Advantage SMEs

Why Develop SMEs?

2017-03-06T03:30:00.001-08:00

The advocates of SME development are often asked why they believe SMEs to be the vehicle for national social and economic development. The inquisitive mind will ask the question, “Why SME development when SMEs are only 8 percent of the total number of enterprises in the country? Why not focus on micro enterprises?”

The immediate answer that comes to mind is that this situation shows that most of our micro-enterprises do not develop to become SMEs. Either they are not sustainable and their growth peters out, or they remain a micro-enterprise forever. This is the reason the country does not have many global brands and businesses in the international market place.

The situation calls for efforts in incubating micros to become SMEs, and SMEs to eventually become large enterprises. Clearly, the gap in our development efforts is bringing micro enterprises to the next level of development which is becoming an SME. Hence, the need to focus on SME development starting with the graduating micros.

By their very nature, SMEs have characteristics that enable them to be catalysts for development. Their growth will pull people up out of poverty and ultimately uplift standards of living. So to clarify the unsettled minds of those who still doubt the wisdom of pursuing the development of an SME sector, we have identified and ascertained, based on our personal experience and on available literature on the subject of SMEs, their characteristics and role in nation building.

SMEs are More Stable Even Even as we recognize that most businesses start from being micro, it is our best option that we invest or finance SMEs. First, is that unlike micro-enterprises, SMEs are at a level that is more stable and resilient having passed through the start up stage and having paid the “tuition fees” for beginning enterprises. The entrepreneur running the SME is also more experienced having survived the early years of the enterprise. So it is theoretically less risky for the lender to finance SMEs, it being with more permanence and stability than micro enterprises.

Multiplier Effect

Assisting SMEs has more impact than smaller enterprises. As SMEs grow so do allied businesses along its value chain. For example, in a manufacturing enterprise, from product design to procurement of raw materials, packaging and marketing will have various businesses either in the form of services or material inputs that are benefited by an SME’s growth. As the volume of production grow, so does the levels of contribution of the businesses in the value chain. So in effect, the development of an SME positively contributes to the growth of other SMEs as well.

Sustainable and Alive

A typical SME grows at an average of 10 percent per year. And a really good SME may grow at a faster rate. Regardless of their rate of growth, the fact is SMEs are “alive” and grow. For lenders this is a good thing because they can grow their loan portfolio as SMEs grow. The lender’s relationship with SMEs is sustainable as the business with SMEs grows over the years until they become big enterprises.

Job Creation

Because they grow and have a multiplier effect, they are good job creators. Yes, SMEs actually provide jobs for people within the community they are located. As they grow they create jobs not only within themselves but also in the value chain.

At the macro level, in India for example, recovery in job losses during the recession was led by SMEs as they showed steady growth in job creation, creating about one million jobs per year. Overall, SMEs provides 40 percent of all jobs in India.

In Canada, a developed country, SMEs create about 100,000 jobs annually. In China, SMEs provide 80 percent of jobs. In the Philippines, more than 60 percent of jobs are provided by SMEs. Given that they are major provider of jobs is enough reason to support SME development.

Contributes to Economic Production.

SMEs also contribute significantly to the country’s GDP. In the Philippines value added to GDP is about 37 percent. SMEs in our neighboring countries have value added to GDP which are much higher than those of Philippine SMEs. Japan for instance has more than 50%, China 45.4 %, South Korea 46.5 %, and Thailand 40 %. The value added from SMEs in the case of the Philippines can still be significantly improved.

Germinate New Industries

Big business especially in developed societies originates from SMEs. And so did precursors of new industries. In Japan which has a number of top global brands started many of these products in business incubation centers as SMEs. In the early 20^th century, even large corporations such as Toyota, Honda, and Sony started out as small backstreet factories.

Historically, manufacturing in its earliest form was carried out by artisans with assistants. These were small workshops usually based at home that did work on special projects. Usually, these artisans form guilds which protected their “industry.” Furthermore before the industrial revolution most manufacturing were located in the rural areas which were household-based. These were technically SMEs, but the term was still unknown then.

The point here is that SMEs have the potential to germinate and bloom into new industries and the revitalization of SMEs can promote competition in the marketplace, creating new industries and becoming the motive force behind economic restructuring.

In more contemporary times, we see garage-based workshops which later became Microsoft, e-bay, Amazon, and spurred the dot.com era. There are numerous other examples of success stories of SMEs becoming big. Here are some of them aside from those already mentioned: Apple, Disney, HP, Amazon, Dell, Starbucks, Mattel, Harley Davidson, e-Bay, and many more.

Can stabilize society (inclusive growth)

Given the benefits of a robust and vibrant economy with a strong SME sector as its backbone, the social and economic life of people will be at par with those of the more developed societies of the world.

A strong SME sector will be able to stabilize developing societies. As providers of jobs, maker of new industries, contributors to economic growth, stable, growing and having the ability to spread wealth among the people, SMEs by themselves are able to stabilize societies.

For example, let’s take a local economy in the interior towns of Bohol province that were a bastion of insurgency during bad times (financial crisis of late 90s), were transformed into peaceful and progressive communities when enterprises came back and a vibrant SME sector was once again established. Because SMEs are purveyors of growth and development, the insurgency left the place because people did not need one to recover economically.

Engineered Bamboo: Environment Friendly Solution to our Housing Needs

2013-09-16T01:39:00.004-07:00

A new product is being developed that is made of bamboo, which can replace the construction materials made of hard lumber from our forests. The product is called engineered bamboo. And as its name implies there is a process done to the typical bamboo poles to turn them into construction materials that are as durable and long lasting as lumber from our forests.

As part of my work of financing SMEs with promising and profitable products and services, I have come across several proponents looking for equity financing for their engineered bamboo projects.

From my initial appraisal of the product, I would say that it looks exciting and if proven successful can become a very profitable domestic and export industry of the country.

First, bamboo is not a tree, it is a grass. Cutting them will not present any environmental problems compared to cutting trees in the forest. Second, bamboo can be cultured and can grow almost anywhere in the Philippines. Third, it is a hardy and perennial plant and can be established easily and replenish itself in a shorter time than trees. You can harvest poles from a short time of 3 to 6 year cycle.

The technology used to produce engineered bamboo is simple and a combination of practical physics and chemistry. First, large bamboo poles are shredded into strips and configured according to the size and shape ( dimension of the lumber material) required or desired by the producer. Once the matrix for the required dimension is built or configured, low viscosity (VOC) resin is added into the configured bamboo strips and placed in a hydraulic press which compresses the bamboo at several thousand of pounds of force.

The compressed bamboo is allowed to stay that way until the resin is completely dry and then removed from being pressed. The resulting product is a dense block of bamboo that is nearly indestructible.

It is subsequently milled and sanded into what is popularly known as bamboo lumber or engineered bamboo.

The block of compressed bamboo could be made into different dimensions as required by the construction industry. It could be made into ply boards, posts, and other wooden construction material. You can even build an entire house from engineered bamboo.

Already, bamboo is a commodity that is considered a notable and significant plant in the Southeast Asia region, being popular as raw material for homes, handicrafts, furniture, and food; the young shoots are harvested and used as a vegetable in many areas of the region. But with engineered bamboo, we now have a material that can substitute for hard lumber, and can meet man’s appetite and demand for wood.

What about its durability and strength? And questions regarding its resistance to wood louse and other insects that dig and gnaw on bamboo and other wood?

According to those who have experience using engineered bamboo, they claim that it is hard as Oak, and is actually resistant to insects that feed on wood. As to its resistance to insects, fully matured bamboo is not palatable to the insects, it’s the young and immature poles that are attacked and serves as insect food. So the key to its durability is to use only matured bamboo poles when manufacturing engineered bamboo.

A bamboo blog site http://www.bamboogrove.com/blog /has these to say about bamboo as construction material:

· It takes an acre of hardwood forest to build an average house; it takes only a quarter of an acre to build the same house;

· It will take 40 years to regenerate the hardwood forest; it takes only a year for an acre of a bamboo forest to regenerate;

· Ounce for ounce, bamboo is stronger than wood, brick, or concrete;

· It is a fast growing species---can grow a yard per day;

· Highest tensile strength than most grades of steel (withstanding 52,000 lbs. of pressure PSI and weight to strength ratio surpassing graphite)

· A house made of bamboo is earthquake proof.

One anecdote I read extolling the benefits of using engineered bamboo is about a demolition expert who was asked about which house was most difficult to demolish? Not steel, not concrete, not hard lumber----yes, you guessed it, a bamboo house.

In the Philippines, the countryside is abuzz about engineered bamboo. It has been identified by the country’s Department of Trade and Industry as one of its products under its OTOP (One Town; One Product Program), and some regions are already laying the groundwork for its development as an industry. As I write this article, bamboo plantations are being established. Engineered bamboo projects can be found in Iloilo, Nueva Ecija, Cordillera, Abra, and regions where bamboos are found to be part of the natural landscape.

It is about time, the country develop this natural resource that could prove to be the savior of our forests. As it develops, I see a reduction in the cost of engineered bamboo and housing will be more affordable, even for the poor.

Upgrading Financial Services for the Rural Folk

2013-09-16T00:06:00.001-07:00

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.

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

2012-05-22T03:39:00.001-07:00

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

2012-05-19T01:47:00.000-07:00

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

2012-05-19T01:16:00.000-07:00

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

2012-04-12T03:14:00.002-07:00

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

2012-04-12T03:10:00.000-07:00

“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

2012-04-10T04:20:00.000-07:00

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:

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.

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.

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.

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.

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.

CRB-Bulacan Experience: Micro-Enterprises are Good Business

2012-03-26T17:12:00.000-07:00

Micro-entrepreneurs given the proper opportunities, the right resources, training, and confidence, are after all good investments.

This was the opinion given by Nestor Custodio, General Manager, as he described micro entrepreneurs as the reason the Cooperative Rural Bank of Bulacan (CRB of Bulacan) went into microfinance operations a decade ago.

While riskier than traditional banking, it was with great optimism that the CRB of Bulacan ventured into micro finance operations catering to the needs of the small and low income clients which are largely unserved by the formal banking sector.

It was the conviction and belief that this unserved market is a lucrative business opportunity that encouraged the bank to go into micro finance.

Today, that conviction has not failed expectations. With more than a thousand depositors and members, it has grown to an asset base of P 1.8 Billion, and a multi-million micro finance loan portfolio that continues to cater to the needs of the pre bankable entrepreneurs despite the challenges of a developing economy.

The key to this success according to GM Custodio is the availability and sustainability of funds.

“Our experience taught us that one of the major reasons why our micro finance program continues to be successful is because funds are always readily available to finance the growing businesses of our micro finance clients.

“SBGFC was there when we needed the financing to meet the demands of our clients. Through an Omnibus Credit line, SB Corp. was able to respond quickly whenever we needed the funds to sustain the growing business of our micro entrepreneur clients, relates Custodio.

“The continued training of our staff and our clients is likewise a very important aspect in microfinance. Our being sensitive and adaptable to changing market trends that resulted to a high rate of client retention is also one important success factor. Our program is able to adjust and develop flexibility to serve the needs of our clients,” he added.

Indeed, the CRB of Bulacan has contributed in a significant way in uplifting the standards of living of its beneficiaries. In its own way, it has touched the lives of the poor through the provision of “affordable, accessible, and suitable” banking services not usually provided by other banks.

“The bank has created job opportunities in the communities it serves. Furthermore, since most of our clients are women, we have seen their transformation into more responsible, assertive and confident members of society,” concludes Custodio.

Postcript:

The CRBB has been closed by the Philippine Deposit Insurance Corporation last May 23, 2013. A success story for cooperative Rural Banks, the CRB of Bulacan is an example of how a successful financial institution can be demolished by mismanagement and poor governance. We are saddened by its closure, but remain positive that lessons can be learned from its debacle. This blogger will unravel the reasons for its failure and post them so that all can learn from the CRBB story.

Businesses Filipinos should be into---those with competitive advantage

2012-03-25T20:51:00.005-07:00

Despite its human, natural and agricultural resources, the

Philippines

cannot boast of global brands which can compete in the world’s marketplace except for one or two which are known internationally --- San Miguel beer, and perhaps Jollibee.

Our country has been known to be a major producer in the 1900s of agricultural products and ranked among the top in the world. We had abaca, then known as Manila hemp, sugarcane, coconut in the form of copra, and lumber from our then abundant forest resources.

But the competition, technology and the unsustainable exploitation of these resources enabled the world’s markets to find cheaper and better substitutes. These commodities eventually lost their appeal and were overtaken by other commodities far better and cheaper from other countries in the export market.

It will be noted that our top exports then were in the form of raw materials or semi-processed produce which had little value added. Contrast this to the other economies in the world that developed new technology to produce finished products which gave them the competitive advantage.
Our exports then lost, or did not have, competitive advantage so other countries outpaced and outgrew them in the market.

Today, the competition to sell in international markets is as intense and is more difficult. But competitive advantage remains to be a necessary ingredient for any successful entrepreneur to break into and maintain a strong foothold in the export market.

Yes, if you cannot compete well, you are doomed to failure especially in an environment of high risk and constant and fast paced changes. An understanding therefore of the concept of competitive advantage will help the entrepreneur focus on what is important and to build on a business with innate and developed competitive advantages.

As defined by Michael Porter, Harvard University Professor and leading authority in competitive strategy, competitive advantage is the position the firm occupies against its competitors in terms of a superior product and service, and cost leadership.

According to Porter, this position of sustainable competitive advantage is created through cost leadership, differentiation or focus. Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost. Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm's position in its industry as a leader in either superior services or cost.

To further simplify the definition, your business has competitive advantage when you are able to do something different than your competitors in such a way as to make it difficult to imitate. When your ability as a business to create value added products for your customers cannot be duplicated or imitated by your competitors, then you have competitive advantage.

This means that the higher the value delivered to your customers and the lower the cost it takes to produce that value, the stronger the firm’s market position.

However, it is difficult to sustain competitive advantage because the competition will always try to copy your technology and strategy, and steal your customers from you. To be sustainable, the entrepreneur must do two things: set an objective to attain superior market position through value added products and services and put in place a strong defense to protect the market position.

Value added products and services can be developed by using firm-specific resources that cannot be easily imitated or acquired. Examples of these resources are: patents, trademarks, proprietary rights to technology, reputation, customer base and brand equity.

Another valuable input to value added products and services are the capabilities of the firm in the way it does its work. An example of a capability is the ability to bring a product to market faster than competitors. Or the ability to create unique design concepts. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.

Taken together, resources and capabilities make up the firm’s distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.

Knowing all these, we go back to the most important question, what is the competitive advantage we need to develop as a country to create competitive global brands?

For the Filipino entrepreneur this is an important point to ponder. Indeed knowing one’s competitive advantage will increase his chances of success in competing globally. His efforts would be better used if focused on an enterprise with inherent competitive advantages.

Venturing a conjecture at this point, as a country consisting of numerous tropical islands, populated with a diverse species of flora and fauna, with a climate making possible all-year-round agriculture, and with a robust young and literate population, our best bet would be in agriculture related enterprises specifically agri-businesses, aquamarine, biotechnology, pharmaceuticals, and in the services related enterprises such as Business Process Outsourcing (BPOs), Information Technology, Medical and Entertainment services.

In tandem with these resources, SMEs must develop their capabilities so that taken together (resources + capabilities) they will have competencies that would be difficult to copy.

Once the Filipino entrepreneur consciously identifies and exploits his competitive advantages, then we will see more Philippine-made products and services competing in global markets.

Seakid Crispy Snacks: Gutsy Move Saved the Future

2012-03-23T00:58:00.001-07:00

“He conquers who endures” --- Persius

It was an ordinary day by most respects, but for Elizabeth Toscano, owner and general manager of Toscano-Soriano Trading, this was a day she hopes would change the course of her business. She was attending the National Trade Fair organized by the Department of Trade and Industry that summer day of March, 2003, and she has decided that whatever happens today she will introduce her product to then Secretary Mar Roxas and present her needs and get some kind of assistance to expand her business.

So when the opportunity presented itself, with much bravado, she boldly and with great pride had her products tasted by the Secretary who was then with the Small Business Corporation Chairperson, Zorayda Amelia C. Alonzo and some officers of the DTI. It was an instant hit. Because of its distinctive taste and crispiness, the taste test paved the way for the product to be a bestseller in the trade fair. Easily, the product, sold under the brand name Seakid, sold all its stocks with a reported average sale of P 25,000 a day.

Toscano started her business in 1993 as a micro enterprise, packaging and trading ordinary dried anchovies(dilis), squid(pusit), and peanuts(mani) from Divisoria market. Realizing the need to put added value to her products, she started to innovate and introduce new ways of cooking and packaging the dried fish such as dilis, tuyo, sasap, and dried squid (pusit). Her creative ways with the dried fish and squid paid dividends as exporters and consolidators considered Seakid to be of export quality gaining acceptance in the domestic and foreign markets.

Seakid products did not go unrecognized. In December 5, 2001, they were awarded by PHILFOODEX, INC. the Most Promising Product Award, which is a testament to the good quality of Seakid products. The rest is history, the recognition paved the way for its membership in industry associations such as the Philippine Food Processors and Exporters Organization Inc., the Philippine Exporters Confederation, Inc., and the Integrated Food Manufacturers’ Association of the

Philippines

for Productivity.

The determination and hardwork that Toscano put into the business, and her bravado that day at the national Trade Fair opened the doors for the her to get the financing support she badly needed to expand the business. With the Small Business Corporation’s GUIDE program, Toscano was able to get a P 3.4 million loan in 2003 to finance the expansion of her business as follows: renovation of the office and factory, acquisition of equipment, establishment of cart outlets and additional working capital.

The financing from Small Business Corporation brought the business from a backyard type of operation to a commercial one. Since then, Seakid products have gained inroads both in the local and international markets. Moreover, the initial loan became a catalyst to move Seakid products to higher level of production and marketing.

Since then, Toscano-Soriano Trading has not looked back and continues to grow in the export market. Subsequent working capital loans followed which saw its products gaining international acceptance.

The story of Seakid products is always appreciated for its commercial success, but it is more admirable when we know that its humble beginnings were spurred by a couple that did not possess the high education associated with material and business success.

They were high school graduates who dared to dream, and had the determination and sacrifice needed to succeed. Today, whatever success Seakid products have is a testament to the courage, will, and determination of ordinary people who did extraordinary work on a simple, homegrown natural resource that is now going places in the world market.

Investment in Anti-Dengue Enterprise

2012-03-21T01:50:00.000-07:00

Small Business Corporation’s (SBC) venture capital program for SMEs invested P3.5 million in an enterprise producing personal care products such as lotions, and mosquito repellent sprays including decorative candles made from citronella oil.

Citronella oil is popular as a 'natural' insect repellent. Its mosquito repellent qualities have been verified by research, including effectiveness in repelling Aedes aegypti (dengue fever mosquito).

Research also indicates that citronella oil is an effective repellent for body louse and head louse.

The enterprise was financed under SBC’s SME-VIP (Venture Capital and Business Incubation Program) which identifies, selects, nurtures, and develops business ideas and early stage/start-up enterprises into viable and competitive businesses.

The investee corporation, initially started as Mag Creative Crafts Company created in 2005 following its successful entry of hand-made decorative, scented and everyday candles to retail trade channels. In March 30, 2007, they dropped the name Mag Creative Crafts Company and changed it to MAG Starlight Industries Inc.

The investee corporation is majority owned by Mary Ann Gendrala, a 48 year old businesswoman who is a graduate of De La Salle University with a degree of BS in Commerce Major in Marketing Management. She also has a master's degree in Business Administration from the Ateneo Graduate School of Business.

A minimum general objective for the SME-VIP is to produce successful firms that will leave the program financially sustainable and standing on its own.

SBC has already invested in five SMEs over five years of its existence as a program for a total invested funds of almost P15.0 million.

SBC has allocated a P 50 million fund as seed fund for the equity financing/venture capital program.

She focuses on sales and marketing while overlooking the production aspect of the company.

The SBC investment in the enterprise is 48% of common shares of the P 8 million total capitalization. Gendrala and her nominees own the balance of the common shares for a 52 % ownership.
The enterprise will have a payback period of about 2-3 years and an internal rate of return (IRR) of 21%

The demand and surge in sales for mosquito repellent products had increased tremendously over the last decade due to the life threatening diseases brought by mosquito bites, dengue and malaria. Also, as consumers are becoming more aware of health and environmental issues, products with "natural" or "organic" ingredients for home and personal use are increasing at breakneck speed.

The company was formed several years ago and initially started as a manufacturer of hand-made decorative, scented and everyday candles. These products made its way to retail trade channels catering to middle and high-end markets.

Aside from helping consumers, the enterprise also benefits some 36 families of farmers in the upland areas of Camarines Sur where Gendrala sources her citronella oil. These farmers planted and grew citronella grass and extracted the oil using technology provided by the Department of Science and Technology and supervised by PFEC (Philippine Federation for Environmental Concern) an NGO operating in the province helping farmers acquire a sustainable source of livelihood.

Citronella candles as mosquito repellent was introduced 4 years ago and captured a positive response and continued patronage from consumers. They have seen the opportunity to expand their product lines in the home and body care line and they have identified that there is a strong and great potential along the mosquito repellent category substantiated by consumers' positive response and increasing demand for citronella candles, thus the insect mosquito repellent sprays and lotion were born using pure and natural citronella oil as active ingredient.

The US Environmental Protection Agency states that citronella oil has little or no toxicity when used as a topical insect repellent, with no reports of adverse effects of concern over a 60 year period. Because some products are applied to human skin, EPA requires proper precautionary labeling to help assure safe use. If used according to label instructions in the US, citronella is not expected to pose health risks to people, including children and other sensitive populations. The US Food & Drug Administration consider citronella oil as generally recognized as safe.

How to Reinvent your Business?

2012-03-21T00:56:00.000-07:00

In today’s competitive business world, it is likely your edge over business rivals become smaller everyday, and before you know it, it is gone in the blink of an eye.

What does this mean?

It simply means that your products and services have been copied by the competition. And that they have put one over you, a better and more customer- oriented business model.

A product or a service’s life usually lasts for months, or years, even decades, or until the competition finds out your business secrets, copies them, and sells an improved version that puts you out of the competition, or worse, out of business.

Warning Signs

There are tell-tale signs of a dying product or service.

Here are some of them: 1.) costs become counter-optimal (additional cost does not yield more sales or profits), 2.) sales volume declines or stabilizes, prices and profitability diminish, and 3.) profit becomes more a challenge of production/distribution efficiency (cost cutting) than increased sales.

These are warnings. And when you observe these signs, you better get your act together and review your business to avert its death.

Yes, your business could die if you don’t heed the warnings.

First, this means that your business model, or your product or service has lost its competitive advantage. It cannot compete anymore and is slowly losing its leading position to the other players in the business. Second, the product or service is already at the end of its product life cycle, or the industry you are in is already in the sunset of its life.

Whatever the situation, don’t lose hope because all is not lost. You can reinvent your business.

According to experts, reinventing your business means innovating on the business model you employ to create value and generate profits. A business model describes the underlying principles of how an enterprise creates and delivers value--- economic, social, or other forms of value.

When a business is established, it either explicitly or implicitly uses a particular business model that describes the design or architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit: it thus reflects management’s hypothesis about what customers want, how they want it, and how an enterprise can organize to best meet those needs, get paid for doing so, and make a profit.

Catalysts

Reinventing your business may be undertaken using various forms of catalysts. Prominent among those used by experts to reinvigorate a dying enterprise, or jump start a fledgling start up are the following: innovation, branding, technology and corporate culture.

While each enterprise is unique in itself, the use of one or any combination of the stated catalysts will be able to stimulate and renew the growth of a business.

Let’s define and discuss each catalyst on how it delivers a fresh kind of enthusiasm and interest in the business.

Creating Something New

Innovation is when you create something new to spark renewed interest in your product. This term may mean different things to different people, but simply put, innovation means something entirely new. In the context of enterprise management, it is said that when a business stops innovating, it stops growing.

Incongruously, when business is excellent, entrepreneurs forget about innovating because there is no need for it---not realizing that doing so may in the long term spell death for the enterprise.

Innovation can come in a new product, or a new way of selling , or still, a new method of producing the product that lowers price.

But according to the Beveridge Consulting Group in the person of its CEO Dirk Beveridge of Illinois, USA, it is not just these things that provide the competitive advantage.

“The competitive advantage must be their willingness and desire to better understand the needs, desires, wants, opportunities and problems of their customers better than anyone else,” said Beveridge.

“And they must have the skills to provide value-added services. That is the competitive advantage---not the product, not the price.” It is what Beveridge calls product orientation vs. customer focus.

Customers are more difficult to satisfy nowadays.

So if you want your innovation to be successful, then it must satisfy the customers’ needs first; product improvement or innovation comes later as a result of being able to determine what the customer actually needs or wants.

Consistent and Focused Approach

Second catalyst is branding, wherein the brand acquires a new and distinct personality from the old one.

As defined by experts, a brand can take many forms, including a name, sign, symbol, color combination or slogan. Historically, the word brand began simply as a way to tell one person's cattle from another by means of a hot iron stamp.

Today, a legally protected brand name is called a trademark. The word brand has continued to evolve to encompass identity - it affects the personality of a product, company, or service.

It is assumed that brand marketing can effectively change the perception of customers of the products and services of an enterprise, and can consequently enhance the value of the product or service. For the entrepreneur using branding as catalyst, it is important that he is able to communicate exactly and accurately what the business does exceptionally well for the customers. This should be done in a distinct and consistent manner in all forms of communication media including advertisements, the internet and events and trade shows.

The new branding strategy will do for the new business the following:

Position the product or the service in a new light considering customer needs and preferences;
Repackage the product or service to effectively communicate its value added features; and

Expand the market for the product or service.

A word of caution for the entrepreneur, branding is not as simple as it may seem. To be successful, one must invest resources in research to find out what needs to be improved in the product or service, in the way it is communicated and delivered to customers, or in the target customers themselves.

One must have a customer-focused approach to come up with a new brand and be able to communicate this effectively.

Some tips from known practitioners of the branding strategy: “When using this strategy, according to Charles Conn, Managing Director for the Boston-based Encompass Communication, a design and brand marketing firm, “branding becomes a matter of consistent repetition of the presentation of the company name or product.”

“Without consistency, the target audience may view the company or brand as confused, resulting in a lack of confidence and loyalty to the brand or service,” he explains.

Dan Droz , President of Droz and Associates, a branding and design management firm sums it up, “Reinvention through branding can work for any company that understands both its customers’needs and distinctive positioning that allows the company to fulfill those needs.

Leveling the Playing Field

Another way of reinventing your business in through the use of new technology. Technology is the process by which humans modify nature to meet their needs and wants. Most people, however, think of technology in terms of its artifacts: computers and software, aircraft, pesticides, water-treatment plants, birth-control pills, and microwave ovens, to name a few. But technology is more than these tangible products.

Technology includes allof the infrastructure necessary for the design, manufacture, operation, and repair of technological artifacts, from corporate headquarters and engineering schools to manufacturing plants and maintenance facilities. The knowledge and processes used to create and to operate technological artifacts -- engineering know-how, manufacturing expertise, and various technical skills -- are equally important part of technology.

In today’s business world, the fastest and most efficient way of jumpstarting your business is through the technology of the internet, or the Web.

Two points of view emerge in the use of the Web. First, it levels the playing field for entrepreneurs and allows enterprises to reinvent themselves to compete in a global scale. Second, the Web forces enterprises to remodel themselves or be left behind as technology continues to improve. Businesses in the internet are compelled to create its distinctive personality to attract customers, encourage brand loyalty because barriers to entry of competitors in the Web is so low.

In a way, the Web allows the enterprise to expand its market to the optimum it can, given the billions of people subscribed to the internet. Its limitations however, is itself given the limited resources of the SME. However, the Web leverages these resources to the maximum enabling the SME to double its market exposure in the least possible time and effort.

The Web also contributes to the efficiency of the business especially in the selling and collection of payments. “Folks go online, do their purchase research, and complete the transaction in a jiffy either onsite (going to the store and purchasing the selected item) or electronically buying it through the internet and just wait for delivery. This level of efficiency can double sales by as much as threefold based on the experience of many Web users.

Changing People’s Culture

Finally, you may reinvent your business by focusing your attention on your greatest asset---your people. This is usually done by a strong leadership in the organization that can drive a corporate culture that says to the people: either you grow; or you go!

In short, it will require a change in your organization’s mind set.

Business culture is a blend of principles, ethics, attitudes, way of life, things forbidden and prohibited, symbols, traditions and folklore all organizations develop over time. You may not think about it, but your business has its own culture.

Whether formally written as a mission statement, or merely spoken and understood, culture governs the way owners and employees think, feel and act.

If you're not happy with your current culture, there are things you can do to change it now.

Look for a symbol, story, ritual or some tool you could use to bring out the values and practices you want for your organization.

Your cultural tool might be a new corporate logo symbolizing your company's personality. Or you could choose a story to embody your approach and make it part of your culture.

If you can't find a tool, make one. For example, you can turn an admired former employee into a symbol by giving an award named after that individual, complete with ritual ceremony.

In the Philippines, we can easily think of a few examples of reinventing one’s business through a change or adoption of a new culture.

For example, a popular pizza chain “Hates Late” and challenges customers to prove them wrong by committing to deliver in a certain number of minutes. This establishes a norm of behavior among employees to be always on time.

Then there is a drug store that says, “Gising 24 Oras” (Awake, 24 Hours) showing its culture of always being there to provide medicines to Filipinos in a timely and efficient manner with the customers’ convenience utmost in its work ethic.

Another example is an academic institution known for its intellectual snootiness changed its culture by a policy of democratization of its admission policies, where the rich students subsidized the poor. Now, it is populated by the well off as well as the poor students, and is known for its democratic ideals and principles.

Reinventing your business is not easy. It takes a lot of creativity and hard work. But given all things needed to be successful, one thing is crucial: “you will need to obtain a shared commitment to change from all your enterprise’s stakeholders---employees and officers alike, and a readiness from them to redefine the business.” In all likelihood, your business will be competitive and grow in the future.

How Risky is Your Business?

2011-02-21T19:35:00.000-08:00

Starting a business is no easy task. And growing it and making it sustainable is twice the difficulty of starting it. Ask any entrepreneur about running a business and you will get an endless stream of anecdotes about the hardships and challenges of developing and growing the enterprise. Of course there is the other side of the coin which is about the excitement, fulfillment, and the fruits of all the hardships that go with being an entrepreneur.

Successful entrepreneurs won’t need to put in words the benefits of entrepreneurship. They are all displayed for us to see---the affluent lifestyle, and for some who lead simple lives, the aura of happiness from fulfilling one’s goal of business success.

Of course Small Business Corporation won’t be around if there was no significant upside in entrepreneurship. For one, the reason for being of the Corporation is to increase the probability of success of the Filipino entrepreneur by providing financing and other services such as technical and marketing, to develop and grow Filipino mSMEs into globally competitive enterprises.

In an interdependent, global environment, there are so many threats to the success of mSMEs.

We’ve seen it happen before and see it happening again today. While the Asian financial crisis of 1997 affected even the developed countries of the world, the financial catastrophe of an imprudent system of investing such as the subprime real estate market in the U.S. has today led to the fold up of established and respected financial institutions and caused the growth of the U.S. economy to go into low gear.

Already, its ill effects are rumbling across the globe affecting small businesses in our region thousands of miles away.

Today the value of Philippine exports to the U.S. has fallen resulting to losses for our exporting mSMEs.

Among our mSMEs, therefore, only those who are able to identify and address these threats will be able to sustain themselves and survive.

Ideally, it would have been better for them if they were able to identify the risk early on and prepared for such a contingency. This is where risk management comes into the picture. An entrepreneur who knows how to manage risks will likely survive economic reversals.

Ronald Inciong, Manager of the Credit Review Department of the Risk Management Unit in SBGFC recognizes the value of risk management and believes that like the entrepreneurs it serves, SBGFC as a financial institution and being entrepreneurial itself, must manage the risks relating to its financing operations.

Accordingly, SBGFC recognizes that mSME lending is inherently risky and that it should be able to manage the risks associated with mSMEs for it to be successful in its development efforts.

Inciong said that in using a risk rating model as a tool to manage credit risk, SBGFC has identified the factors of risk which can spell the difference between a successful and a failed mSME.. Today all its borrowers, especially under the retail lending program, are risk rated. So every borrower is evaluated and given a risk rating which shows the level of credit risk entailed in lending to said borrower.

“Early on we already know the areas of risk of the enterprise and are able to mitigate these risks,” explained Inciong. Consequently, a high risk borrower will need to be monitored more frequently and the loan would be priced aptly, which in this case, given a higher interest rate than lower risk borrowers.

Based on the Borrower Risk Rating (BRR) system, critical factors have been identified that would tell SBGFC whether a borrower is risky or not. “With the use of the BRR system we can immediately see the areas of risk in an enterprise’s operations and know the degree of likelihood it would default in loan repayment, said Inciong.

So what makes an enterprise risky? In reviewing credit applications, Inciong already has a list of what makes for risky borrowers. Following are the factors or situations that Inciong believes, as shown by his experience, make a business a credit risk.

• Poor liquidity and negative cash flows – the enterprise is having difficulty servicing its current indebtedness, because its liquid assets is not enough to pay them off. Simply put, when the enterprise does not have the money to pay its immediate loans, then this is a red flag which would warn both the borrower and the lender that cash is tight and a default in its obligations is a real possibility. This also impacts on the debt servicing capacity of the enterprise. When the cash flow is negative then, the ability to repay its loans will suffer.

• Inefficiency in operations – this is evidenced by poor activity ratios such as accounts receivables, accounts payables and inventory. Any of these balance sheet items going beyond the average 180 days aging, discounting any possibility of being caused by natural market movement of the product or service, extraordinary events or natural calamities, means inefficient operations which may eventually result in difficulties in cash flow management.

• High leverage – enterprises that are with huge debts are always a risk. Debt financing should be leveraged carefully with the revenues being generated by the enterprise. While it is good for the business to finance part of its growth through debt, it should be within certain parameters so that there would not be a mismatch between the earnings from the use of the funds and the cost of the borrowing.

• Inexperience of owners and management – this is self-explanatory. An entrepreneur who lacks experience will always encounter more setbacks and challenges than one who have been through it all before and would know how to handle different situations in running the business.

• Poor health, Old Age, and Lack of Succession – old entrepreneurs who are sickly and are hampered by health issues will tend to perform poorly in business. More significantly, the possibility that such an entrepreneur will succumb to the sickness leaving the enterprise impaired and non-operational is always present. A business whose owner does not have a successor will most likely perish with the entrepreneur.

• Poor financial capacity of Owners – when the owners have poor financial capacity, meaning they do not have any personal assets or have zero net worth (outside of business assets), then it would be difficult for them to inject money into the business should they fall into hard times or crisis situation. This makes the business unsustainable in times of crises.

• Bad Attitude to Banks - they are borrowers who are with negative records with their banks. These adverse records show that the entrepreneur has the tendency to violate the rules of the banks and incur past due on their accounts. At worst, the bad attitude is a reflection of bad character which may affect negatively the other aspects of running the enterprise.

• Dependency on a few suppliers – dependency on a few suppliers will make a business riskier than others. A failure in the supplier will also affect production of the enterprise. A simple scenario wherein when there is no supplies, means no production thereby impairing the business operations.

• Decreasing Sales – a trend of decreasing sales for the past three years does not augur well for the enterprise. The industry where the enterprise belongs would most likely be on the decline. In such a case, it would be better for the entrepreneur to start up another business in another industry.

• Dependency on a few clients – when your business is in this situation wherein it is dependent on just one or two customers, any reversals encountered by your clients will become like a contagious disease and adversely affect your business as well. A better situation is the opposite wherein the there is no dependency on a few clients and regardless if one or two of them goes bankrupt, your enterprise won’t be pulled down by such an event.

• Low production capacity – If the enterprise has limited capacity to produce its product or service, it cannot meet any increased demands for its product or service. This means its potential for growth is limited and therefore hinders the development of the business. Should such an enterprise attempt to service a big requirement beyond its production capacity, it exposes itself to risk of not being able to serve the contract.

• Poor location – Location in this instance refers to proximity and acessibility to its market and suppliers. Usually, a business far from its market and suppliers and business infrastructures will incur additional transport costs, or if not, find itself hampered in its marketing, collection, and delivery efforts.

Presence of any of the foregoing conditions does not mean the businees cannot be financed. “The important thing,” said Inciong, “is that we know the areas of risk and are able to impose safeguards to lessen the risk of default.” For the entrepreneur, knowing these risk factors helps in identifying areas for improvement of the enterprise, and hopefully increases the potential for its growth and development.

Competitive Advantage: the Key to the Global Market

2011-02-21T19:05:00.000-08:00

Despite its human, natural and agricultural resources, the Philippines cannot boast of global brands which can compete in the world’s marketplace except for one or two which are known internationally --- San Miguel beer, and perhaps Jollibee.
Our country has been known to be a major producer in the 1900s of agricultural products and ranked among the top in the world. We had abaca, then known as Manila hemp, sugarcane, coconut in the form of copra, and lumber from our then abundant forest resources.
But the competition, technology and the unsustainable exploitation of these resources enabled the world’s markets to find cheaper and better substitutes. These commodities eventually lost their appeal and were overtaken by other commodities far better and cheaper from other countries in the export market.
It will be noted that our top exports then were in the form of raw materials or semi-processed produce which had little value added. Contrast this to the other economies in the world that developed new technology to produce finished products which gave them the competitive advantage.
Our exports then lost, or did not have, competitive advantage so other countries outpaced and outgrew them in the market.
Today, the competition to sell in international markets is as intense and is more difficult. But competitive advantage remains to be a necessary ingredient for any successful entrepreneur to break into and maintain a strong foothold in the export market.
Yes, if you cannot compete well, you are doomed to failure especially in an environment of high risk and constant and fast paced changes. An understanding therefore of the concept of competitive advantage will help the entrepreneur focus on what is important and to build on a business with innate and developed competitive advantages.
As defined by Michael Porter, Harvard University Professor and leading authority in competitive strategy, competitive advantage is the position the firm occupies against its competitors in terms of a superior product and service, and cost leadership.
According to Porter, this position of sustainable competitive advantage is created through cost leadership, differentiation or focus. Cost advantage occurs when a firm delivers the same services as its competitors but at a lower cost. Differentiation advantage occurs when a firm delivers greater services for the same price of its competitors. They are collectively known as positional advantages because they denote the firm's position in its industry as a leader in either superior services or cost.
To further simplify the definition, your business has competitive advantage when you are able to do something different than your competitors in such a way as to make it difficult to imitate. When your ability as a business to create value added products for your customers cannot be duplicated or imitated by your competitors, then you have competitive advantage.
This means that the higher the value delivered to your customers and the lower the cost it takes to produce that value, the stronger the firm’s market position.
However, it is difficult to sustain competitive advantage because the competition will always try to copy your technology and strategy, and steal your customers from you. To be sustainable, the entrepreneur must do two things: set an objective to attain superior market position through value added products and services and put in place a strong defense to protect the market position.
Value added products and services can be developed by using firm-specific resources that cannot be easily imitated or acquired. Examples of these resources are: patents, trademarks, proprietary rights to technology, reputation, customer base and brand equity.
Another valuable input to value added products and services are the capabilities of the firm in the way it does its work. An example of a capability is the ability to bring a product to market faster than competitors. Or the ability to create unique design concepts. Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult for competitors to replicate.
Taken together, resources and capabilities make up the firm’s distinctive competencies. These competencies enable innovation, efficiency, quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage.
Knowing all these, we go back to the most important question, what is the competitive advantage we need to develop as a country to create competitive global brands?
For the Filipino entrepreneur this is an important point to ponder. Indeed knowing one’s competitive advantage will increase his chances of success in competing globally. His efforts would be better used if focused on an enterprise with inherent competitive advantages.
Venturing a conjecture at this point, as a country consisting of numerous tropical islands, populated with a diverse species of flora and fauna, with a climate making possible all-year-round agriculture, and with a robust young and literate population, our best bet would be in agriculture related enterprises specifically agri-businesses, aquamarine, biotechnology, pharmaceuticals, and in the services related enterprises such as Business Process Outsourcing (BPOs), Information Technology, Medical and Entertainment services.
In tandem with these resources, SMEs must develop their capabilities so that taken together (resources + capabilities) they will have competencies that would be difficult to copy.
Once the Filipino entrepreneur consciously identifies and exploits his competitive advantages, then we will see more Philippine-made products and services competing in global markets.

How to Prepare Your Business Against Disaster?

2011-02-21T17:01:00.000-08:00

If there is something good from the spate of disasters that have befallen our country in recent months, it is the realization that many of our SMEs are ill-prepared and not protected against business continuity risks. In short, they are not protected against events that would result to the business shutting down.

This grim realization have surfaced after the devastation brought about by typhoons Ondoy and Pepeng. It is a fact that most, if not all SMEs have not provided for business continuity risks; such that when disaster struck on that fateful month of September, many did not have the wherewithal and the plan on how to continue with the business.

If you observed the SMEs affected by the floods, it was already two months after the disaster and yet many businesses remained closed. Apparently only those with a disaster plan or with enough back-up resources were immediately on their toes and starting up once again. Those not prepared will most likely be closed for good.

If it is any consolation to us, we are not alone in this kind of predicament. In fact even in developed countries, it was found out by formal studies that SMEs are likewise not protected against disasters and do not have a business continuity plan.

New independent research, commissioned by the British Insurance Brokers' Association (BIBA), revealed that millions of small and medium sized enterprises (SMEs) across the UK are failing to protect themselves and their employees against emergencies such as fire, flood or an act of terrorism.

As a result, BIBA has launched a high profile campaign to encourage SMEs to get serious about business continuity, the practice of ensuring that businesses are protected in the event of an emergency.

Estimates suggest nearly 20% of SMEs suffer a major interruption every year. Further research suggests 80% of businesses affected by a major incident close down within 18 months, and 90% of those who lose their data are forced to close down within two years.

Small enterprises in particular suffer severe financial loss if closures prevent or restrict trading over a period of weeks or even months.
A Business Continuity Plan (BCP) is the least expensive insurance any company can have (especially for small companies, as it costs virtually nothing to produce). Unfortunately, many companies have never taken the time to develop such a plan.
Here you will see suggested steps and considerations, in an abbreviated way, for small companies to create a BCP that will improve their chances of continuing operations during or after significant disasters. Development of a BCP for larger companies is not within the scope of this document.
Business Continuity Plans are sometimes referred to as Disaster Recovery Plans (DRP) and the two have much in common. However a DRP should be oriented towards recovering after a disaster whereas a BCP shows how to continue doing business until recovery is accomplished. Both are very important and are often combined into a single document for convenience.

Steps
1. Document internal key personnel and back-ups. These are people who fill positions without which your business absolutely cannot function – make the list as large as necessary but as small as possible. Consider which job functions are critically necessary, every day. Think about who fills those positions when the primary job-holder is on vacation. Make a list of all those individuals with all contact information including business phone, home phone, cell phone, pager, business email, personal email, and any other possible way of contacting them in an emergency situation where normal communications might be unavailable.

2. Identify who can telecommute. Some people in your company might be perfectly capable of conducting business from a home office. Find out who can and who cannot. You might consider assuring that your critical staff (identified in Step 1) can all telecommute if necessary.

3. Document external contacts. If you have critical vendors or contractors, build a special contact list that includes a description of the company (or individual) and any other absolutely critical information about them including key personnel contact information. Include in your list people like attorneys, bankers, IT consultants...anyone that you might need to call to assist with various operational issues. Don’t forget utility companies, municipal and community offices (police, fire, water, hospitals) and the post office!

4. Document critical equipment. Personal computers often contain critical information (you do have off-site backups, don’t you?). Some businesses cannot function even for a few hours without a FAX machine. Do you rely heavily on your copy machine? Do you have special printers you absolutely must have? Don’t forget software – that would often be considered critical equipment especially if it is specialized software or if it cannot be replaced.

5. Identify critical documents. Articles of incorporation and other legal papers, utility bills, banking information, critical HR documents, building lease papers, tax returns...you need to have everything available that would be necessary to start your business over again. Remember, you might be dealing with a total facility loss. Would you know when to pay the loan on your company vehicles? To whom do you send payment for your email services?

6. Identify contingency equipment options. If your company uses trucks, and it is possible the trucks might be damaged in a building fire, where would you rent trucks? Where would you rent computers? Can you use a business service outlet for copies, fax, printing, and other critical functions?

7. Identify your contingency location. This is the place you will conduct business while your primary offices are unavailable. It could be a hotel – many of them have very well equipped business facilities you can use. It might be one of your contractors’ offices, or your attorney’s office. Perhaps telecommuting for everyone is a viable option. Wherever it is, make sure you have all the appropriate contact information (including people’s names). If you do have an identified temporary location, include a map in your BCP.

8. Make a "How-to". It should include step-by-step instructions on what to do, who should do it, and how. List each responsibility and write down the name of the person assigned to it. Also, do the reverse: For each person, list the responsibilities. That way, if you want to know "who is supposed to call the insurance company?" you can look up "Insurance". And if you want to know what Joe Doe is doing, you can look under Joe for that information.

9. Put the information together! A BCP is useless if all the information is scattered about in different places. A BCP is a reference document – it should all be kept together in something like a 3-ring binder. Make plenty of copies and give one to each of your key personnel. Keep several extra copies at an off-site location, at home and/or in a safety-deposit box.

10. Communicate. Make sure everyone in your company knows the BCP. Hold training classes – mandatory training classes – for each and every employee whether they are on the critical list or not. You do not want your non-critical staff driving through an ice storm to get to a building that has been damaged by fire then wondering what to do next.

11. Test the plan! You’ve put really good ideas down, accumulated all your information, identified contingency locations, put your personnel list in place, contacts, service companies, but can you pull it off? One thing you will definitely learn in the test is that you haven’t gotten it all just exactly right. Don’t wait until disaster strikes to figure out what you should do differently next time. Run the test. If you make any major changes, run it again a few months later. Even after you have a solid plan, you should test it annually. Pick a day – let everyone know what’s going to happen (including your customers, contractors and vendors) then on that morning, act as though your office building has been destroyed. Make the calls – go to the contingency site.

12. Plan to change the plan. No matter how good your plan is, and no matter how smoothly your test runs, it is likely there will be events outside your plan. The hotel you plan to use for your contingency site is hosting a huge convention. You can’t get into the bank because the disaster happened on a banking holiday. The power is out in your house. The copy machine at the business services company is broken. Your IT consultant is on vacation.

13. Review and revise. Every time something changes, update all copies of your BCP. Never let it get out of date. An out-of-date plan can be worse than useless: it can make you feel safe when you are definitely not safe.

Tips
• All critical personnel should keep a copy. It's not a bad idea to keep one in your car.
• Prepaid cell phones are an inexpensive option for emergency communications. In some disasters cell phones don't work so considering a satellite communications system may protect your ability to communicate.
• The binder you use for your BCP should be very distinctive – bright, neon orange is a good color.
• Keep your BCP out and visible so everyone sees it frequently – that way the idea of business continuity will stay on everyone’s mind.
• Have a weather plan for your employees with a number they can call to get an update on conditions. Look into some of the new Internet phone services with a voice mail message.

Warnings
• Do not rely on a fireproof safe to store your computer media. Fireproof safes are designed for paper; a CD, DVD, floppy disk or a magnetic tape will melt. Get a media safe for those items. Better yet, store data off site!
• Do not make pirated copies of important software. Even if you can do that (often you cannot) they might not work, and you could create serious legal problems for yourself. Contact your software vendor if you don’t understand your options.
• Do not distribute your plan to people that don't need to have it. Your plan will contain sensitive and secure information that could be used by a disgruntled employee for inappropriate purposes.

Van Sweet Home: Recycling Container Vans into Low-Cost Homes

2011-02-08T02:48:00.000-08:00

“Necessity is the mother of invention.” This ancient quote from Plato, Greek philosopher rings true today as it aptly describes the transformation of Storage Providers Inc. (SPI) from a simple trucking services business called Sa Tao Trucking Corporation in 1988 to an innovative and specialized enterprise that it is today.

“It was really a blessing disguised as difficulties that started the business of Storage Providers Inc.,” says Socorro Y. Yap, owner and Vice President for Finance and better half of founder and President Ronald F. Yap of SPI.

“In 1994 when constraints in the business such as the increasingly heavy traffic in Metro Manila and government restrictions in trucking operations started severely affecting the business, Management was constrained to reflect on the enterprise’s survival and future direction, and decided to reinvent it.

“We needed to change and evolve the business; otherwise it would not have survived and gone on to do innovative and bigger projects.

“First, it endeavored to become a cargo container and depot and took the name of Human Dimensions Enterprises. This change in its nature of business paved the way to embark on other related ventures such as the fabrication and conversion of container vans into mobile offices and homes and the recycling to second hand containers into 10-footer vans for domestic shipping lines,” relates Ms. Yap.

Soon, they found out that fabrication and recycling activities were the shot in the arm the business badly needed. It became its “goose that laid the golden eggs” and that led to the expansion and diversification of its recycling and conversion activities, and paving the way to the establishment of SPI.

True enough, the change and the evolution that the business has undergone has produced dividends. From an asset size of P 27 million in 2004 when it embarked on recycling container vans as Storage Providers Inc., it has grown today to about P 50 million in asset size.

Using environment friendly materials, it recycled marine container vans into mobile homes and office units winning for it an accreditation from the Housing and Urban Development Coordinating Council (HUDCC) for innovative housing in 1996.

Today, SPI has proven itself as an innovative and creative recycler and converter of container vans and has undertaken projects for big businesses in the country. From a toilet and bathhouse to office buildings and residential houses, SPI has built them all from recycled container vans.

“Our products are better than your regular housing units constructed from concrete and lumber in several aspects.

First, it is typhoon and earthquake proof, says Ms. Yap.

“Their stable structure and steel material can withstand typhoons and earthquakes and not easily demolished by nature.

“They are also less costly to build, can be assembled in less time, and is permanent and comfortable as a shelter,” enumerates Ms. Yap.

“The completion of the house made from recycled container vans does not entail high development cost. The fittings for the house can easily be constructed and adjusted to the terrain of the land without need for the costly and time consuming land development cost normally entailed using traditional construction technology,” she explained

Homes built from container vans using the technology of SPI are less costly than similar modular homes and even those built using the traditional construction technology. Based on parallel studies done with other construction technology, it was found out that container vans are less costly to build into homes.

For example, a 30 m2 home would cost anywhere from P250, 000 to P 300,000 which is about P 8,000 to P 10,000 per m2 cost. This is at least 25 percent lower than those built using reinforced concrete and traditional construction technology.

“The container van is versatile. While being sturdy and low cost, a family can gradually upgrade their house using the existing structure as they generate more income for expansion, adds Ms. Yap.

SPI is a client of Small Business Corporation since 2005 when it availed of a P 2 million credit line for receivables financing. The line was used to finance a contract with SMART Communications to fabricate and convert 40 container vans into 60 units of SMART “Click” Internet Café’.

Over the years and many projects later, its dealings with SB Corp. has remained satisfactory and its credit line has increased to P 6 million. At present, SPI has financed from SB Corp. credit line a total of about P 23 million worth of projects.

As one of the major players in the container van recycling and fabrication business, SPI continues to deliver creative, dedicated and personalized service to its clientele. Aside from container van recycling and fabrication, its other products and services are: container lease and sale (of 20 foot or 40 foot container vans), and trucking and logistics which consist of general cargo handling, materials delivery handling, warehousing services and equipment rentals.

Already, SPI has provided its services to some of the country’s big companies and institutions such as the Armed Forces of the Philippines, Pagcor, Land transportation Office, EEI Corp., Stradcom Corp., PNOC, Leighton Corp., Jollibee, Rotary Club, Netopia, Smart Mobile, Sage Water Co., Universal Robina Corp., and the Tollways Management Office. It also did a project for the Republic of Palau.

The dream of its founder is to build a business that is sustainable with a market that will not run out. True enough that is what SPI’s housing and shelter development products and services are turning out to be. In addition, part of the SPI vision is to make warehousing an institutionalized service through the provision of mini-warehouses wherein clients can drive in, put in or withdraw their goods, and drive out again in a jiffy.

Apart from growing a profitable business, SPI owners are happy to say that their business has contributed in making the environment a better place to live in. Recycling container vans into homes has big environmental benefits.

“One is that with the SPI technology, less wood is needed to build homes, saving trees for the environment. Second is that the technology used by SPI in recycling worn out container vans does not entail melting and reprocessing of the steel which saves on energy costs, and does not involve emission of pollutants into the environment as steel mills are disposed to do, explains Ms. Yap.

Still SPI has remained relentless in its pursuit of advancement and has not let down its sights on its vision to someday become the leader in a sustainable and profitable business. It continues to grow and SB Corp continues to provide the financing needed to reach its vision.

Indeed with its persistent effort in improving its technology, and its open-minded adoption of best practices in the management of the enterprise, it would not be long before we see it become a big enterprise and a major player in the housing and storage market.

Managing Business Risks: Warning Signals that Help Avert Business Failure

2011-01-18T01:14:00.001-08:00

Man’s survival since the beginning of time has relied on his ability to see signs of threats before they happen. This enabled him to prepare for the perceived threat and thus mitigated the adverse effects of the event--- when it happens---to his habitat and to his fellow human beings.

The ability to identify early warning signals (EWS) and to effectively act on them has become essential to man’s survival and is now a vital component of many aspects of his life.

From the environment, to man-made structures and from military and political organizations to business enterprises, early warning systems are found and make our world a more stable and safer place to live in.

What is an Early Warning System?

A more fundamental understanding of early warning systems may be gleaned from the following definition: “It is the process of gathering, sharing, and analyzing information to identify a threat or hazard sufficiently in advance for preventive action to be initiated.”

An early warning signal management system (EWSMS) therefore is a network of actors, practices, resources and technologies that has their common goal of detecting and warning about an imminent threat so preventive measures can be taken to control the threat or mitigate its harmful effects. The underlying assumption is that threats develop over incubation periods during which warning signals may be discerned, tracked and assessed.

Because many threats can have far-reaching and devastating impact, early warning systems today tend to be distributed, multi-level, and collaborative, and may be implemented or supported by a coordinating body or central clearinghouse.

Examples of these EWSs are the tsunami warning system in place in the Indian Ocean, the J-Alert system, a satellite based nationwide warning system in Japan to inform the public of threats, the typhoon warning system of the PAG-ASA, and the most common Warning Signal of an oncoming train in railroad crossings.

Then there are more primitive and natural warning signals such as the use of birds (canary) in detecting toxic gases in mines. When the bird dies inside the mines then its air quality is unsafe. Then there are the instinctive warning signals in our bodies such as fear and pain. The former is man’s emotional response to danger; the latter is part of the body’s defense system to avoid a harmful situation in the future.

In finance, more specifically in credit and loans management, early warning systems have increasingly been used by banks and other lenders to manage their portfolio and lessen the risk of loan default and consequently of portfolio quality deterioration. And since recent episodes of financial crises, early warning systems have been part of risk management structures in financial institutions.

The same basic principles can be applied in the management of enterprises, and EWS is a useful tool in being able to anticipate the occurrence of threats and thereby mitigate the adverse effects of a disaster when it comes.

How and where do we generate EWSs?

Early warning signals can be found in the most unsuspected places and circumstances.

In fact it can be found in our day to day work of going about our business. But that would be passive action and reactive response to possible threats if we waited for warnings to pop up our noses, and we do not want that kind of situation in dealing with uncertainty. We want to be capable of generating EWSs and be able to deal with them proactively.

We are able to generate EWSs from the data and information gathered in the course of monitoring our enterprise’s financial performance and operations and that of our suppliers, buyers, and markets. In short, the mechanism to generate EWSs lie in the Monitoring System in place in the different aspects of our enterprise’s operations and activities and that of the environment in which it operates such as the social, political, and economic conditions prevailing in the areas of production, and marketing.

Following are some examples of sources of EWSs:

1. External Sources – these are sources that are not part of or external to the enterprise. These may be in the form of events, news reports, studies, plans, etc.
• Natural disasters and calamities
• Political change and upheavals
• Wars and insurgencies
• Economic Crisis
• Lifestyle changes
• Technology advancement
• Changing weather patterns
• New and changing markets

2. Internal Sources – these are sources that can be found within the borrower’s physical boundaries, structures, systems, and territorial influence.
• Management (changes in ownership)
• Movements (people, offices and functions)
• Financial Statements
• Employees (news or gossip)
• Management and Production reports
• C I reports
• Legal problems
• Compliance to government rules and regulations

Early warning signals exist in abundance throughout any organization. They are in pieces of conversation you had with an office mate over lunch, papers given by competitors at conferences, gossip from suppliers, a conclusion a colleague came to after reading a press release, or in the knowledge of someone down the hall who years ago worked on a project that is now becoming important.

For example, a rise in the level of an enterprise’s receivables is a warning signal that may mean any of the following: our collection system has become inefficient, our buyers are having collection problems themselves, the market for our products is shrinking and retail sales are lower that’s why orders are not being paid on time, or there is a big increase in orders consequently resulting to an increase in receivables.

In any case, the sharp change, whether an increase or decrease, should turn on the alarm bells and should immediately cause us to investigate, identify and prepare for the possible threat. We can either prevent the threat from happening, or we can mitigate its adverse effects.

The problem with capturing this data is that the value of it is not often recognized by the person who has it. The backbone of such an early warning process and culture must be a technology for the capture, collection, assembly and dissemination of early warning signals. Usually, this involves a management information system (computerization of business processes and database management) and the ability to generate information from a database.

It must be easy to use, and it must provide value for the person entering the information, or they won't do it. This information then has to be sorted and pushed to the person who can make sense of it, who can see the pattern.

The process must separate noise from the true early warnings signals; the technology and the culture of the company must mesh. While having the technology to help us manage risk is a pre-requisite for effective use of EWSs, it is of greater importance that the person tasked to use the technology believes (this is the “culture”) in the EWSMS and takes seriously the process of valuing the EWSs and mitigating the risks identified.

In using the EWSMS, we should be guided by the following procedures (refer to EWSMS framework diagram):

• EWS generation

Involves maximum use of the senses and the tools needed to generate data and information. This requires to a large extent the monitoring of the internal and external environments of the business.

• Risk Assessment

Risks or uncertainties that affect the project or the borrower are identified based on the EWSs generated and observed.

• Risk Analysis

The effects of the risks identified are quantified. It is usually done by identifying risks and quantifying each risk’s probability of occurrence and the potential severity of its impact. The impact may be expressed as a range of values, with a confidence level, or as a probability distribution.

• Risk Mitigation

Risk mitigation involves preparation of a risk management plan. This is a list of action steps to do the following:
a.) Eliminate or reduce the probability of a threat occurring
b.) Eliminate or reduce the impact of the threat if it does occur.
c.) Ensure or increase the probability of an opportunity occurring.
d.) Increase the impact of an opportunity if it does occur.

• Risk Control

Risk control is the implementation of the risk management plan. This step includes the triggers referred to in risk mitigation. A key element of the implementation process is the continual tracking and reporting of progress with special attention given to variances and deviations along the way.

SMEs are Fireflies in a Vibrant Economy

2011-01-18T00:50:00.001-08:00

They glow in the dark; small and numerous. Nowadays, they are often a fleeting and a rare occurrence in nature.

A beautiful sight to behold in the deep of the night, many small dots of flickering lights moving everywhere but nowhere, and yet synchronized to display their mating call to attract their opposite sex. These are fireflies when they are out to propagate their species, and attract partners to grow and continue their mundane natural existence.

But beyond the mating call is the meaning of their presence in a place.

Fireflies are an indicator; an index of a safe environment free from the toxic waste man has inflicted on Earth. It is a good assumption and a reliable marker that where there are fireflies, there are no poisons in the earth.

Where you see them, the environment is safe --- where life is free to grow and blossom. Where the fireflies are, is an environment where nature can develop to its full potential.

MSMEs are like fireflies.

They are small, but the good and healthy MSMEs will issue forth a glow that makes them attractive.

Like fireflies, many of them come and go. They exist fleetingly. But for those who are able to attract like minded MSMEs, they partner to collaborate, to engage in symbiotic relationship, to merge, to be one giving birth to a bigger and better enterprise.

Like fireflies, they are a sign of a safe and clean environment, a vibrant and healthy economic environment in this instance. The number of MSMEs in an economy is often indicative of growth or stagnation of an economic system. A high number and progressive growth of MSMEs is a sign of a healthy and business-friendly economic environment. while declining numbers of MSMEs is often a sign that an economy is in the brink of stagnation.

The seemingly inconsequential and insignificant existence of fireflies in the natural scheme of things in the environment is shared by MSMEs. Often thought of as irrelevant in an environment where bigness is a highly valued attribute in business, MSMEs by their sheer number, despite being small, have proven their economic contribution as they impact on the greatest number of people and sectors in the country, providing the most number of jobs and helping people survive in bad times.

This year, we celebrate the improving economic environment as the “fireflies” of the economy (MSMEs) have continually shown resiliency in the face of difficulty and have become the bearers of light, albeit small and flickering, during difficult times.

We feature the “fireflies” of the Philippine economic environment as we have shared in their development and their impact on the greatest number of people and lives in this country. On the following pages we take a look, and not help being inspired by their stories on how they have grown and done their share in growing the economy.

Unlike the real fireflies, we have discovered that MSMEs have an ability fireflies do not have.

The real fireflies will remain so in the natural scheme of things; MSMEs will turn into something else. --- big enterprises and institutions that will spread their wings to help fly our country’s economy to a future of prosperity.

Why Capacity Building?

2011-01-18T00:45:00.000-08:00

Borrowing from an age old adage, “Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime." This is exactly what Small Business Corporation intends to do as it embarks on its capacity building programs for its various stakeholders in mSME development.
Capacity building is part of SBC’s new set of mandates as a result of the passage of the new Magna Carta for mSMEs or R.A 9501. Already, it has embarked on a two-pronged strategy to capacity building. First, is directed towards mSMEs addressing its various needs to improve the way it conducts business and how it keeps and share information. Second is directed towards Financial Institutions with the end view of providing a new mindset in SME lending that will result to mSMEs having greater access to financing and for the FIs to have the ability to expand their SME portfolio with a higher level of confidence because they are able to manage the risks involve in SME lending.
There are many definitions of capacity building suggested by practitioners who work with both profit and non-profit organizations. Given their differences, most have several elements in common----- they emphasize strengthening the institution and achieving sustainability; enabling institutions to achieve their mission is usually mentioned, along with increasing organizational effectiveness. They also identify specific areas of organizational capacity that should be addressed. The following definition from the Create the Future website captures the strengths of many definitions:

"Capacity building" refers to intentional, coordinated and mission-driven efforts aimed at strengthening the management and governance of institutions to improve their performance and impact. This occurs through organization development activities, such as leadership development, strategic planning, program design and evaluation, board development, financial planning and management and others.
Given this definition of capacity building, it becomes easier to understand the rationale behind the inclusion of capacity building in SBC’s mandate. It is a component in the mandate that ensures the continuity and endurance of SBC’s contribution to the development of mSMEs.
Areas of capacity building that SBC sees itself to be actively doing are: SME and microfinance lending technologies (such as risk-based lending); anti-fraud and anti-corruption practices; good governance and internal controls; and environmental management systems. These, it will deliver through TA-consultancies, trainings, coaching and policy advocacies.
A greater appreciation of capacity building will come from an understanding of its conceptual framework (refer to fig.1) in which we see the overriding significance of leadership and governance to the institution’s delivery of its products and services. The framework shows how and where capacity building can take place and make a difference. First is in the strategic plan ---its vision, mission, and objectives, then in the various spheres of doing business to deliver its services and make an impact on its stakeholders. Capacity building can enhance strategic relationships, its development of resources both human and material, and its ability to manage these resources and operate in a sustainable way.
Sans capacity building, and after many years of development work and the amount of financing and resources that went to mSMEs, the success rate remains low and the age-old problems continue to persist. It is in this context that capacity building was included and meant to address the perennial problems of mSMEs.

With capacity building, the mSMEs, or the Financial Institutions, or the other stakeholders, acquire capabilities that will enable them to work skillfully, adjust to challenges with a fresh mindset, create structures and systems that will improve efficiency and integrity of business processes, and imbibe the values that will instill the perseverance, diligence, and the courage needed to rise from setbacks, or worse, from the ashes of failed projects to start again and fulfill their mission.
Capacity building imparts to the stakeholders the capabilities and values that will not be lost in instances of business reversals and crises. It becomes part of the human or institutional psyche that will always be there from which people and institutions can draw their strength and inspiration to continue on, despite all the difficulties and hardships, and see success on the horizon.
It is somewhat sentimental, or worse, mushy, writing about capacity building in this way. But come to think of it, when all is lost; the money and the material resources gone ---- what’s left is what’s inside the person’s being, or for that matter, the institution’s consciousness.
Capacity building provides something that cannot be bought or taken away and serves as the key to making people and institutions sustainable.

Changing the Mindset towards Risk-Based SME Lending

2011-01-18T00:41:00.000-08:00

This is the challenge of providing SMEs greater access to financing --- we have to change the way people think.

In this particular instance, the mindsets of both the borrower and the lender must be changed. Without the change in mindset, SME lending will remain to be collateral oriented and will be biased towards those who have collateral to the detriment of profitable and promising enterprises.

We say this because we ourselves have come to a change in mindset since we started using risk-based lending technology in extending credit to SMEs.

First, let us discuss what risk- based lending is all about.

Risk-based lending is a system of lending to SMEs that is based on an accurate assessment of credit risk in which the loan package i.e. loan amount, interest, and term, is determined and influenced by the credit risk level of the enterprise, specifically the quality of the borrower and the debt repayment capacity of the enterprise. In this type of lending, collateral is not a determinant of loan approval, but impacts on the pricing of the loan. More importantly is the quality of the borrower and his capacity to repay the loan. Under this system of lending, the lender is able to assess, price, and manage the credit risks to ensure repayment.

Risk-based lending requires the use of a credit risk rating tool. In SBC, we have a Borrower Risk rating tool which we call CAMP analysis because in it we examine the Cash, referring to the financials of the enterprise, the Administration, referring to the quality of management, Market, referring to the buyers of the products, and Production, referring to the capacity and efficiency by which the enterprise produces and delivers its products and services.

Using the BRR helps the lender come up with a risk rating of the borrower and with this rating identify its competitive advantages and its weaknesses or areas of risk. Our BRR is a 10 grade rating system with 1 as the least risky and 10 is the most risky. On this basis, the lender knows beforehand the quality of the borrower and decides to lend or not on this assessment of credit risk.

With the use of the BRR, the lender will know how “real” the business is, or how honest the borrower is in his declarations about the enterprise. So borrowers beware about the truthfulness of your declarations and disclosures. Using the CAMP analysis, the AO will surely uncover irregularities including fraud if not fully disclosed by the borrower.

In addition, the lender has identified the sources of loan repayment, and knows whether or not the borrower can repay the loan.

In this system, no amount of collateral can influence the lender to lend to a bad borrower unless, the lender has decided to accept the risk of non-repayment and has provisioned the account for eventual losses. Or he has priced the risk of lending to a bad borrower. In this system, the higher the credit risk, the higher the interest rate (pricing it right) and the stricter the loan covenants (monitoring the business and mitigating the risk).

While in risk-based SME lending lenders are able to manage credit risks well and may lend to all types of borrowers, there are certain non-negotiables such as: 1.) if the risk is so high for both BRR and FRR that it cannot be priced, then the Bank should not grant the loan at all; 2.) If the credit risk cannot be mitigated, don’t finance; and 3.) Do not lend if borrower does not have debt servicing capacity.

The last condition is the most important of all because debt servicing capacity will decide whether the enterprise will be lent how much and for what purpose. The DSC is not based on forecast and projections but on the current state and historical performance of the enterprise. The lender will know whether the borrower, as it operates now, will be able to repay the loan given its present income.

It is a change in mindset because using the technology will destroy all our traditional thinking and practice in lending to SMEs. While many of us will think this is revolutionary--- it is not. Many of these changes are actually reflection of good banking practices on the part of the lender.

Here are some examples of this new mindset:

• Collateral should be from the assets that were the object of financing

It is not bad to require collateral or security for the loan, but it should not be beyond what the loan is financing. Requiring REM or hard collaterals has no direct relationship with low probability of default. Whatever it is that is the object of financing is good enough to secure the loan. If the loan is for working capital, then ARs or inventories would suffice to secure the loan. These assets should then be closely monitored to forewarn the Bank of any problems which may be encountered by the SME and which may hamper loan repayment.

• Equity, not loan, should finance expansion

In general, this principle means that if the SME does not have enough capital, then it cannot support an expansion program. Expanding the business may be ill-timed if it cannot support the expansion from its net income and from equity. Banks are ill-advised if they grant a loan for project financing without looking at how the SME will be able to repay the loan from its existing level of operations. In these instances, the Bank should evaluate the SME’s present equity and DSC levels and their projections and make sure that the repayment for the loan can be financed from its equity and DSC. Ideally, according to this principle, project expansion should not be financed by a loan, but rather by equity.
.

• REM as collateral does not necessarily prevent the occurrence of default

Unknown to many of us, but shown by studies on Banks and their loan portfolio in developed countries, it is a fact that REM as collateral does not mitigate the occurrence of default, nor does collateral have any correlation to default. Default is a function of debt servicing capacity of the borrower not the loan value or quality of the collateral. It is by this fact alone that the absence or lack of collateral should not hinder the SME from accessing credit for its growth. In fact a culture of collateral oriented lending contributes to the failure of most SMEs.

• SMEs should not be overtrading

Always look at the sales trend or its movement over a series of time periods. Normally, sales should only increase at a rate of about 10 percent. A steep climb (if increase is more than 50%) will always mean possible overtrading on the part of the SME.

Overtrading means a situation in which a SME is growing its sales faster than it can finance them. This usually leads to enormous accounts payable or accounts receivable and a lack of working capital to finance operations. SMEs may service larger orders only if it has the equity to support these orders.

A common scenario is for the SME to take the orders and try to squeeze its suppliers because it does not have the financing or the equity to support sales expansion. When this happens, the suppliers may stop supplying the SME.

And the SME is in trouble because it not only cannot meet its orders, but could not pay its creditors as well.

It is an established fact that 60 percent of all bankruptcies in U.S. and Canada are due to overtrading.

• Don’t finance expenses; only assets

This principle simply means that before we finance an SME’s needs, be it working capital or fixed asset, we must first look at the whole enterprise and see if it has enough assets to generate the net income that would serve as source of repayment. Does it have enough inventories? Recievables? Is it an operating concern? These questions when answered in the affirmative assures the lender that it is financing a business and not just any want the borrower needs to satisfy. It is also important that the Bank will not finance on the basis of expenses because these are supposed to be paid from the revenues of the business, not from a loan. The Bank should only lend on the basis of assets used to generate income for the SME; never expenses.

• Finance the business, not the transactions; Restructure the business, not the loan

This principle is really about looking at the big picture of the business, or getting the “global” view of the SME when financing, restructuring, or rating the SME. When financing, do not focus on the transaction alone. We need to look at the other aspects of the business most especially, its assets whether they are the kind that can generate the net income needed to repay the loan. Or in restructuring, see if the business can still generate enough business to meet the restructuring requirements. Don’t just focus on the loan amount and how this can be restructured to the benefit of the borrower. The most important point is whether the business as a whole can continue to exist and see the restructuring to the end. If in both instances, when the answer is in the negative, then easily, we should decide against extending or working out the loan. The situation in this case should be to focus on recovery and collection.

While risk-based lending technology is new to SBC and has been used for about three years, we can say that it has a positive impact on our past due ratio. In short, using risk-based lending has significantly reduced our past due ratio. It has also enabled us to make our pricing and our product features more responsive to risks. This has made financing more accessible to SMEs because collateral is no longer a determinant of whether to approve a loan or not.

While lenders must have a change in mindset, borrowers will have to make the same adjustments in the way they think. They must understand that this technology will weed out the fraudulent borrowers from the true entrepreneurs. And this will require their utmost cooperation when the AO will insists on the submission of records and documents pertaining to their operations. Or when the AO will have to ask a lot of questions about the business and do frequent project visits. The borrower must realize that these things are part of the evaluation and risk rating and management process, and it is only this way that more of them (SMEs) will be able to gain access to credit.

Small Business Corporation: Sustainable Intervention to Address Gaps in SME Financing

2011-01-18T00:26:00.000-08:00

The challenge to a developing economy such as the Philippines is to be able to implement credit supplementation programs that will effectively assist and develop Small and Medium Enterprises (SMEs) and be sustainable in the long term. The Small Business Guarantee and Finance Corporation (SBGFC) or Small Business Corporation for short is an organization that has attained these twin objectives of being developmental and sustainable at the same time. The key to the successful fusion of service and sustainability in a developing economy is being able to make SME financing a viable activity in which credit guarantees play a vital role.

Introduction to Small Business Corporation
With the vision of producing globally competitive enterprises, Small Business Corporation is fortunate to have a mandate that encompasses a wide range of possible financial interventions to develop SMEs. The SBGFC was established on January 24, 1991 by Republic Act 6977, and later amended by Republic Act 8289, otherwise known as the Magna Carta for Small and Medium Enterprises. This law was enacted to support the development of SMEs through the provision of various alternative modes of financing and credit delivery systems. It was on July 16, 1992 that Small Business Corporation started operations.

Under the law, the mandate of Small Business Corporation is to perform the following functions:
• Source and adopt development initiatives for globally competitive small and medium enterprises in terms of finance, production, management, and business linkages;
• Promote, develop and widen in both scope and reach various alternative modes of financing for SMEs including but not limited to the following:
1. direct and indirect project lending
2. venture capital
3. financial leasing
4. secondary mortgage
5. rediscounting
6. secondary/regional stock markets
• Guarantee loans obtained by qualified SMEs, private voluntary organizations and cooperatives;
• Provide second level guarantees (i.e. reinsurance) on the credit and investment guarantees made by credit guarantee institutions and other institutions in support of SMEs; and
• Provide instruments to the financial sector for alternative mandatory compliance as provided for in the R.A. 6977 as amended by R.A. 8289.

As a government agency, the Small Business Corporation is attached to the Department of Trade and Industry. It is under the policy, program and administrative supervision of the Small and Medium Enterprise Development (SMED) Council, the body responsible for the promotion and development of SMEs in the Philippines.

As provided in R.A. 6977, Small Business Corporation has an authorized capitalization of Five Billion Pesos (P5,000,000,000) of which One Billion Pesos (P1,000,000,000) have been subscribed and paid up. Of the initial capital of One Billion Pesos, five government financial institutions infused equity into Small Business Corporation in the form of common and preferred shares. These are the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP), Government Service and Insurance System (GSIS), Social Security System (SSS), and the Philippine National Bank (PNB).

In November 16, 2001, the Small Business Corporation was merged with the Guarantee Fund for Small and Medium Enterprises (GFSME), one of several guarantee institutions in the country active in providing credit supplementation to SMEs. With the merger, Small Business Corporation’s capitalization as of March 31, 2001 stood at P 1.825 Billion and has emerged a stronger institution

Currently, Small Business Corporation has a total workforce of 98 personnel. Of this number, 84 staff are in the Head Office, six are in the Mindanao Area Office, six in the Visayas Area Office and one each in the La Union and Bicol Desk Offices.

The Credit Guarantee System

Small Business Corporation’s targeted clientele are the micro, small and medium enterprises. These enterprises are defined as any business activity engaged in industry, trading, agri-business, and/or services whether single proprietorship, cooperative, partnership or corporation whose total assets, inclusive of the proceeds from loans but exclusive of the value of the land on which the office, plant and equipment are situated have asset size values falling under the following categories:
• Micro : Up to P 3,000,000.00
• Small : P3,000,001.00 to P 15,000,000.00
• Medium : P 15,000,001.00 to P 100,000,000.00

Small Business Corporation’s guarantee serves as substitute or supplement to the collateral requirements of SME loans from banks and other financial institutions. The guarantee is a contingent liability of the Small Business Corporation to the lending bank and becomes only a real liability when the loan is defaulted and there is a call on the guarantee. Small Business Corporation then pays the lender the equivalent amount of the loan covered by guarantee.

Under the program, Small Business Corporation may guarantee loans used for the following purposes: 1.) acquisition of fixed assets; 2.) permanent working capital; 3.)temporary working capital by way of credit line facility with a term of one year; 4.) debt retirement/refinancing; 5.) financial lease/lease purchase of a single or variety of machineries, equipment and facilities.

Loans that can be guaranteed or lent to SMEs may range from P 100,000.00 to
P 20 million. The aggregate amount of loans to borrowers with related interest shall in no case exceed P 20 million.

The maximum guarantee cover is 85 percent of the loan amount depending on the type of guarantee being extended and the risk involve in the enterprise. There are two types of guarantee extended to SMEs: the clean loan guarantee, which is given to cover risk of loans without any collateral, and the credit risk guarantee, which is given to cover loans with real estate and/or chattel mortgage.

Financial Highlights of the System

Over the years, Small Business Corporation has guaranteed a cumulative amount of P 8,662,498,000.00 in loans for 4,675 accounts benefiting 209,688 SMEs. In 2003, it was able to generate guarantee approvals amounting to P 271,988.000.00 for 59 accounts. As shown in Table 2: Credit Guarantee Program (in Million Pesos), it will be noted that since the merger in 2001, and the economic downturn in 1997, guarantee originations have been gradually increasing indicating a gaining confidence in the system.

Paradigm Shift in SME Financing

The credit guarantee system is only one of several modes of financial intermediation used to develop SMEs in the Small Business Corporation. Aside from guarantees, the corporation is into wholesale and retail lending, and recently embarked on an equity financing program. Addressing the problems in financing SMEs, it has developed a new paradigm of SME financing.

The usual problem confronting SME financing is information asymmetry which is the imbalance in the exchange of information between the lender and the borrower. The lender does not trust the borrower because of inadequate information in the same way the borrower does not want to fully disclose his business plan because he fears the lender might pass the information to his competitors. In this kind of situation where reliable and timely information is critical, the first step to bridge the gap between lender and borrower is to invest in systems and that make for proper accounting and business transactions, and to encourage transparency.
In the new paradigm, it was observed that SMEs can be classified into several types based on their capability to provide credible information about their business which translates into how the banks and financial institutions perceive them. Based on the studies of these SMEs, Small Business Corporation classified SMEs as bankable , meaning those who are already assisted and preferred by banks; the nearly bankable, those that are capable, with a business track record, but lack the credit track record and collateral to secure a loan; and finally the non-bankable and yet viable, those that are limited in both business and credit track record, no collateral and has limited management systems, but has a viable business.
In the paradigm as illustrated in Fig 2: Small Business Corporation’s Credit Delivery Intervention, the credit guarantee system becomes the major intervention to assist SMEs that are near bankable. For the Non-Bankable SMEs, the intervention is direct lending because other financial institutions will not want to lend to them. For the Bankable SMEs, the intervention is to provide wholesale funding to financial institutions who in turn will re-lend to the Bankable SMEs.

The credit guarantee intervention addresses the security requirements of the loan, and enables the SME to enter the formal lending system paving the way for it to grow and establish its bankability. It also helps the banks open up to these SMEs and learn the way to finance SMEs while significantly reducing their credit risks.

Role of SBGFC in SME Development

As the leading player in SME development in the Philippines, Small Business Corporation’s role is largely to address the gaps in SME financing. As already illustrated in the paradigm of SME credit delivery, SMEs being assisted are those rejected by the banks or those the banks perceived to be lacking in their capacity to borrow and repay the loan. However, the corporation maintains a high level of professionalism and attention to credit evaluation processes that minimizes information asymmetry resulting to a high quality of loan, guarantee and investment portfolio that would sustain operations in the long term.
In this light, the programs of the Small Business Corporation give SMEs the break they need to enter mainstream business and to grow themselves into competitive enterprises. It does not compete with the formal banking sector but complements their efforts in helping SMEs.

Strategies to Expand the System

The strategy to expand the credit guarantee system is three pronged:
• Geographical Expansion – Financial services and access to credit is mostly found in the urban centers. These are the metropolitan areas and regional capitals which are also centers of business. The rural areas which compose majority of the country’s regions are largely unserved by Small Business Corporation. There is so much economic and business potential for SB Corporation to finance the requirements of SMEs in these areas to upgrade the quality of goods and services using indigenous raw materials and human resources. Part of the strategy for expansion is setting up area offices and Small Business Incubation Centers (SBIC) The strategy includes going into joint ventures in setting up the SBICs which will serve as Small Business Corporation’s extension offices marketing its services and financial products.
• Program Technology Expansion - Another opportunity for expansion is to fill the gaps in financing technology and information asymmetry in the SME sector. The strategy is to develop products and services that would meet the financing and technology needs of the SME sector. These are market niches that have not been served by banks and financial institutions.
• Asset base expansion – There is a need and an opportunity to expand Small Business Corporation’s asset base. This can be done by leveraging its existing funds through the credit guarantee system, and by securing additional funding from other sources. Asset base expansion answers the need to fully finance its mandate.

Future Prospects

A really strong and effective credit supplementation system is one that can direct investments and loans with a high level of confidence towards certain industries, enterprises or firms. An indication of this ability is when a lending institution accepts a credit guarantee with a high level of trust and confidence, and will readily lend or invest in the given enterprise.
Given this precondition to the development of a strong and credible guarantee system, Small Business Corporation is set to launch two programs, the Credit Guarantee Certificates (CGC) and the Automatic Guarantee Line (AGL) that will redefine the credit guarantee as a financial intermediation tool to encourage small and medium enterprise (SME) lending
The plan to introduce these new programs this year was made to increase loan originations and the use of credit guarantees. But more importantly, they were meant to change the way banks and financial institutions view the credit guarantee system.
Since the financial crisis of the late 90s, the banks have remained very cautious in lending to SMEs, and require hard collateral such as real estate as part of the loan security. The new programs will aim to make the banks take a second look at credit guarantees and gain renewed confidence in using them.
Oftentimes, banks view credit guarantees as having tedious documentation and being difficult to collect on guarantee calls because of possible revocation and non-payment due to technicalities. The CGC and the AGL will hopefully change these perceptions. Both will do away with the tedious evaluation and documentation that go with guarantee approval, and provide a more efficient system of guarantee call payments. In short, the CGC and AGL answer the need for a fast and reliable credit guarantee facility that will boost confidence of financial institutions in the system.

The system may, in the future, be performing the primary evaluation of the loan or investment application and the lending or investing financial institution performing the secondary credit evaluation. This is a vision that is not easily attainable, but can happen through a build up of a credible track record and excellent performing portfolio of SME credit guarantee accounts.

In line with this vision is the establishment of a new model for the system, which is a state agency type of guarantee model using the sovereign guarantee as major feature and the portfolio and mutual guarantee systems as subsidiary systems to effect industry and regional development.