No one gets rich from being an employee, or so they say. That’s why you, like many others, might be dreaming of starting your own business. But the big question is, where do you get the capital to turn that dream into reality?
Starting a business requires a solid financial foundation, and fortunately, there are several funding options you can explore. Understanding these options is the first step toward realizing your entrepreneurial dreams.
In this article, we’ll dive into the various funding methods available to get your business off the ground. Whether you’re considering personal savings, asking friends and family for help, or looking at more structured options like bank loans, grants, or venture capital, there are numerous paths to consider.
Each funding source has its own requirements, benefits, and challenges, so choosing the one that best aligns with your business goals and financial situation is essential. We’ll guide you through the pros and cons of each option, providing you with the information you need to make an informed decision and confidently start your business journey.
Table of Contents
1. Government Loans
The Small Business Corporation (SB Corp) and the Development Bank of the Philippines (DBP) offer loan programs specifically for small businesses. These loans typically have lower interest rates and longer repayments than traditional bank loans. SB Corp primarily focuses on financing Micro, Small, and Medium Enterprises (MSMEs). They offer various loan programs like the P3 Program for micro-entrepreneurs and the RISE UP program for MSMEs in general. You can check their website for details and eligibility requirements: https://sbcorp.gov.ph/
The Development Bank of the Philippines (DBP) offers loan programs targeted towards specific sectors and purposes. They focus on development projects that align with national goals. Explore their website for details on their MSME programs at https://www.dbp.ph/
The loan amount varies depending on the program and the size of your business. They typically range from ₱5,000 to ₱5 million. As I’ve said, their interest rate is generally lower than commercial banks, with some programs offering zero interest rates for the initial period. They offer flexible repayment schedules, often extended up to several years.
For the requirements, eligibility criteria may include business registration, a business plan, and financial statements. Some programs might have specific industry requirements. Research the different loan programs SB Corp and DBP offer to find one that fits your business needs and qualifications. Then, gather all the required documents like business permits, financial statements, and a business plan. Don’t hesitate to contact SB Corp or DBP for help understanding the application process and requirements. They often have representatives who can guide you.
2. Grants
Government grants are free money government agencies provide to support specific industries, technological advancements, or community development initiatives. They typically don’t require repayment but come with conditions and eligibility requirements.
Several government agencies offer grants for businesses. For example, the Department of Trade and Industry (DTI), might have information on current grant programs or announce upcoming ones. Check their website for updates: https://www.dti.gov.ph/.
In addition, the Department of Science and Technology (DOST) offers grants for science, technology, and innovation-based businesses. Visit their website for grant information at https://www.dost.gov.ph/.
Just check with other relevant agencies depending on your industry. For example, if your business is related to Agriculture, check the Department of Agriculture because they sometimes give away free seeds and fertilizer. Also, check the local government units (LGUs) because some provinces, cities, and municipalities offer grant programs to support local businesses. Look for updates on their websites or business development offices.
Grants are often given to businesses operating in priority sectors like agriculture, innovation, tourism, or export-oriented industries. Project-based grants are also typically awarded for specific projects that align with the agency’s goals. You’ll need a well-defined project proposal with a clear impact plan. Securing a grant can be competitive, so be prepared to demonstrate your business’s viability, innovation, and potential social impact.
3. Personal Savings
Funding your small business with personal savings or bootstrapping is a popular option for many Filipino entrepreneurs. As a Finance Coach, Chinkee Tan always advises not to go into business using debt but to use your savings first. Bootstrapping involves using your savings to finance your business launch and initial operations. This approach is more straightforward and fast, so you don’t need to go through lengthy loan applications or convince investors. You can start your business when your savings reach your target amount. You also maintain complete control over your business decisions and avoid having to answer to investors or lenders. All the profits from your business go directly to you, allowing you to reinvest them in growth.
However, you’ll only have limited capital, restricted by the amount you have saved, potentially hindering growth opportunities that require larger investments. Dipping into your savings can create a financial burden if the business takes longer than expected to become profitable, so relying solely on savings might limit your risk tolerance, making it difficult to pursue bold business ideas.
To make bootstrapping work, create a comprehensive business plan that outlines your funding needs, projected costs, and a realistic timeline for profitability. Of course, be frugal! Focus on cost-effective strategies. Look for used equipment, explore free marketing channels, and outsource tasks strategically. Explore alternative income streams like part-time work or freelancing to supplement your business income.
4. Business Loans
Business loans are a popular way for small businesses in the Philippines to acquire funding. They provide a lump sum of capital that you can repay over a set period, with interest. There are different types of business loans, like term loans, which are the most common type. You receive a one-time lump sum payment and repay it with interest over a fixed term, typically ranging from a few months to several years.
You can also use your line of credit, which acts like a credit card for your business. You get a credit limit that you can tap into as needed, repaying only interest on the used amount. It provides more flexibility for ongoing expenses.
If you want a loan specifically designed to finance the purchase of equipment needed for your business, consider equipment loans. They often come with longer repayment terms to match the lifespan of the equipment.
If you want to cover temporary financial needs like working capital or seasonal inventory, go with short-term loans. They typically have a shorter repayment term and higher interest rates.
The best loan type depends on your specific needs, so ask yourself, What will you use the funds for? How much capital do you need? Can you comfortably afford the monthly payments with your projected income? How long do you need to repay the loan?
You might be wondering where to get a business loan. Traditional banks are a major source of business loans. They offer a variety of loan products but may have stricter requirements. Credit unions, which often offer more competitive interest rates and flexible terms for their members, also offer business loans.
If these are hard, then go with online lenders. Several online lenders cater to small businesses, offering faster application processes but potentially higher interest rates.
An excellent personal and business credit score increases your chances of loan approval and favorable terms so work on this. Remember, business loans come with debt obligations. Ensure you have a clear plan to repay the loan on time to avoid financial stress.
5. Microfinance
Microfinance refers to providing financial services like loans, savings accounts, and money transfers specifically targeted towards low-income entrepreneurs and individuals. Microfinance institutions (MFIs) typically cater to businesses that traditional banks might not do due to their size or perceived risk.
Microloans are ideal for financing smaller business needs like initial inventory, equipment, or marketing efforts. MFIs often offer more flexible repayment schedules than traditional banks, catering to small businesses’ fluctuating incomes. Their services and requirements are often designed to be more accessible for small businesses than traditional banks. What’s good about MFIs is that they sometimes provide additional services like business development training or financial literacy workshops to help borrowers succeed.
The Eligibility criteria can vary depending on the MFI but generally involve business registration, business plan, and credit history. While not always a dealbreaker, a good credit history can strengthen your application.
The Bangko Sentral ng Pilipinas (BSP) maintains a list of MFIs operating in the Philippines, so try to be on that list. Many non-government organizations (NGOs) offer microfinancing programs, often focused on specific sectors or regions, so be on the lookout. Some local cooperatives also provide microfinancing services to their members, so be part of them.
While generally lower than traditional lenders, microfinance interest rates can still be higher than government loans. MFIs often have closer relationships with borrowers and may require more frequent repayments or check-ins, so don’t get annoyed.
6. Angel Investors
Angel investors are typically rich individuals who invest their own money in early-stage businesses. They are attracted to businesses with innovative ideas and a strong potential for significant return on investment. If they see potential in you, then they’ll invest in you. In exchange for funding, angel investors typically receive ownership equity in the company, giving them a stake in its future success.
Angel investors can provide significant amounts of funding, often exceeding what traditional banks might offer to a new business. Aside from that, many angel investors have experience in business and can provide valuable mentorship, helping you navigate challenges and make strategic decisions. You get an investor and a mentor at the same time! My favorite part is that angel investors often have extensive networks that can be helpful for your business, connecting you with potential customers, partners, or future investors. A good network is important for business!
Angel investors want to back businesses with a passionate and capable team that can execute the plan and achieve success, so have a good story. They are also interested in businesses with the potential for high growth and significant returns on their investment.
The Philippines has several angel investor networks that connect entrepreneurs with potential investors. These networks can be a good starting point for your search. Check Facebook groups and you’ll find some angel investor groups. Aside from that, attend startup pitch events or conferences where you can present your business idea to potential investors. If you have rich friends, then look for angel investors within your network of contacts, or seek introductions from people who know potential investors.
Develop a compelling and concise pitch that effectively communicates your business opportunity and why it’s a good investment. Be prepared to answer questions about your financial projections, market size, and potential return on investment. Practice your pitch beforehand to ensure you can deliver it confidently and persuasively. Keep in mind that securing investment from angel investors can be a competitive process. It’s important to be well-prepared and present a strong case for your business.
7. Venture Capitalists
Venture capitalists (VCs) are a different breed of investor compared to angel investors. Venture capitalists (VCs) are firms that invest in high-growth, innovative companies with the potential for significant returns. They typically manage funds from a pool of investors like pension funds, insurance companies, and high net-worth individuals. Unlike angel investors who are individuals, VCs operate with a more structured process and stricter criteria.
VCs are primarily interested in businesses with the potential to become industry leaders and generate substantial returns on investment within a specific timeframe (usually 5-7 years). They are drawn to businesses with innovative ideas that have the potential to disrupt existing markets or create entirely new ones! The business model should be readily scalable, meaning it can quickly expand and reach a large customer base. Think about exportation or monopolizing an entire area. A highly competent and experienced team with a proven track record is essential to convince VCs of the business’s ability to execute its plans.
VCs can provide significantly larger amounts of funding compared to angel investors, allowing you to fuel rapid growth and expansion. They often have extensive experience in specific industries and a vast network of contacts that can be valuable for your business. Securing VC funding can bring credibility and attract further investment or partnerships from others!
The cons? Meeting the strict criteria of VC firms can be difficult for many startups and they typically receive significant ownership equity in exchange for their investment, potentially diluting your control over the company. They expect a high return on investment within a set timeframe, which can lead to pressure for rapid growth, even at the expense of profitability in the short term. The pressure is on!
8. Crowdfunding
Crowdfunding involves raising capital through online platforms where many individuals contribute small amounts of money to your project or business idea. There are different models of crowdfunding, each with its own set of rules and rewards for contributors:
The first one is donation-based crowdfunding. We always see this on social media. This is where people donate to your campaign with no expectation of receiving anything in return. It’s a good option for businesses with a strong social impact mission. Tell your story on social media and ask for help from kind-hearted people.
If that does not work, then go with reward-based crowdfunding where contributors receive a reward based on their donation amount, such as a product discount, early access to your service, or exclusive merchandise. This is a popular model for businesses launching new products or creative projects.
If you’re confident that your business will be a success, then try debt crowdfunding. In this model, you essentially borrow money from the crowd and repay them with interest over a set period. It can be an alternative to traditional bank loans but of course, a bit scary.
The next one is equity crowdfunding wherein you raise funds by selling shares in your business to everyday investors. This model is becoming more regulated but can be a good option for high-growth businesses seeking long-term investors.
The pros of crowdfunding? Anyone with an internet connection can contribute to your campaign! It’s even a good way to gauge public interest in your product or service before a full launch. It’s like a thirst trap. Besides, if these people help fund your business, they’ll share your business on their social media so a lot of people will know about your business. A successful crowdfunding campaign can generate significant media attention and build brand awareness for your business. It allows you to connect with potential customers and build a community around your brand early on.
Remember that the success of your campaign heavily relies on effective marketing and promotion to reach your target audience and if you offer rewards, make sure you have a clear plan to deliver them efficiently to avoid disappointing your backers.
9. Credit Cards
Credit cards offer a quick and convenient way to access cash for your business needs. You can use them for immediate purchases or operating expenses. Some credit cards offer the option to separate business and personal transactions. Using a business credit card responsibly can help establish a business credit history, which can be beneficial in the long run. Some business credit cards offer rewards programs or cashback on business purchases, which can translate to savings for your business.
I know some people who started a mini grocery store and a sari-sari store using their credit cards. The products in their sari-sari store are fast-moving goods so they can sell them quickly and repay the credit card debt. Aside from that, they can have cashback so it’s a win-win situation!
However, credit cards typically carry high interest rates. Interest charges can quickly accumulate and eat into your profits, especially if you don’t pay your balance in full each month. Relying heavily on credit cards can lead to a significant debt burden for your business, hindering your ability to invest in growth or manage unexpected financial challenges. Excessive credit card use or late payments can lead to credit card companies reducing your limit or even closing your account, limiting your access to funds.
10. Supplier Credit
Supplier credit refers to an agreement between you and your supplier where you purchase goods or services with a delayed payment. Essentially, your supplier extends you a short-term loan, allowing you to pay for the inventory or materials after you’ve sold them and received payment from your customers. This can be beneficial for businesses that need to purchase inventory upfront but don’t have the immediate cash flow to pay for it.
By delaying payment, you can free up cash to cover other business expenses or invest in growth opportunities. Supplier credit allows you to purchase more inventory without spending all your cash upfront. This can be helpful during peak sales seasons and early payment discounts offered by some suppliers can translate to additional savings for your business.
However, overreliance on supplier credit can lead to a buildup of debt, making it difficult to manage your finances if sales are slow. Late payments can also result in penalties or damage your relationship with the supplier, potentially affecting future credit opportunities. Aside from that, your business becomes dependent on the terms offered by your suppliers, limiting your negotiating power.
Remember, the best funding option for your business will depend on your specific needs and circumstances. Consider factors such as the amount of funding you need, the stage of your business, and your ability to repay the debt.
Conclusion
If you’re thinking about starting a business, having enough capital is key, so it’s a good idea to explore different funding options that fit you best. Start by figuring out how much money you need and how much time and effort you can put into securing it since some options have lots of requirements. For smaller amounts, consider quick and easy options like dipping into your savings, asking friends or family for help, or trying crowdfunding, which usually doesn’t take much time or paperwork.
On the other hand, if you’re aiming to fund a bigger business, you might want to look into loans or grants. These options can provide the larger sums you need but often involve a more detailed application process and a greater commitment. Loans from banks or financial institutions can be a good route if you have a solid business plan and some collateral. Grants are fantastic because you don’t have to pay them back, but they’re competitive and come with specific criteria. And if your business has high growth potential, you might consider venture capital, though it means giving up some equity and control. So, take a good look at your business needs, think about how much effort you can invest in the application process, and weigh the long-term effects of each funding option.
