IT is with great pleasure that I return to this esteemed section of The Manila Times after a two-year hiatus. This marks my fourth piece since December 2021, where I have explored various topics, ranging from stepping out of one's comfort zone to building a business from inception to community contribution. In February 2022, the focus shifted to educating readers on the importance of building a credit score. Today, I bring forth a topic that resonates with us all — the transformative power of borrowing.
Borrowing, in its essence, has been a lifeline for humanity throughout history. From the barter system during the pre-colonial era to the modern-day bayanihan spirit ingrained in Filipino culture, asking for help has been a shared practice. This extends to the rural areas where neighbors seek assistance from the owner of vegetables or fruit trees, that they may be permitted to harvest in exchange for gratitude. When I was still a young boy, I, too, experienced when my parents sent me to the nearby sari-sari (variety) store with the hope of extending credit until a later date.
In the business landscape, especially for small and medium enterprises (SMEs), borrowing becomes a crucial tool for survival and growth. Whether it's from informal lenders, friends and relatives, government funding agencies such as the small business corporation, which is attached to the Department of Trade and Industry, pawnshops, traditional banks or online lending apps, SMEs explore every avenue to meet their business needs. Even public-listed companies resort to borrowing through bonds and shares to finance infrastructure and other projects.
Surprisingly, some SMEs exhibit reluctance toward borrowing, often driven by fear or misinformation. They are afraid that they may not be able to pay the lender on time due to the uncertainties they might face while conducting the business. Shying away from seeking some help from financial institutions is one of the reasons many businesses are forced to cease their operations. From my personal conversations with different SMEs, some of them were particularly focused on the interest rate and other fee charged against the actual loan amount. What they are missing is the opportunity to have access with financials, which not everyone is qualified to be catered for.
Again, just like what I wrote with my article about credit score last 2022, a lot of businesses were interested in borrowing from different financial firms but only to be rejected because of their low credit score. In contrast, these SMEs being tapped for a financial partnership are the ones with hesitations and reservations.
The misconception lies in the perception that borrowing is solely a financial burden. It is crucial to understand that the purpose behind borrowing should be to add value to the business. While personal gratification such as using the loaned money to buy gadgets, spending it to a holiday spree, paying the utility bills, shopping or settling outstanding debts may seem tempting, the smart use of borrowed funds lies in strategically investing them to enhance business operations, support the delivery of purchase orders by their buyers or purchase necessary inventory. Others would venture to expand their business into another branch or location which later on will grow the revenue of the business.
To delve deeper into this, let's analyze borrowing with the primary goal of improving the financial health of a business. Beyond the critical assessment of interest rates and charges, businesses must evaluate whether the projected income generated from the borrowed funds can surpass the associated expenses. This comprehensive evaluation ensures that borrowing becomes a strategic decision that propels the business forward rather than a financial setback. When someone can include this process in their business operations, it will give them more confidence to consider exploring different institutions and start forging their financial partnership.
Just to set the record straight, I am not encouraging anyone to borrow without seriously considering their capabilities to pay. What I am trying to convey is that there are lifelines that we can utilize instead of allowing the fortune to get away of our sight. We only need to conduct a calculated risk in order for us to be guided in the right direction.
In conclusion, when standing at the crossroads of whether to borrow or not, businesses should consider two fundamental aspects. Firstly, the borrowed money should add value to the business, not just be a liability. Secondly, it should pave the way for unlocking the optimal potential of the business in the future. Embracing borrowing as a tool for progress, when used judiciously, can indeed be the key to unlocking new heights of success for businesses of all sizes.
Jesse Aaron Felicitas is a licensed customs broker by profession but found his passion to help SMEs seven years ago through First Circle Growth Finance Corp. Today, he is a relationship manager working with companies of different industries providing strategic advice and consultations for the continuous growth of their businesses.