Collateral ranks low in evaluating MSME applications for bank loans

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Tuesday, April 15, 2014


ALTHOUGH most micro and small entrepreneurs think their biggest hurdle in acquiring financing is the lack of collateral, a banking official assured that this is not the case.

Elsie Fe Tagupa of the Land Bank of the Philippines said collateral is one of the last things they consider in evaluating loan applications.

Tagupa said the first thing they look at is the character of the applicants and their capacity to pay. They also look into the financial viability of the business and the industry prospects. Having quality collateral will not matter if the applicant fails to pass the first four parameters, she said.

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Tagupa said entrepreneurs should be grateful if a bank informs them that a business lacks in viability and sustainability because they can be told where they can make improvements.

Not like pawnshops

She said they do not work like pawnshops, saying their first consideration is to make sure a business can pay for itself and succeed, rather than just acquire good property.

In evaluating the quality of ownership, Tagupa said they check on the skills, integrity and reputation of the business owners. She said those with canceled credit cards and estafa cases are sure to be rejected outright. Tagupa said it is critical for business owners to have clean dealings.

Other things they look into are if business owners are heavily indebted, have heavy personal withdrawals from the business accounts and if they have reputations for indulging in gambling or other vices.

Tagupa said they prefer to give funding to owners who are committed to their business and are actively involved in daily operations. “Do they bring fresh funds into the business or make additional investments to improve, upgrade or modernize their operations? These are things we consider,” she said.

Management capability

Another thing they evaluate is the management capability of a business. Tagupa said they look into the experience levels, educational background and track record of the business under its managers. This also includes human resource turnover, corporate governance and records keeping. “Most SMEs don’t know what financial statement is submitted. You should know what your bookkeeper does,” she said.

Tagupa assured entrepreneurs that the financial sector wants to help micro, small and medium businesses but only if they too help themselves by shaping up.

Higher rates

However, MSME association Filipino Cebuano Business Club president Rey Calooy pointed out that banks charge higher interest rates to MSMEs. Transaction costs are also high, which is not the case for large enterprises. He said that the difficulty in getting funds leads micro enterprises to approach loan sharks.

But Tagupa said that the LBP offers funds to many cooperatives, which in turn help small retailers and offer loans without asking for collateral. She encouraged
organizations get LBP accreditation so they can become a conduit for loans.

She said cooperatives offer loans with interest rates of 2.4 percent, much lower than the 20 percent charged by loan sharks. She also pointed out that these cooperatives earn for members dividends, which loan sharks do not provide.

Tagupa said there are many formal financial institutions that do offer loans for small businesses, as long as businesses help themselves by showing their business is viable.

Published in the Sun.Star Cebu newspaper on April 16, 2014.

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