolio Management, Market Research for Market Positioning and Manualization of Policies and Procedures.

For KiMECO, the interventions were in portfolio and risk management, Marketing and Product development, Accounts Management, and Organizational Structuring and Staffing, and policy formulation and institutionalization.

The intervention consists of classroom type of lectures, group dynamics, case studies, field work and workshops, and coaching and mentoring.

Results of Capacity Building

While the cooperatives’ learning from the capacity building effort may be immediately implemented and discernable, their impact is not abrupt, but could be seen only over the long term. The important thing is that the cooperatives are made aware that the capacity building intervention will not bear fruit without their judicious improvement in management and implementation of new policies, and the organizational changes required of them.

For example, according to Gerry Cabonegro, Chair of MMPC they are now working towards the attainment of the recommended improvements set by MICRA and spurred by its capacity building interventions.

“These areas of improvement are in the adoption of best practices in micro-finance to be integrated into MMPCs credit policy and manual of operations.  Hopefully, the improvement in policies and process efficiencies will improve the quality of our portfolio,” says Cabonegro.

“We are also working to strengthen our credit committees and other Board of Directors’ oversight committees to enhance governance and be compliant with good governance principles,” he added.

Already, as a result of the capacity building intervention by MICRA and SB Corp., the coop is now capable of product development, conducting market strategy sessions, enhancing its customer service orientation and doing market surveys.

In Kiamba, the KIMECO has also shown a determination to pursue their learnings from the capacity building intervention. It is now practicing the disciplines of portfolio management.

For example, explains Jane Rojas, KIMECO Chair, the coop has adopted the portfolio at risk (PAR) to manage its problem accounts. “We realized that the longer the occurrence of default, the harder it is to collect from these problem accounts,” she says.

“We also are now provisioning for probable losses. The net surplus of our financial operations is now correctly computed and reliable as basis for paying out dividends,” Rojas pointed out.

“Portfolio quality is projected to improve with the policy changes in portfolio management. For example, non-earning assets will be limited to five percent of total portfolio. Operational self-sufficiency is set at 130 % and liquidity is ensured by aggressive collection efforts in proportion to its disbursement rate,” she added.

Other areas of learning which the KIMECO has started to implement are: product development, risk management, documentation of processes and policies, and appropriate organizational structure and staffing.

It will be the long term results of the capacity building that will be the judge of its success. However, Vengco is positive that the future is bright for these two Pre-MFIs, and they will be able to truly live-up to their moniker as the bank of the people.

Pangasius Rising

I attended a gathering of entrepreneurs, bureaucrats, academicians, farmers, and fisherfolk and other professionals at the Gems Hotel and Convention Center in Antipolo City,  Philippines last March 30, 2012 where the 12^th  Pangasius National Conference was being held.

 I was invited to be one of the speakers ( I spoke on the equity financing program of SB Corp.)  to this group of diverse backgrounds but common interest. And this shared interest is in the development of the Pangasius, a fish that is fast emerging as a new industry in the Philippines agri-business landscape.

I was surprised at the response of people (I estimate to be 200 individuals at least) attending the conference. There was a genuine interest and enthusiasm at an industry that has had a roller coaster journey as a fledgling industry.

The Pangasius Hypopthalmus, or popularly known in Philippine aquaculture circles as Pangga, a term of endearment in the Ilongo dialect, or to be precise, the localized name of a fish species of the cat fish family that is sold in grocery stores and supermarkets as cream dory, is slowly but surely, on the rise as its new star in the local aquaculture scene.

It all started in 1981, when the country’s Bureau of Fisheries and Aquatic Resources (BFAR) introduced this catfish to the Philippines.  Since then, attempts to grow it as a full-fledge aqua-culture industry has failed until recently when the various players in the value chain has come together to address the challenges it faces as an industry.

Glen Baticados, an entrepreneur and a Pangasius advocate who runs Bay Cove International Inc., shared his experience and his vision on how the Pangasius can become a successful aquaculture industry in the country in the said conference.

Ups and Downs

According to Baticados, Pangasius production and processing in the Philippines is characterized by a boom and bust cycle. Early attempts to establish it as a major aquaculture commodity produced locally failed.

This may be attributed, according to him, to a failure to integrate the various aspects of the industry and the different players in the value chain into one cohesive whole. There were gaps in the value chain and nobody took care to look at the big picture and address these gaps, he explained.

But it persisted. Some of its pioneers just would not give up.

Since its relaunch in 2007 as a food fish from Vietnam, its popularity has increased and so did its importation.

Merle Cruz, Department of Trade and Industry Under Secretary for Regional Operations, said that the country imports a monthly average of 600 metric tons of pangasius fillet valued at $ 1.6 million. This amount could have been earned by our local producers of Pangasius, if the industry was already well established.

The Current Situation

While importation is still growing and the demand for the pangasisus fillet increasing, the industry is still unstable given to the gaps in the value chain.

For example, Baticados pointed out several major problems of the industry that hinder its growth. First, he said there is a lack of institutional buyers. Being a new commodity in the market, it is not yet as acceptable as other fish species such as bangus and tilapia. Filipino households have not yet accepted it as a regular fare, but the product is slowly getting there.

Second, production inputs are unstable and some producers complain of high production costs. Baticados said that P 50 per kilo should be the baseline production cost for Pangasius for the industry to be competitive. Higher costs would make the locally produced pangasius more expensive than those imported. And this would kill the local industry.

Baticados is optimistic this production cost can be stabilized given that bigger producers that have resources to produce their own feeds are able to maintain the P 50 per kilo base line cost.

“Pangasisus can be fed alternative feeds such as surplus fruits and vegetables, snails (kuhol found in rice fields have been tried successfully), and duckweeds, small free floating plants found in ponds and rice paddies with high crude protein content). While this is so, however, the sustainability of sources for these alternative raw materials for feeds cannot be sustained at commercial levels.”

The challenge he said is to develop these stable supply of alternative raw materials for feeds. 

In some areas of the country this is not a concern, but for the others, the sources of alternative feed supply are a problem. So in these areas, production is dependent on commercial feeds which can be an expensive input to production resulting to higher costs of Pangasius.

“Another concern is the supply of affordable fingerlings. There are many producers but very few commercial hatcheries,” emphasized Baticados. Pangasius is a fish endemic to a certain area of the Mekong river where it exclusively breeds. Anywhere else in the world, the pangasius is incapable of natural breeding. So for the many growers, they buy their fingerlings from hatcheries that induce artificial breeding to produce the fingerlings for production.

Right now, there are not enough hatcheries to supply the demand for fingerlings so there is an irregular supply of live fishes.

Baticados sums up the problems of this emerging industry as, “weak linkages among the actors in the industry value chain.  The actors in the value chain operate independently of one another, and nobody is looking at, and taking care of, the big picture of the industry.

The Solution

The industry needs integration and managing the value chain.  To Baticados, this is what needs to be done to make the industry sustainable.

Right now, according to him there is no one in particular that manages the value chain.  For instance, the various players in the supply chain not only are independent of one another but compete among themselves.

Baticados explains that the industry can follow the example of the poultry industry where there are integrators that manage the value chain and integrate the different players to produce the final product.

And this is what Baticados has adopted as a strategy to grow his business and at the same time help in the development of the Pangasius industry. His firm, Baycove International Inc. is now in the process of establishing formal and informal linkages with the various value chain players in the industry and strategic alliances with the other major players that will facilitate the delivery of inputs and outputs in each linkage in the value chain.

For example, as Baycove tries to be the integrator, it is developing the local supply chain and doing research on at least three hatcheries it has and will establish in Luzon area---HO Hatchery in Victoria, Laguna, Meralco Foundation Inc., hatchery in Jala-jala, Rizal and the Baycove hatchery in Resureccion, Silang Cavite; signing marketing agreements with growers; forging strategic partnerships with processors and feedmillers.

“Our strategy is to bring everybody in one house,” said Baticados.

“So far we are doing good in that strategy, he added.

Already, Baticados is working on partnerships with other players such as: Meralco Foundation Inc., in hatchery operations; Fish Ventures International in Bulacan as processor; Vitarich in the supply of production inputs and feeds and growers in Bustos, Bulacan, Calamba, Laguna, and Binan, Laguna.

In addition, it has entered into a joint venture with Soro-soro Ibaba Development Cooperative (SIDC), an established agri-business coop dealing in feedmilling, hogs and poultry production, organic fertilizers production to develop and operate a 21-hectare commercial grow out farm of Pangasius in Batangas.

Optimistic about the future of the industry, Baticados says that their growers’ program practically provides a stable supply of inputs. “There is an assured supply of fingerlings, a feed support program, and a buyback program.

Baycove is trying to model its system to the existing broiler contract growing industry. However, he is not lost on the need to validate his assumptions. “To come up with a doable model, we must first standardize the production assumptions,” he pointed out.

“The integration of the value chain is a work in progress,” he further explained. “Let us collaborate first,” he calls on his colleagues in the industry. “Let the industry grow first, then there will be profit for everybody,” he emphasized.

“In the value chain, everybody should earn; even if only one segment of the value chain should wind up losing, then that would kill the industry,” he concluded.

Sources of Business Financing

The crucial role of adequate capital in starting and operating a business should not be overlooked.  Both the availability of capital and the form of financing for a newly established business will be for many a deciding factor in the development of that business.

Financing can come in the form of a loan (debt financing) or in sharing the ownership of your business (equity financing).

Loans (debt financing) are usually classified as follows:

1. Short-term Loans.  This category is used to designate borrowed capital that is to be repaid within one year.
2. Intermediate Loans.  This title is applied to borrowed capital which is to be repaid in one to five years.
3. Long-term Loans.  This capital has repayment arranged for more than five years.

The business person should determine which form of financing is the most beneficial to his/her business and then approach those lenders who specialize in that form of financing. 

 For example, a business person who is seeking money to expand inventory (short-term loan) should go to a commercial bank instead of a savings and loan company.  Commercial banks specialize in short- and immediate-term loans.  Some savings and loan institutions now make medium-term loans even though they historically only made long-term loans.

Finally, two things should be recognized when one is faced with the problem of obtaining capital assistance:
1. an established concern with a good record of operations usually has better access to available sources of capital than a new firm.
2.  Some personal capital available for investment in the firm by the new owner is almost always essential to obtain any type of outside assistance.

The following are several sources of funds for small firms with a brief description of the source:

Personal Funds
Whenever potential creditors, partners, or stockholders are invited to invest in or lend financial assistance to a new firm, their first question is, "How much does the owner have invested?"  In any event, it is important that the owner have assets of his own to invest in the firm.  The closer to fifty percent of the total capital needs that can be provided; the greater will be his independence and share of net profit.

Loans From Relatives and Friends
Many new owners are encouraged in their enterprise by parents, relatives, or friends who offer to supply loans to the firm to get it started.

However, mixing family or social relationships with business can be dangerous.  Many unpleasant situations might have been averted if the terms of the agreement had been more clearly specified, including the rights of the friend or relative to insist upon making business policy.  The best way to avoid problems is to make sure that agreements are made on a business-like basis and viewed as business dealings.  These agreements must provide for termination of business, death of partner, etc.

Trade Credit
Trade credit is the financial assistance available from other firms with whom the business has dealings.  Most prominent are the suppliers of inventory which are constantly being replaced. For example, if a P20, 000 inventory can be purchased for a P10, 000 down payment and the balance in 30 days, the wholesaler has virtually provided P10, 000 of required capital to run the business.

Loans or Credit From Equipment Sellers
This type of financial assistance is often considered another form of trade credit.

Mortgage Loans
When the new firm's planners own a commercial building, they can secure a mortgage loan on it with payments over the long term.  If the firm will operate out of the building, the planners will be making mortgage payments instead of rental payments to a landlord.  Mortgage loans are typically made by savings and loan associations, mutual banks, and mortgage banking institutions.

Commercial Bank Loans
Commercial banks are generally short-term lenders who assist businesses in expanding their working capital needs for inventory and accounts receivables.  Banks, however, will make longer term loans which are sometimes guaranteed by government.

Government Lending Programs to Small and Medium Enterprises
Government lending programs are available to small firms from agencies such as the Small Business Corporation, Quedan Guarantee and Finance Corporation, Philippine Export-Import Credit Agency, National Livelihood Support Fund (NLSF).  These agencies provide loan guarantees and make direct loans to small firms.  These loans generally are intermediate or long-term. 

Small Business Investment Companies or Private Equity Funds
These are privately owned companies which make long-term loans and even take equity positions in small businesses.  Funds from P 1 million to P 20 million or more have been obtained by new companies from these sources.

Venture Capitalists
If your business is a start-up, you may approach a venture capitalist. Venture capitalists take equity positions in firms they believe can rapidly increase sales and generate substantial profits.  Why?  Because venture capital firms invest for long-term capital gains, not for interest income.  Most venture capital firms are interested only in investment projects requiring an investment of P50 million and up.  Projects requiring lower amount of investments are of limited interest because of the high cost of investigation and administration.

Non-Government Institutions and other Micro Finance Institutions

NGOs and other micro finance institutions finance new projects but may require the borrower to undergo preparation such as values formation or teambuilding seminars that fit into their special lending schemes.

At this point, I hope I have enlightened you on some aspects of financing assistance for young entrepreneurs. I also hope that you have been inspired to become one. Our future depends on the youth of today and our country needs young entrepreneurs with a fresh vision for business. Let’s do business!

Qualities that Make a Successful Entrepreneur

I am happy to note that today more and more of the youth are thinking of going into business. This may be the result of being educated to be an entrepreneur. Schools, colleges and universities now offer entrepreneurship courses.

 Or this may be borne out of the influence of parents who are themselves entrepreneurs; who have grown their businesses and their children have to follow in their footsteps to join the family business.

Or may be out of necessity for the youth because there are no longer enough jobs in the market to absorb the growing number of new graduates yearly. On last count new graduates from college could be about 400 thousand yearly and only about 10 percent land in good jobs.

Nevertheless, the good thing is, finally, despite the slow process, more young people are changing their paradigm on how to move forward in life. Many of the young are considering becoming entrepreneurs. As entrepreneurs, instead of being job seekers, they now aim to be job providers running their own businesses.

The Young Entrepreneurs

For bankers,young entrepreneurs are a risky lot to lend to. Indeed, even discounting age, new entrepreneurs are risky borrowers.

Studies in the U.S.A. show that only one in 25 new businesses continue to operate for 10 years or longer.  Or still some studies say that 80 percent of new businesses fail.  Not a good prospect for the aspiring entrepreneur.

However, being a successful entrepreneur has great rewards --- ask Bill Gates of Microsoft or Yahoo founders David Filo and Jerry Yang. They are all Billionaires providing jobs, products and services to millions of people worldwide.  In short, it is not easy to be an entrepreneur, but the rewards are great if you become successful.

Now I pose to you the question: Do you have the right attitude and capability to startup your own business? Have you been asking yourself that big question--- To be or not to be an entrepreneur?

Then let's find out if you've got what it takes to be a successful entrepreneur.

Note: There is a debate about whether people are born with these entrepreneur characteristics and traits or are they learned through training and practice? Do these characteristics come from "nature" or "nurturing?"

First, let's define what an entrepreneur is and then we'll discuss the common characteristics and traits that most successful entrepreneurs possess. A quick look in the dictionary tells us: "An entrepreneur is a person who organizes, operates, and assumes the risk for a business venture."

Not a bad definition, however not all entrepreneurs actually do all three parts all the time. There are some entrepreneurs who just start up businesses and then sell them right away. Thus, they don't operate their small business for a very long time. Once they sell it for a tidy little profit, they move on to the next project.

So, what is the essence of an entrepreneur? I believe the definition of an entrepreneur in it's most basic form is: someone who sees an opportunity and takes advantage of it.

Traditionally, most successful entrepreneurs were thought to possess the following four characteristics:

1. Risk Taking- entrepreneurs are risk takers. They are able to calculate the risks of starting up a new business and weighing them against the benefits that may be produced for themselves as well as society. With their time, money, and reputation at stake they leave little to chance or luck. Yes, entrepreneurs take risks, but they are usually calculated risks.

2. Decisiveness- entrepreneurs must be able to make decisions on a strategic level. They are able to see where they are now, where they want to be in the future and decide on how to reach their goals. It's the ability to see the forest through the trees, and decide how to navigate through it.

3. Action takers- After conceiving an idea, calculating the risks versus the benefits, and making strategic decisions, the entrepreneur takes the initiative to make those decisions a reality. They do not allow the bigness of the endeavor to grip them with fear. Anything they can't do themselves they find others who can.

4. Innovative- Entrepreneurs see a need and are able to fulfill the demand. Whether it is a new technology or a new way of solving an old problem, entrepreneurs have been considered the people who were on the cutting edge of many industries.

These four entrepreneur characteristics and traits are still very important today. However, not every entrepreneur can invent the next great contraption and with the technology available to us today and the way it continues to make our world a smaller place, it is becoming harder and harder to even have an original idea.

So, there must be other entrepreneur characteristics and traits that contribute to an entrepreneur's success. Here are some that I think are important.

Passion- That's right, LOVE! Most successful entrepreneurs love and enjoy their work. If you are doing something you love, then it won't feel like work.

Hard working- Don't waste your time or that of other people who are willing and able to help you if you are not willing to do some good old fashioned hard WORK! Many entrepreneurs got started in business when they were young as paper boys, cigarette vendors, janitors, messengers, car wash boys etc. A strong work ethic will be the engine that powers your business' success.

Competitiveness- Most successful entrepreneurs don't like to lose and when they do fail, they aren't afraid to get back out there and TRY AGAIN. They are willing to test their abilities against those of others and even thrive on the competition.

Perseverance- The ability to keep your goals in sight and not to give up as you run into the myriad of problems and obstacles that are sure to arise as you startup your new business.

Adaptability- Entrepreneurs have the ability to find creative solutions for a variety of situations and problems. This ability to step outside the box or think outside the box is not easy and may require some unorthodox approaches.

Organized- I personally believe this is one of the more important entrepreneur characteristics that can be mastered.

You will need to make the time and a place to work.

Present, past, and future records (seven years!) and files of: sales, taxes, employee records, balance sheets, business contacts, and contracts will be necessary. Phones, faxes, computers, a desk, chair, lamp and a window view if you must.

Next, MONEY. Entrepreneurs must manage their own personal finances as well as their company's. You may need to hire an accountant at some point, but that is no reason not to know your own bottom line and Do the Math!

And finally, TIME. Another four letter word. Entrepreneurs must make calls and appointments and keep to schedules. They know they must use their time wisely and efficiently. It's the one thing you can't get back. The ability to organize your time, money and effort is critical.

Discipline- Successful entrepreneurs have the mental fortitude and discipline to stick to their plans and schedules. Long hours, no vacations, and a lack of funds are just some of the obstacles and challenges new entrepreneurs must face.

Persuasive- Entrepreneurs must deal with many types of people when doing business. They have to talk to lawyers, accountants, bankers, employees, and customers. They must be able to get people interested in their business ideas and persuade them to help attain their goals.

Optimists- Entrepreneurs see obstacles and challenges as opportunities. Their outlook on life is positive. The glass is always half full.

Loners- Finally, being an entrepreneur can be a lonely job. You may be forced to work alone without any help until you get your business up and running.

Yes, you will talk and interact with many types of people, but at the end of the day, you alone will need to make the difficult decisions and have to live with the consequences.

Also, if you do become successful, you will need to maintain a certain amount of emotional distance between yourself and your customers and your employees if you are to remain objective and fair. You may have an employee who is not doing their job and it may become necessary to fire them.

Remember this... Business is war. And as they say in the military, "The more you sweat in peace time, the less you bleed in war." Practice, train, and drill these into your brain and you'll be on your way.

Art of the Enterprise

Art imitates life; or life imitates art?

As we ponder this question, the importance of art becomes real to us, and we realize that the life we make for ourselves is the product of our creativity. It is not difficult to see that life itself is art; and art is life.

From the mundane to the complex fixtures of our environment; from the daily implements that help us get by work to the sophisticated machines that make living comfortable; to the simplest method of doing a task to the complicated processes we undertake to complete a project--- they are all products of creativity. One undeniable fact remain: art is in everything we consume, use, and the way we do things to survive and prosper in this world.

This is true in business as well. Running a business, as many of us know it, and the way it is frequently stereotyped, is a difficult job that requires indifference. An entrepreneur is often cold, calculating, and apathetic to concerns outside his business. Like the market he serves, the entrepreneur is not so much troubled about the impact of his decisions on others, as their impact on the bottom line. To him, the important thing is to generate revenues, earn a hefty profit, and grow the business.  However, many successful entrepreneurs are nowhere near the cold hearted and uncaring individuals they are portrayed to be. They are really artists who are passionate about their business and the way their products and services impact on the market---these be institutions, communities, or people. Their products, services, and the processes they conform to are the result of creative thought. Works of art that call for the artistry of the entrepreneur. It is this creative spark that gives the enterprise the human face, its color, and the vitality that is its culture.

Figaro: Giving Life to a Dying Industry

“The purpose of life is a life of purpose.”---Robert Byrne

This Filipino enterprise serving the famed barako blend of coffee has come a long way since its modest beginnings in 1993 as an unfussy coffee shop. Today, after becoming a full service store that offers a whole range of fast food items, and going into franchise operations, the company has established16 franchisees, and 14 company owned stores throughout the country. It’s a profitable business that continues to grow.

The Small Business Corporation, by way of its Franchise financing facility has financed the establishment of several Figaro coffee stores, and has helped in the growth of the business.

But more than just its business success, what makes Figaro Coffee Company unique among its SME peers is fulfilling a purpose--- to revive the once vibrant and now struggling coffee industry.

It is one of the leading movers in an effort to bring back to the industry its old position of prominence in the world coffee market. Representing the private sector as one of the leading coffee retailers in the country, Figaro Coffee Company has built on the image as a source of Filipino specialty coffee.  It introduced Barako roast in 1999 and it immediately became a big success.

Believing in the potential of the Barako bean, Pacita Juan, owner of Figaro embarked on a program called “Save the Barako.” The program promoted the coffee bean, and encouraged farmers to plant and improved their cultural practices to increase productivity.  At the same time, Juan also set up the Figaro Foundation Corporation to address the plight of the coffee farmers and the other humanitarian needs of the industry.

Soon the business promotion effort became an industry saving cause. Figaro became active in launching various projects such as tree planting, coffee farm tours, art exhibits, coffee conventions, seminars, and trainings in quick succession, all in the call of reviving the coffee industry.

With its use of the mass media, Figaro soon made people aware of the low productivity of the Barako coffee due to the low demand, and because of this awareness, people soon started buying the local coffee which increased the demand among domestic and foreign coffee retailers.

Figaro’s involvement eventually became institutionalized as its owner was selected as private sector representative and co-chair of the National Coffee Development Board, a government created, but private sector led collaborative effort to bring back the Philippine coffee industry on its feet.

Since then, there has been an air of optimism as industry players look to the future. As one industry stalwart puts it, “its bean value is at least three billion pesos. It’s growing by leaps and bounds and there’s room for investment, not only in retail but also in farming.”

Figaro has truly epitomized the devotion of the entrepreneur to its art, or to the purpose to which the enterprise was created. As industry analysts sum it up, it’s an inspired effort to “secure the future of a dying coffee bean.” In the process, not only Figaro has reaped the benefits, but the Filipino and the country as well.

Equity Financing is a Good Way to Finance your Business

Debt financing is what everybody is familiar with. It is what you know as a loan. It may be short term or long term, or it may be transactional. The institution I belong to---Small Business Corporation, a government financial institution attached to the Philippines Department of Trade and Industry provides loans for MSMEs. In fact loans make up much of its portfolio.

                                            

Loans are lent out with the intention of getting back the principal amount plus the interest depending on how long the loan is to be repaid. If the borrower is not given a grace period of about 6 months to a year at most, the loan is immediately amortized or repaid; the principal plus interest which is usually fixed and given at the onset of the loan.

The lender in most cases is does not participate in the business; is not interested in owning it, but merely wants to get his money back plus interest.

 Debt is ideally used only to finance the working capital requirements of business at most about 70 percent of it. Or short to medium term asset acquisition such as for machinery and equipment.

For start ups, product development, or expansion of the business, a more appropriate kind of financing is available.

We call it equity financing. In this article, I will talk mostly about equity financing under SB Corp.’s Venture Capital and Enterprise Incubation Program or SME-VIP.

First let’s start with the basic---- equity financing is not a loan; it is an investment.

So unlike a loan, an investment is not to be repaid immediately. The one providing the investment becomes part owner of the enterprise, and shares of stocks are issued for the invested amount.

Second difference from a loan is that an investor expects their investment to grow and given back over a period of several years many times over their original amount of investment.

However, there is no specified rate of return, but has a minimum rate of return without limits on the upside. Usually, there is no specific time the investment has to be returned to the investor.

Finally, investors may get involve in the management of the business as part of the deal of investing. Investors are often members of the Board of Directors.

The good news is that aside from SB Corp.’s lending or loans program, it now has a venture capital/equity financing program as an offshoot of the passage of the revised Magna Carta for mSMEs or R.A. 9501, which includes in our mandate, a venture capital fund.

What is SME-VIP?

The SME-VIP shall identify, select and nurture and develop business ideas and early stage/start-up enterprises into competitive businesses. A minimum objective is to create sustainable and viable enterprises that are self-supporting and can already stand on their own.

Specifically, the SME-VIP will have the following objectives:

• To provide equity and/or venture capital financing;
• To provide by itself or though its network of  partners capacity building services; and
• To help provide through its network of partners access to production facilities, office spaces, equipment and machinery rentals, and marketing venues.

How does the SME-VIP work?

The program concept starts with a business idea. This may be a technology, a unique product or service that requires capital to start. Or may have already started up but requires additional capital to grow further.

We take this pre-bankable business and let it undergo the business incubation process. Business incubation is a business support process designed to accelerate the successful development of start-up and fledgling enterprises through an array of business support resources and services, developed and orchestrated by SB Corp. management and offered both in the incubator and through its network of contacts.

The enterprise that graduates from the incubator program is expected to create jobs, improve the environment, commercialize indigenous technology, improve local economies, and contribute to the general standard of living of the country.

Critical to the definition of an incubator program is the provision of capacity building such as management guidance, technical assistance, and consulting tailored to fledgling and growing firms. The usual thinking is that it is a requisite for incubators to provide physical locations and facilities to its clients. However, about half of incubator programs serve “virtual” enterprises. These are enterprises that are housed outside of incubator facilities, most probably home based or with their own premises, but can benefit from the services extended by incubators.

In this particular instance the SME-VIP shall provide venture capital and equity financing, and capacity building services to businesses enrolled in the program. The SME-VIP shall broker the package of assistance needed by the enterprise be these in the form of financing or of capacity building services. An enterprise incubator’s main goal is to produce successful firms that will leave the program financially viable and freestanding.

Five Stage Implementation

The SME-VIP shall adopt a five-stage process in its implementation to attain its set objectives and targets. The following describes the general mode of operation of the SME-VIP:

1. Enterprise Identification and Prequalification

This involves the scanning of the environment for business ideas and early stage enterprises which may be the subject of the incubation program. Various sources of such enterprises may be the sub-borrowers of conduits financial institutions, inventors, SME borrowers of SB Corporation, the academe, research institutions, government institutions and their programs, Chambers of Commerce and Industries, Trade and Industry Associations, Non-government Organizations and other VCs and private equity funders. Those identified as potential investees/incubates are screened based on a set of pre-qualification standards and subjected to a due diligence process that they should pass.

2. Enterprise Institutionalization (pre-operating requirements)

The next step is to institutionalize the enterprise based on the requirements of the SME-VIP.  This involves the registration of the enterprise as a corporation, its capital structuring, the preparation of its business plan, the execution of all necessary documentation of the assistance to be provided whether financing or capacity building in nature, its location in an incubation center (only when needed) and the completion of all attendant activities prior to its operation as an incubator enterprise.

3. Enterprise Incubation

At this stage, the enterprise starts operating under the incubator program and starts enjoying the benefits of such. VC or equity financing will be provided. Loans also whenever needed are made accessible.  Capacity building in areas of management, marketing, or production; technical assistance in product and business development, and consultancy and advisory services may likewise be extended. This stage could last from a short one year to about three years depending on the status of the enterprise upon joining and the speed by which it can establish itself in the market and generate revenues.

4. Commercialization

At this stage, the incubated enterprise is spun off as a commercial going concern which means it shall operate at the level of self-sustainability without further capital infusion, grants or subsidies from outside parties or from the incubator. Exceptions would be loans for working capital or capex for expansion, which are part of the normal modes of financing by operating enterprises. This is the test for the enterprise prior to its graduation from the program. At this stage, the enterprise is expected to grow at a faster rate and generate sufficient revenues to sustain its operations and generate profits. Once the enterprise has proven itself to be sustainable for a period of about one to two years, then it is ready to be graduated from the program.

5. Graduation

The enterprise is released from the program and proceeds to fulfill its growth potential. The residency for an enterprise under the program is only for five years maximum.

Applying for the program

First thing to do if you are interested in participating in the SME-VIP is to write us a letter to formally signify your interest in the program. As part of the letter, attach a 1-2 pager description of your business model. This is a short description of your enterprise telling us about the product or service and how it intends to make money, its competitive advantages, and its socio-development impact or how it will benefit the community.

After receiving your letter, we will schedule an interview with you regarding your business.  In the interview we will get to know you better and clarify whatever concerns we have about your business model.

The initial interview will tell us whether or not to endorse the project. We will prequalify it and have it affirmed by our credit committee for us to proceed with due diligence. At this stage, we will ask you to submit a detailed business plan.

Then we examine the business plan and conduct due diligence on you and your business. At this stage, we shall conduct credit investigation, an audit/validation of the business plan, and a valuation of the enterprise.

After due diligence, we structure the deal. The deal structure is the financial plan of business detailing the amount of investment, the nature of the investment whether in common or preferred shares, or convertible debt, the term of the investment, the ownership structure, the projected rate of return, and exit plan.

Finally, we submit our recommendations to our Credit Committee based on an investment risk rating tool that we use and the results of our evaluation and deal structuring.

 The Crecom either approves or disapproves the deal.

Investment Risk Rating

To evaluate our investees, we have developed a risk rating tool for our investments and using this tool, we are able to assign investment grades to our investees and identify, quantify, and mitigate the risks in a particular project.

We call our investment risk rating tool LeADER Analysis which is an acronym for the major parameters that we evaluate in rating the risks. These parameters are: legal aspect of the business, the administration aspect, the Doability of the business plan, the economic prospects and market strategy and its return on investment.  As investee, you must pass the risk rating. Projects with 66-above points or an equivalent investment grade B+ in our Investment Rating table passes the evaluation. The highest investment grade is A+ and the lowest is C.

 

New Mode of Financing for Filipino SMEs

Hopefully, after getting an overview of our SME-VIP, we hope that you will now start to look at equity financing or investment as an alternative mode of financing to loans. After about five years of investing in SMEs our portfolio remains to be small hampered by our ability to find really good opportunities in the SME sector.

However, we are proud to say that so far our batting average is better than 50%---which also means that SMEs are good investees.

For those we have invested in, more than half of them have been good deals. Examples of our deals are investees in cosmeceuticals, a mix of cosmetics and pharmaceutical products, in an engineering firm in the telecom industry, in a seaweed production and processing project, in a manufacturer of movable walls and building acoustics, and a producer of personal care products using essential oils.

Currently, we are doing due diligence on a food processing start-up based in Bicol region that would retort Bicolano delicacies such as pinangat, laing, and bicol express for the consumer market.

SB Corp. has initially put up a Venture Capital/Equity Fund of P 50 million pesos, and we are targeting to invest about P 15 million this year. We have modest targets because we have a small fund. Nevertheless, we look forward to be able to do some strategic deals in certain industries and contribute to their development.