North Point
By Ariel F. Nepomuceno
A warning to struggling entrepreneurs
The contribution of countless Small- and Medium-Enterprises (SMEs) to the overall economic resilience of the Philippines goes beyond mere numbers. More than 66% of our GDP for example, has come from our SMEs starting 2011 based on the Department of Trade and Industry data. Of the more than 820,000 registered companies, 99.6% are SMEs. And at least 61% of our entire work force is employed in these enterprises. We cannot even account for the additional impact of micro-businesses, many of which are unregistered.
More than these figures, they help build dreams, innovations, uplift the competitive spirit of everyone who aspires to succeed away from the safe arena of working for other employers where their monthly salaries are assured. And lastly, their eventual commercial victory would catapult the entire nation to real progress where the majority will benefit at least materially.
However, in my years of dealing, mentoring, and helping many aspiring entrepreneurs, I have seen a common error when it comes to their need to access additional funds to support their operations, sometimes expansions, and courageous ventures. Their financial distress (though sometimes mere greed) blinds many of them to the traps and abuses of would-be financiers or agents of big funders. Surprisingly, some of these smart businessmen suddenly became prone to obviously too-good-to-be-true funding scams and criminal schemes.
For example, one of my new friends — he had accumulated his wealth through long arduous years of selling medical equipment — recently confided to me that he paid P5 million to a financial broker representing an investment company based in Singapore. He proudly claimed initially that very soon he would be awarded at least P80 million to support his market expansion. But when I asked when that would happen, he pathetically admitted that the funds were already delayed for more than three months from the supposed due date. That raised my concern.
What were the cues that, had my new friend been more objective, could have alerted him so he could have avoided losing his hard-earned capital? First, the office of the financial broker (who had presented himself as a successful financial advisor) is a virtual office in Taguig. I have no biases against firms using virtual offices — I also used one before while registering a joint venture company with a foreign partner. But for a supposedly big-time fund advisor acting as an agent of a huge Singaporean investment house for several years, having a virtual office as a corporate address must be a red flag. To help my friend, I asked a colleague in Singapore, a legitimate and respected investment banker, to check the track record and capability of the Singaporean company which was to have provided the P80 million to my trusting friend. I wasn’t surprised, but to the dismay of my friend, that company is also in a virtual office. And that company ironically claimed that it is only a branch office of the Taguig-based financial advisor!
To continue with the story, the P5 million was supposed to be used for a performance bond that would guarantee the risk being undertaken by the fund provider of P80 million. But when asked, my friend told me that no due diligence was conducted by any insurance or bonding company on him or his company prior to his payment of the P5 million premium fee. Well, no insurance or bonding company would cover the risk of any applicant for a bond without undertaking a serious investigation and evaluation of the latter’s capability to perform. By the way, no credible business plan was required by this financial broker. Another glaring clue that was ignored.
My advice to our entrepreneurs: You are a rare breed, our country needs you, but be extremely careful in dealing with fund and investment advisors, brokers, or managers. Think and evaluate ten times before you release your funds. Remember, you are the one in need of additional capital for expansion or even survival — it doesn’t make any sense that you’re the one giving away money. Nominal fees are normal when you engage the services of a lawyer or an accountant. But beyond a few thousand pesos, better be smarter. Payment of a success fee, based on actual delivery of funds, is obviously a safer deal. In Europe, US, and Hong Kong, private equity firms can charge an acceptance fee in the vicinity of $2,000 to $5,000 — but this is only after they have initially made a professional appraisal of your application that includes your business plan. Besides, these are real financial firms.
Be wary, too, of financial fairy tales being peddled to you similar to many much publicized ponzi schemes. Many have not learned from the horror stories of victims of the famed Aman Futures Securities that duped billions of pesos from unsuspecting Filipinos in 2012. It’s founder, Manuel Amalilio, pointed to Okachi Malaysia as the final destination of his stash. We have seen too, but again not learned from, the earlier “double your money” scam of the Legacy Group of Companies in 2008 where at least P30 billion was amassed from the local victims. Many more scams have happened, such as the Performance Investment Products (PIPC) in 2007 wherein the Singaporean owner made off with at least P11 billion from his on-line forex trading that hoodwinked his Filipino victims. Royal Manchester Five made away with P2 billion in booty, FRANCSWISS, etc. The list is long. But then again, memory of many people is short. They failed to recall.
Remember these two pieces of most basic advice. As our oldies always tell us, when it sounds too good to be true, it’s probably is not true. So think twice. And, get the guidance of respected experts on such funding needs. The best is by referral from someone who has a good, successful, and verifiable story. I put emphasis on the word “verifiable.”
Ariel F. Nepomuceno is a management consultant on strategy and investment.
