Startup funding for small businesses in Vietnam
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SMEs have been developing so fast in Vietnam in recent years of the supportive policies from the government. According to the report from Bao Chinh Phu, in 2022 we have 125.800 newly opened companies, which have been hugely contributing to the GDP of Vietnam.
However, some of these companies didn’t know how to raise appropriate capital to support their business and had to close after a period of operation due to a lack of capital.
So how do receive startup funding for small businesses? Here are some answers to this.
Startup funding for small businesses
Before the seed and pre-seed rounds, a small business must overcome the hardest period of the startup life is “exists” (that often happens in 3 or 4 beginning years of a startup’s life).
At that time, the startup needs small capital (around $20.000 to $50.000) to continue running the new company and covering at least 6 months of operation.
Where does startup funding come from and how small businesses can overcome this hardest time?
Where does startup funding come from?
*The number and types of funding options can be overwhelming for a new startup. Understanding the types of startup funding can help you understand what's out there and how it aligns with your company's goals, so let’s cover that next.*
It has 6 types of startup funding including self-funding, crowdfunding, loans, grants, private equity firms, incubators and accelerators.
However, in the first step of a startup’s life, most of the founders choose self-funding and loans for running their business.
Self-funding for startup
Self-funding is used by most of the startups in Vietnam. Most Vietnamese owners don’t like to borrow money outside for fear of trouble, so they choose the safe solution “going to work for maybe 5-10 years to accumulate money and experience and then opening their businesses”.
Some other ways of self-funding for a startup that the business’s owners:
- Lending capital from families and friends or using personal savings to run companies.
This solution is also called bootstrapping. With this solution, owners can receive a small capital and maybe continue going to work for running their businesses.
During that period, business owners will face 2 situations:
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- The first one is if the startups succeed and can go to the next steps of growth, they will get compliments from everyone.
- The second is that if the startups fail, the founders lose their savings or that of their families and friends.
- Using credit cards is also one self-funding solution for startups.
Credit cards also can help the founders to have a small capital in the first step of startup growth. However, when founders want to use this way to have a budget, they need to be careful with the interest rate of the cards that they use.
If the interest rates, penalties, and payments of cards are higher than the interest rate of their companies, they shouldn't use this method.
- Barter is one of the choices.
*Bartering can be a useful way to finance big purchases like furniture, phones, or advertising for your startup. Startups that use bartering offer a useful product or service in return. This can save operating funds and expand your network.*
- Customer Commitment
If founders are popular people like KOL/KOC, superstars, etc. they can have the customer's trust for the first time in the startup’s life. In this situation, the customer's payments alone can fund the startup at the beginning.
It could be seen in Vietnam many superstars open their restaurants, some of them are successful, some of them fail because of their reputation as opposed to the product they sell.
Loans for startups
- Bank loans
If the owners have the assets as mortgages, they can think about this solution for the beginning of the startup’s life. With this solution, they must be sure they can afford it, if not, they will lose their assets and bad debt affects their credit score.
- State support loans
In Vietnam, the startup is a revolution that many people want to accede to. They all have a dream to become unicorn startups.
Understanding this demand, in 2019, the Vietnamese government declared Decree 39/2019/ND-CP with the notable content as follows
*First, innovative start-up SMEs may borrow capital from the Fund with the following conditions:
(1) There must be feasible projects and plans for production and business, and exploitation of the types of the intellectual property specified in Clause 1 of this Article. Law on Intellectual Property or new technology as prescribed in Law on Technology Transfer or new business model as prescribed by law.
(2) Ensure that the equity capital involved in the project, production and business plan is at least 20% of the total investment capital for the implementation of the project, production and business plan and must ensure sufficient capital. to implement production and business projects and plans;
(3) Satisfy the regulations on loan security as prescribed in the Decree.
Second, the direct lending interest rate for SMEs is 80% of the lowest commercial lending interest rate. The lowest commercial lending interest rate is determined based on comparing the lending interest rates of 04 state-owned commercial banks and having the largest total assets at the time of determining the Fund's lending interest rates.
Third, the maximum loan limit for each production and business project or plan shall not exceed 80% of the total investment capital of each project or plan. The Fund's total lending to an SME must not exceed 15% of the Fund's actual charter capital. The loan term is determined by the enterprise's ability to recover capital, repayment capacity and specific conditions of each project, production and business plan, but not exceeding seven (07) years.
Fourthly, SMEs can be financed up to 1 billion VND for investment items to build factories, purchase machinery and equipment for the project, production and business plans of SMEs when meeting the loan conditions. capital as prescribed in the Decree.
In general, the introduction of Decree 39/2019/ND-CP is an important bridge to help SMEs get closer to credit capital, creating the necessary motivation for businesses to develop and increase competitiveness.*
*Sourced by the Vietnamese law library
- Participating in the program for startups
In Vietnam, we have many programs which are organized annually to welcome startups to the startup community.
In these programs, angel investors will take part in and make investment decisions for the businesses they feel are most worthy of investment. One of these programs is Startup Wheel in Ho Chi Minh City.
The above information is about how small businesses can overcome startup funding. FinFan hopes with these details, startup owners can choose the best way for them to be firmly on the path to becoming a unicorn.