Starting a Micro-Lending or Small Financing Business

Q. I have a capital money to put up a microlending and small financing money, My problem is I have only few idea about this business, That’s why I need your help and idea about this. What are those techniques or tips of marketing system, legal system and etc…Kindly pls. let me know this, Thanks a lot. – Noel (Philippines)

Dear Noel,

In the Philippines, microfinancing is an activity dominated by rural banks, non-government organizations (NGO) and people organizations (PO), with support from international donor organizations. It is a strategy used to combat poverty particularly in the rural areas.

There are several approaches to engaging in microfinancing. You can get accreditation from the NGOs like Grameen Bank, CARE Philippines and government institutions like Small Business Guarantee and Finance Corporation (SBGCF). Partnering with these organizations will provide you logistics, knowledge and support in pursuing this endeavor.

However, you can also decide to go at it alone – but with a lot more work, more risks and more resources.

I believe the most efficient private entities who are engaged in micro-lending are the “Bombays”. Although they operate illegally as usurers, they have actually mastered the technique of marketing and collecting, so much so that they have flourished and grew and their simple “5-6” operation have been passed through generations.

One of your primary concerns will be to establish a system or mechanism that would allow your micro-loan clients to repay their loans on time. Two key microloan policy strategies recommended by experts (including USAID) are cash flow-based client analysis and “zero tolerance” for overdue repayments.

With cash flow-based lending, you should get a clear picture of revenue streams of your potential clients. You can determine their actual and potential income, and, with this information in hand, determine how much of a loan the potential clients can afford to handle. You can also devise a loan repayment schedule that fits the clients’ cash flow.

Given this, it is imperative that you select your clients very carefully. Your client must have the ability to pay you back with cash, not with chickens or vegetables harvested from their gardens. Like the “Bombays,” they offer their money to legitimate small businesses or to someone who wants to make an honest living through a means of livelihood, like sidewalk vendors, small carinderias, and stalls in the public markets.

Regarding the “zero tolerance” policy, you must view micro-loans in the same way the banks view the loans that they provide. It is not a social service. You must be “zero tolerant” of any late payment, or non-payment of loans regardless of any contributing circumstances. With this approach, it can be very profitable for you. Interest rates on micro-loans must be market-driven, and must be high enough to allow you to cover all costs associated with the loan. Here in the US, many micro-lenders even charges the same kind of interest rates charged by credit cards.

Providing microfinancing, however, is a big undertaking. You must have enough support and logistics to allow you to seek out clients (which would be very easy to find in the Philippines), however to ensure repayment and pursue laggard clients is another story. Seek out specialized training in operating a successful microfinance operation (the Asian Institute of Management in Makati offers such courses). Remember, you must learn not only to run a financing operation, but how to provide excellent client service and nurture long-term relationships with your microfinance clients.

Your capability to collect repayments will depend on your ability to establish a presence among your clientele. If you have a wide clientele located in Metro Manila, Laguna, Iloilo or Baguio, it may be difficult to collect back on your loans.

Going back to the “Bombays,” note that they limit their operations in one specific area where they can easily manage the collection process and keep a very strict watch on the businesses that they lent their money. For example, one person will concentrate only at Libertad St in Pasay City, another one will concentrate only at Paco Market and its vicinity, another at Pasong Tamo, Makati, Guadalupe, Caloocan, Malabon, etc. The main purpose of these concentrations is to be able to collect 100% of the calculated and agreed interest of the principal, every day.

An important part of your logistics is software that will allow you to keep track and monitor repayments. Your software must instantly flag any instance of late repayment, or non-repayment. Given that microfinance loans are typically of short duration (usually some where between 30 days and six months), and frequently call for weekly or bi-weekly repayments. Keeping track of payment due dates for hundreds of clients is a demanding task, and can only be achieved if you have a good IT infrastructure. If you cannot have this kind of software, a very tight record keeping is necessary to allow you to monitor payments and repayment schedules. The “Bombays” keep a small notebook to record the accounts of all their clients.

Another more secure example of Microlending is the pawnshop. If your money is sufficient to capitalize one, this is the safest way to go because you don’t lend any money without collateral. This business require accreditation from the Central Bank as a financial institution, you may check the rules and regulations from there.

You may want to visit the following sites to get more information on microfinancing:

USAID’s Microenterprise ( Innovation Project – this site contains research, publications and newsletters that will give you more insight on this industry.

Advice by Nach Maravilla – Publisher,, photo from


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