CHAPTER III: ESTABLISHING A SMALL BUSINESS

INHIBITIONS TO ENTRY IN BUSINESS

Article 13 of the code stiputalates that the following cannot engage in commerce nor hold office or
have any direct administrative or financial intervention in commercial or industrial companies.
A. Persons sentenced to civil interdiction,while they have not get fully served their sentence or
been
amnestied or pardoned.
B. Persons who have been declared bankrupt while they have not obtained their discharge or
been
authorized, by virtue of an agreement accepted at a general meeting of auditor and approved
by judicial authority.
C. Persons who on account of law or special provisions may not engage in commerce.

The following persons in the government are disqualified to engage in commerce under the laws.
A. The heads of the departments and chiefs of bureaus of officers and their assistant. They shall not
during their continuance in office engage in the practice of any professional of intervene, directly
on indirectly, in the management or control of any private enterprise which in any way may be
affected by the functions of their office, nor shall they directly or indirectly, be financially
interested in any contract with the government, or any subdivision or instrumentality thereof.

SELECTING THE PROFITABLE BUSINESS LOCATION

In selecting the location for a small business, personal factors are of far greater importance.
Pragmatically, they may limit the individual’s range of choice to his immediate environment, either
because of his lack of knowledge of more distant locations, or because he does not have the necessary
time or funds to investigate a wider area. Of much greater importance are the highly personal factors that
lead to the deliberate choice in selecting the location for small business. Some of these are:
1. A desire to locate among friends and acquiantances. Sometimes the opposite desire, to locate where on
is unknown.
2. A personal preference for the place near family or relatives.
3. An opportunity to take advantage of established trade connections in a particular territory.
4. A personal preference for a small town or big city.
5. The desirability of being able to give personal supervision to other property or interest in which one may
have a present or prospective future investment.
Credit is easier to obtain where the entrepreneur has already established a good reputation.
Friends and acquiantances will give good word mouth publicity.
For retail, wholesale and service establishment, the following factors are important:
1. Purchasing power of potential Consumers.
2. Their residence, place and kind of work, avenues of transportation, education, means of
communication, habits affecting business, age, family status, leisure, attitudes, wants
and desires.
Other basic factors that should be considered following:
 1. Business always seeks maximum accessibility to its customers in terms of places, form, and
time. Place accessibility is the usual concept of site location, neighborhood, central business
district, and feeder street or highway locations. Form accessibility includes the building and
its facilities and increasingly adequate nearby parking. Time accessibility is indicated b the
return to night and Sunday business hours.
2. Certain conditions attract customers whereas others repel or discourage then.
The city itself is an excellent example, where its reputation, facilities and character have always had
varying degrees of pulling power for others.
Adverse conditions may cause large numbers of people to avoid certain cities or business districts
when ever possible.
It is well known that certain clusters of stores, specially those featuring shopping goods attract
more customers than the same stores could if the were in isolated locations.
3. Intersections of well-traveled routes, access points and transfer points have always been
good locations.
Cost refers to acquisition, maintenance, and development expense.
Profit potentials and, future prospects are estimates but usually can be made fairly accurately for
short periods of time.

GENERAL CONSIDERATIONS IN CHOOSING A LOCATION

Only careful investigation will reveal the good and bad features of any particular location. Four
general factors are important in this investigation. These factors are: personal preference, environmental
conditions, resource availability, and customer accessibility. In a particular situation, one factor may be
more important than the others, but each always has an influence.
Personal Preferences:
All to often, a prospective entrepreneur considers only the home community for locating the
business. Frequently, the possibility of locating else where never enters the mind. Home community
preference, of course, is not the only personal factors influencing location.
Choosing one’s hometown for personal reasons is not necessary illogical. In fact, there are certain
advantages. For one thing, the individual generally accepts and appreciates the atmosphere of the home
community, whether it is a small town or a large cite. From a practical standpoint of business, the
entrepreneur can more easily establish credit. The hometown banker can be dealt with more confidently,
and others business persons may be of great service in helping evaluate a given opportunity. If customers
come from the same locality, the prospective entrepreneur would probably have a better idea of their
tastes and peculiarities than an outsiders would have. Relatives and friends may also be one’s first
customers and may help to advertise one’s services. The establishment of a beauty shop in the home
community would illustrate a number of these advantages.
Personal prefences, however, should not be allowed to cancel out location weaknesses even
though such preferences may logically be a primary factor. Just because an individual has always lived in a
town does not automatically make it satisfactory business location.
Environmental conditions:
 A small business must operate within the environmental condition of its locations. These conditions
can hinder or promote success. For example, weather is an environmental factors that has traditionally
influenced locations decisions. One business owner justifies his preference of the southern coastal state by
saying “You can swim in December“, pick oranges virtually year-round, and go to the beach on your lunch
hour”. Other environmental conditions, such as competition, laws, and public attitudes, to name a few, are
all part of the business environment. The time to evaluate all theses environmental conditions is prior to
make a location decision.
Resource Availability:
Resources associated with location site are on important factor to consider when selecting a
location. Land, water supply, labor, supply, and waste disposal are just a few of the site related factors that
have a bearing on location costs.
Raw materials and labor supply are particularly critical consideration to the location of a
manufacturing business. A wholesale business is also dependent on a convenient location to receive the
goods for redistribution to its customers. However, personal preferences or environmental conditions may
exert a stronger influence on the final location decision thus sacrifice some resource advantage.
Customer accessibility:
Sometimes the foremost consideration in selecting a location is customer accessibility. Retail
outlets and service firms are typical examples of business that must be located conveniently to customer.

TYPES OF LOCATIONS
1. Downtown locations - may be on the main streets, on side streets and in non-retail building.
2. Shopping Centers - clusters of stores and service establishment each independently owned and
operated.
3. Highway location - free of mechandising restrictions price restaurants, and coercion for group
efforts founds in integrated shopping centers.

THE RETAIL LOCATION

In retailing the major location problems of the small businessman center around the selection of
the best site.
Important factor to consider include income levels, buying habits and preferences of the customers,
and the character of existing stores.
Probably in no other field of business is the best site as important a factor in determining the
success of a business as it is retailing. Some studies have found poor location to be among the chief causes
of retail failures.
The factors are usually of maximum importance in retail site selection:
1. Environment - a retail store, like an individual, should keep the right company. Under the broad
term environment come to the subject of “affinities” competition and unfavorable conditions.
Certain kinds of stores do well when located close to each other.
2. Accessibility - for the small retailer accessibility is mainly a question of the ease with which
customers can reach the store. A site with the big volume of pedestrian traffic including his
potential customers would be ideal except that the rent might be beyond his means.
3. Store Building - Most retailers rent rather than construct the store building.
 4. Rent and terms of the lease - two types of lease agreement are used in retailing - the flat rate and
percentage rate under the flat rate plan an annual retail of the definite amount payable monthly in
advance is stipulated in the lease. The percentage lease usually guarantee the landlord a minimum
monthly rental based at some pencentage of sales or, agreed upon by both parties.

SELECTING THE WHOLESALE SITE

For this type of business a site near other wholesalers in order to obtain the “shopping center
advantages” with moderate parking facilities for customer's cars is desirable.
The wholesaler maintains a show room with displays form which visiting buyers make their
selections. The goods maybe taken the buyer of delivered later by the wholesaler.

FINANCING SMALL BUSINESS

In putting up a small business the capital needed should be determined as accurately as possible. So
try to ask yourself.l - How much capital is needed to put up this kind of business? One of the chief causes of
business closures is the failure to determine the financial requirements of the business. Determine the
initial capital requirements - how much money is needed for land building, wages, rent, tools and
equipment, raw materials, purchase of merchandise, transportation advertisement and other operating
expenses. Get the total amount. How will the business be financed? Do you have sufficient funds? Will you
borrow from someone?
Finding money to finance your small business can be a great challenge. You might look to the
traditional avenues such as using personal funds, tapping the resources of the family and friends, or even
relying on partners for financial backing. In the mind- 1960's, another approach of finding capital has
emerged - one of that requires a Feasibility study.

TYPES OF CAPITAL
Every business needs capital in order to begin and maintain operations. Basically, these are four
types of capital:
1. Short – term loans
2. Intermediate – term loans
3. Long – term loans
4. Equity capital
Short – term Loans
A short-term loans are one that is scheduled to be repaid with in a period of 1 year. The most
common forms of short-term loans are trade credit, which is created when the sellers allows the buyer sot
take the merchandise immediately and pay for it later, and short-term bank loans. These types of short-
term loans are particularly helpful when there is a temporary need for more capital, as in the case of a
retailer who builds up a seasonal inventory and once it is sold, is able to repay an outstanding debts.
Intermediate – term Loans
Intermediate-term loans provide capital periods from 1-10 years. Such loans are usually paid back
in a series of installments.
 These intermediate-term loans fill the gap in the financial requirements of many small and
moderate-sized businesses. They make capital available for other than temporary needs, helping owner
who needs funds to expand the operation who does not have capital resources. Thanks to this type of loan,
owners are able to purchase machinery equipment, and other fixed assets immediately and pay for them
over the life of the loan.
Long – term Loans
Long-term loans have a duration of 10 or more years. The only businesses that can get loans of this
duration are these that have been in existence for an extended period or time. This, they are usually
reserved for large, stable corporations. Additionally, it is common to find the lender insisting on collateral.
When collateral is given in the form of mortage, however, long-term loans can also be secured by small
and intermediate-sized businesses. After all, if the business goes bankrupt, the bank can always step in,
take the property, and sell it, thereby recovering at least part of the loan. Aside from this method of
securing long-term funds, however, the small business must often turn to equity capital to meets its needs.
Equity Capital
Equity capital is not a loan in the strict sense of the word. It is an investment in the business and
their is nor promise on the part of the firm to repay this capital.

SOURCES OF CAPITAL
Choosing a source of capital is not an easy decision. There are numerous alternatives, depending
not he business, its credit rating, prior sales record, and the economy in general. The following sections
examine some of the major sources of capital that are available to a small business firm and their relative
merits and draw-backs.
Finally, in just about every community in the country there are people with idle funds to invest in a
worthwhile venture. If the small business owner does not personally know these people, his or her
accountant or banker might be able to put them in touch with someone in this category.
Many types of loan service are offered by banks. Some of the most common are straight
commercial loans and terms loans.
Straight Commercial Loans
These loans are usually made for a period of from 30-90 days. They are generally based on the
financial statements of borrower and are self-liquidating. It is common to find these loans being used for
seasonal financing and of building up inventories.
Term Loans
Term loans have a maturity of between 1 and 10 years. Most of a short-term nature (1-4 years) and
are often not secured by collateral. Longer term loans, however, are generally backed by some of firms
assets. In either event, small loan repayments are made through out the life of the loan every month,
quarter, 6 months, or annually. Depending on the specific terms of the agreement, it is common to find
large payment being made at the end the loan. This is often referred to us a balloon loan, in which case the
periodic repayments are rather small with the large. Bulk of the loan paid off at the end of the term.
This, of course, can be very beneficial to a small business because it means that on a loan of
P25,000 for 5 years, perhaps as much as P20,000 need be paid only at the end. This gives the company
time to build up its business before having to make the large, final payments.
Internal Funds
One of the most basic sources of capital, often overlooked by small business people, is internal
funds. These are monies that have been kept in the firm in the form of retained earnings. Of course, few
business people forget what they have earned in profits the previous year an reinvested in the business;
but many of them fail to consider that what they will make this year can be invested in the business to help
meet expansion needs. Instead they rushed outside looking for bank loans. The first place to look for
funding is internally. With careful budgeting, many small firms can raised part or all of the money they
need.

Trade Credit
Another commonly neglected source of capital is trade credit. In effect, suppliers can be used to
help finance operations. For example, in most credit transactions there are terms of 30, 60, or 90 days. The
most common trade credit terms are 2/10, net 30, pronounced “two ten, net thirty”. The terms mean that
if the buyers pays the bill within 10 days there is a 2% discount. However, regardless of the buyer's position
on payments schedules, the entire bills must be paid within 30 days.

Equity Sources
Another way to raise capital is through equity sources - one of the most preferable methods of
obtaining permanent capital. In tapping this sources, the small business owners should first look at his or
her
own financial resources. Are there any personal funds that could be invested in the business? Some small
business owners find that they have cash surrender value in their life insurance policies that they can
invest in the business. Or they have some property against which they can borrow money for use in the
company.

Next, the owner should go to personal friends who might be interested in investing in the business.
Tempering one's efforts in this area with the cliché “don't mix business and friendship”, the owner can
examine this avenue of investment.

CAPITAL REQUIREMENTS FOR THE SMALL MERCHANDISING BUSINESS

The smaller the capital, the greater the risk might be the axiom of small business.
The man who begins on a small personal investment is working against many obstacles, including
these:
1. He will be unable to afford many employees, he must run the store alone. His duties will include
all store work, everything from sweeping to keeping the store's records. This means long hours and little
opportunities to leave the store.
2. He will operate against stiff completion. Customers credit may be a problem that requires careful
handling. The added capital required for a credit business may deprive him of funds needed to pay for new
goods already bought on credit.
3. The smaller store cannot afford to invest much in fixtures for this money is taken out of essential
working capital. Two thousand pesos spent for an unnecessary showcase represents money that could
otherwise be invested and re-invested in goods, time after time, for profit.
A retailer store’s greatest investment is usually in its merchandise. The stocks of a retail store will
frequently represent a considerably greater investment than its fixtures and sometimes more than the rent
of its building space. Complete line of any kinds of goods call for a substantial investment. However, daily
cash receipts from customers permit circulating capital to flow back into the business constantly with no
long delays. In a retail store, wages and other overhead items do not represents as large an investment as
that in most manufacturing trades.
Capital requirements vary wildly according to the kind of merchandise handle, managerial ability
and trade connections of the merchant, location of the store attitude of the enterprise towards risk-taking
and many other factors in particular cases.