Whether you’re a seasoned business owner who wants to expand your business operations or an aspiring entrepreneur who wants to realize your entrepreneurial dreams, getting the right business loan you need is of absolute importance. Your ability to strategically use and take advantage of financial instruments such as loans and investments can spell the difference between being able to launch and grow a thriving enterprise and having a business concept that remains just that—an idea.
In the Philippines, access to funds is particularly important to the entrepreneurial landscape because difficulty in obtaining appropriate financing—along with the inability to maintain profitable business operations—is the main reason for the high business closure rate observed in the country. According to the Philippine Entrepreneurial Report of 2015-2016—organized by the 2015 Philippine GEM National Team and published by the De La Salle University—the Philippines registered the highest rate of business discontinuance among the member countries of the Association of Southeast Asian Nations, reaching 12.10% in 2015. In addition to this, the Philippines also registered the second-to-the-lowest rate of established business ownership at 7.25% during the same year (note: businesses that have been in existence for longer than 3.5 years are considered established businesses).
Despite these figures, the researchers have noted Filipinos’ generally optimistic attitude toward entrepreneurship. In terms of societal perceptions of entrepreneurship, 76% of the people surveyed expressed a high regard for business owners, while 73% viewed entrepreneurship positively as a career option. In terms of self-perception about entrepreneurship, close to 70% of the people surveyed also believed that they had what it takes to become entrepreneurs themselves.
These statistics can only mean that, given the chance and the right entrepreneurial framework conditions, Filipinos will be more than willing to seize the opportunity to do business. There are many such conditions that can influence entrepreneurial activity, not the least of which are proper education and training, ample support from the government, positive taxation and bureaucratic environment, access to appropriate professional and commercial services, quick research and development transfer, and efficient public infrastructure. However, access to financing still stands out as the most crucial among these entrepreneurial framework conditions, since the availability of financial resources can literally jumpstart entrepreneurial activity.
In this short guide, we’ll fill you in on some of the most popular sources of business loans that you yourself—whether as a longstanding entrepreneur or as someone who aspires to establish their own enterprise—can explore here in the Philippines.
Loan from Family and Friends
Borrowing money from family and friends remains to be one of the most popular ways to raise capital among established and aspiring business owners in the Philippines. According to the Philippine Entrepreneurial Report of 2015-2016, More than 77% of Filipino entrepreneurs sourced capital and investment from family, while more than 38% sourced money from friends.
If one were to think about it, getting a business loan from family and friends really is not only a feasible but also a convenient way for entrepreneurs to obtain the funding they need—and to obtain it fast. The process is usually much quicker and more effortless than getting money from traditional lenders, and one also has the option of offering equity—in the form of partial ownership of the business—in exchange for the money being given.
Just make sure that the terms of your loan and your equity arrangement is made clear right from the get go. It’s best to draft a legal document where all the details of the loan, the payment term, and the share of business ownership are laid out.
Pros:
- Borrowing money from a generous friend or family member does not require lengthy credit checks.
- You’ll likely enjoy a more liberal payment term and an interest rate that is not as high as those you’ll get from banks and other lenders.
- Friends and family are unlikely to ask for collateral when extending credit.
Cons:
- It’s possible to ruin your relationship with people who are close to you if your business fails and you’re not able to pay back the money you owe.
- You’re exposed to emotional abuse if you end up borrowing from the wrong person.
- Often done without a proper contract, which leaves room for misunderstandings
Ideal For: Borrowing money from family and friends is ideal for starting entrepreneurs who are likely to experience difficulty in obtaining financing from traditional credit sources
Pro Tip: Taking out a business loan from friends and family may sound like the most casual way of accessing funds, but it should be treated with as much seriousness as any other loan. Don’t forget to sign a contract, even if it is just between you and your parents..
Asset Liquidation
Another way to raise capital for your business is by liquidating assets that you don’t need anymore. In financial terms, liquidation simply means selling off property in order to convert them to cash. It’s a convenient and often easy way to raise money that you can then use for your business-related expenses, whether it’s to buy the equipment you need, to cover the payroll of your employees, to pay for office rent, to pay for the purchase of a commercial property, and many others. Anything you have that is of value and can be sold off to the open market as an asset. This can include things like jewelry, an expensive artwork, a car, or even real estate.
Pros
- The biggest advantage of selling assets is getting the money you need for your business immediately—and you won’t owe anyone anything.
- If you have assets that are dormant or not being used—or if they are actually costing you money to keep and maintain, then selling them off is a great way not only to earn money that you can use toward your business but also to get rid of potential money drains.
Cons
- Sale of some assets in the Philippines (e.g. real estate and precious metals) may incur the seller capital gains taxes.
Ideal For: Obtaining capital through liquidation of assets can benefit virtually all business owners. However, it’s probably not a good financing option if your capital requirements surpass your possible earnings from the liquidation.
Pro Tip: Assets that you can liquidate can often be used as collateral for a bank loan. Keep that in mind when selling your items and weigh out the two options.
Business Term Loans
Taking out a business term loan is one of the most popular ways of financing a business in the Philippines. This traditional loan is offered by all major banks in the country, although it is also offered by non-bank entities such as private lending companies and government agencies. Term loans can be used for a variety of purposes, whether you intend to use it as working capital, to invest in new equipment, or to finance your business expansion endeavors.
Fixed Interest Rate Term Loans vs. Variable Interest Rate Term Loans
In brief, a business term loan is a kind of loan where the borrower is given a lump sum amount that has a definite repayment schedule over a specific period of time. The borrower agrees to pay the lender back through regular repayments either at a fixed interest rate or at a variable interest rate. A loan with a fixed interest rate will have payments that have the same interest rate for the duration of the borrowing period, while a loan with a variable interest rate will have payments whose interest rates will fluctuate depending on the prevailing market rates.
Secured Term Loans vs Unsecured Term Loans
Taking out a business term loan typically requires a rigorous screening process, and this is true whether one is looking at obtaining a secured business term loan or an unsecured business term loan. A secured term loan will require the borrower to pledge a collateral, which serves as a security for the repayment of the loan. In the event that the borrower defaults on the loan, this security will be forfeited, allowing the creditor to get back the money owed. An unsecured business term loan, on the other hand, does not require collateral, and as such, a borrower’s creditworthiness and financial standing will be more scrutinized. Unsecured business loans also usually entail larger repayment amortizations and bigger interest rates compared to secure business loans.
Short-Term Loans vs Long-Term Loans
Finally, business term loans are available in a range of maturities, from less than a year to as long as 15 years or more. Short-term business loans are usually taken out for smaller amounts that borrowers can pay quickly but also have higher interest rates. Conversely, long-term business loans are available as a financing option to those who need larger amounts. However, it’s precisely because of the huge sums of money involved that lenders conduct a more stringent approval process for long-term business loans. However, such loans typically carry lower interest rates, and as their name suggests, the borrowing period can be a lot longer, allowing you to spread your payments over several years.
Pros:
- You can use a term loan for all business-related purposes.
- Flexible payment methods and loan terms are typically available to borrowers.
- You can take advantage of predictable repayment amounts and payment schedules.
- You’ll have access to larger amounts of cash.
Cons:
- You’ll likely go through a rigorous approval process.
- Collateral is usually required if lower interest rates are desired.
Ideal For: Term loans are ideal for established businesses of good financial standing.
Pro Tip: Despite the convenience of having a relationship manager in the bank/s you usually get financing services from, if your company has an existing business loan, it’s best to explore unsecured term loans that can finance you more quickly without having to secure another collateral for the loan.
Personal Loans
If you are a starting entrepreneur with little to no financial history and experience doing business, your chances of being approved for a small business loan will be slim to none. As such, your only option may be to take out a personal loan. A personal loan is a credit facility that is usually extended to individuals by banks, credit unions, and private lenders, which, like business term loans, are paid in repayments over a specified length of time.
While conventional wisdom states that it’s not at all wise to mix your business and personal finances, you don’t have to fear getting a personal loan to help your business hit the ground running. Because personal loans are lent to individuals, lenders will not be taking the financial shape of your business into account. It also won’t matter whether you’re using the money to fund an existing business or one that is still in the pipes. What the creditor will look at instead is your creditworthiness and your ability to pay the loan.
Of course, you’ll still have to meet certain eligibility requirements, but these normally wouldn’t be as stringent as those you’d expect to encounter when you’re applying for a business term loan
Pros:
- Taking out a personal loan is much easier than taking out a business term loan.
- Lenders make the decision to extend a personal loan not on how well your business is doing (which is useless if you don’t have an established business yet) but on personal factors such as your creditworthiness and your debt-to-income ratio.
- Most personal loans are unsecured and do not need collateral.
Cons:
- You can usually only borrow small amounts for personal loans. This doesn’t matter if you’re only starting out and you only need a small amount of money, but for larger capital requirements, you’re going to have to supplement your financing with something else.
- It will be hard to get a personal loan if you also don’t have a stellar personal finance record.
Ideal For: Personal loans are ideal for aspiring business owners or small business owners with limited financial history.
Pro Tip: Whether you get approved for a personal loan often depends on your credit history. In the Philippines, your credit history would mostly consist of information from your credit card statements or any other loans you have had in the past. Make sure you pay your bills on time.
Lines of Credit
Another type of business loan that banks and private lending institutions can extend to business owners is a line of credit. A line of credit is different from installment loans like a term loan because instead of being given a lump sum of money with a fixed repayment schedule and period, a borrower is provided with a predetermined borrowing limit—a fund that they can draw money from whenever they need cash. If you take out a line of credit, you will be able to access the fund at any time and at your own discretion, but you can’t withdraw an amount beyond your maximum credit limit. In this sense a line of credit is just like borrowing money using a credit card.
Revolving vs. Fixed (Non-Revolving) Line of Credit
Business owners who choose lines of credit as a source of financing usually have the option to take out a revolving line of credit or a fixed line of credit. Similar to a credit card, a revolving line of credit resets when the borrower pays the balance in full. Conversely, a fixed or non-revolving line of credit possesses all the features of a revolving line of credit, but the available credit will not reset after the payment is settled. The account is closed, and it cannot be used again.
Secured Lines of Credit vs. Unsecured Lines of Credit
Just like with term loans, a borrower also has the option of choosing between a secured line of credit and an unsecured line of credit. As you may already know, taking out an unsecured line of credit will not require a borrower to pledge assets as collateral, but they usually have to be creditworthy to qualify. As such, business owners who have clear-cut credit histories are more likely to get approved for this kind of loan. The credit limit to be extended by the creditor will also depend on a number of factors, including how long a business has been operating, how much the business earns, and how much it spends, among many others.
Pros:
- Available funds from a line of credit can be withdrawn at any time and can be used at your own discretion.
- You can borrow only the money you need.
- You’ll only incur interest on the amount you borrowed.
- Lines of credit typically have a lower annual percentage rate of charge than credit cards.
- You have the option of pledging collateral to take advantage of lower interest rates.
Cons:
- Taking out a line of credit often requires good credit history for a borrower to qualify.
- There is some interest rate risk, as lines of credit typically have variable interest rates.
- Approvals for lines of credit are about as long as those for term loans.
- The easy access to cash can entice you to spend more than you need to.
- Lines of credit are not ideal for long-term cash deficits.
Ideal For: Lines of credit are best for established businesses that periodically require access to a reliable source of funds, or those that usually experience short-term cash shortfalls.
Pro Tip: Maintain a good repayment behaviour when taking a lines of credit loan. It’s easy to get caught up in the convenience of having regular loans to fix cash flow problems, but try building on a business piggy bank whenever you can to keep a healthy cash flow and reduce taking out more loans in the future.
(Business) Credit Cards
A business credit card is another great financial tool that you can tap, particularly if you need to consistently borrow smaller amounts of money for your day-to-day business expenses. Having a business credit card is also very useful in terms of helping you better manage and keep track of your business-related outlays. Having one allows you to easily draw the line between your personal and business expenses.
Business credit cards work just like regular credit cards in that they act as a revolving credit facility, letting you withdraw cash within a predetermined credit limit each billing cycle. Once you pay the balance, the funds available to you resets. Business credit cards in the Philippines also often come with a number of perks, from travel insurance, rewards, and rebates to airline miles, access to specialized expense management systems, and annual fee waivers.
Pros:
- Having a business credit card is great for streamlining accounting in your company by way of eliminating tedious reimbursement and claims procedures.
- You’ll be able to take advantage of rewards that can help your company save even more money in the long run.
- A business credit card can afford you an emergency line of credit, providing a financial safety net if your business does not have enough money to foot the bill on certain days.
- Carrying credit cards is likely safer for your employees than carrying cash.
Cons:
- Business credit cards usually have higher interest rates compared to other revolving credit facilities. Moreover, 0% interest rate introductory perks usually only last for a year after you get the card.
- The risk of incurring credit history damage is there if you miss your credit card payments.
- There is also the ever-present risk of credit card fraud if your employees are not careful when it comes to using company-issued cards.
Ideal For: Business credit cards are useful for virtually all types of businesses.
Pro Tip: Corporate or Business credit cards aren’t easy to get. It might be worthwhile checking if you can get a personal credit card first and if you can increase your credit limit.
Invoice Financing
Taking out a term loan may be ideal for gaining access to huge sums of money, but what if you have a shortfall in capital that needs a quick resolution? Perhaps you need it to cover employee payroll, to pay for supplies, or to replace equipment that has broken down due to old age. The amount of money you need might not be as big, but if you need it quickly, then a term loan—whose approval will likely move at a glacial pace—will not be ideal for your situation.
For capital gaps that require immediate financial intervention, you may want to consider invoice financing instead. As the name implies, invoice financing is a method of financing wherein you will be required to submit your invoices or accounts receivable to the lender, allowing you to advance cash against future invoice payments.
An invoice is an official document that is typically issued by B2B businesses to customers after a product or service has been delivered. It serves as a bill or statement of the amount that is still due to be paid after a specified timeline. In short, an invoice is a commitment to pay the supplier, which in this case is your business. By submitting your invoices, you’re only advancing money that the lender knows your customers will be paying you in the immediate future, which essentially lessens the risk of default. As such, this also makes the approval for invoice financing faster compared to how traditional loans are processed.
Pros:
- Invoice financing is a more flexible type of financing than traditional loans.
- The decision to lend against pending invoices, which will be settled in the near future, is often an easy one to make for creditors, making the application process faster. At First Circle, for example, you can expect the money to be transferred to your account in as little as 5 days.
- Invoice financing allows you to quickly solve cash flow emergencies
- Invoice financing also gives you the ability to better balance your incoming cash with your business expenses.
Cons:
- Naturally, invoice financing requires invoices as proof of your ability to pay the money, so this method of financing is not suitable for your business if you don’t issue invoices to your customers.
Ideal For: Invoice financing is ideal for B2B enterprises with long billing cycles.
Pro tip: Take advantage of the speed invoice financing can give you by preparing all the documents needed and ensuring they follow the written guidelines so as not to waste time re-submitting documents.
Learn More about First Circle’s Invoice Financing Facility.
Purchase Order Financing
Purchase order financing is another type of business loan that B2B business owners in particular can explore as an option in the Philippines. Unlike invoice financing, which advances cash against future invoice payments, purchase order financing actually makes funds available to you even before you invoice your customers. To get the money, you simply have to submit your purchase order to the lender, who will then decide whether or not to extend credit to you.
Purchase order financing helps B2B businesses seize opportunities for growth by helping them cover the cost of doing business. Say your business is a store that sells bags, and a client places an order for a large number of leather bags that you can’t otherwise deliver without additional capital. With help from purchase order financing, you’ll be able to pay your suppliers, and they can then proceed to manufacturing the needed goods for you. Indeed, with this type of financing, you’ll be able to commit to more client orders than what you can afford with your current capital.
Pros:
- Purchase order financing allows you take advantage of opportunities when your current cash flow wouldn’t allow for it otherwise.
- As with invoice financing, purchase order financing has fewer restrictive requirements compared to traditional loans. At First Circle, in particular, you can expect the funds to be disbursed in as little as 5 days.
Cons:
- Purchase order financing is only available to businesses that sell or deliver physical products. If your business is a service-based one, you’ll have to look for funding elsewhere.
Ideal For: Purchase order financing is an ideal financing solution for B2B businesses that need to purchase goods from suppliers in order to fulfill large customer orders.
Pro tip: First to get purchase order (PO) financing are usually businesses that are B2B and B2G (Business to Government) or those with well-respected or long-standing customers. Companies that lack assets and a good credit score would usually still have to qualify for traditional financing options so be sure to take care of your credit rating.
Learn More about First Circle’s Purchase Order Financing Facility
Domestic Bills Purchase Lines
Another finance facility that established and aspiring business owners can take advantage of is a domestic bills purchase line. With this financing solution, a business receives the necessary funding by selling their customers’ dated checks or sales bills to the lender. The lender liquidates the deposited checks and then advances the money to the business so that it can be used for business-critical and day-to-day expenses.
A domestic bills purchase line can be especially beneficial for your business if it usually takes a long time for your clients’ payments to be credited to your account. By making the funds from the receivables immediately available to you, you’ll be able to replenish your daily working capital with ease.
Pros:
- Taking advantage of a domestic bills purchase line allows you to quickly liquidate your customers’ dated checks fast.
- Being able to get the money in advance will allow you to better manage the cash flow of your business.
Cons:
- The requirements for taking out a domestic bills purchase lines are usually extensive.
Ideal For: A domestic bills purchase line is best for enterprises that receive a lot of post-dated checks, which they need to wait for to clear.
Export Bills Purchase Lines
Similar to the preceding three finance facilities, an export bills purchase line advances payment to a business, which, in this case, is an exporter of goods. The lender buys the company’s export documents, and it will then pay the face value of the export proceeds even before the importer(s) makes the actual payment.
Essentially, this also means that you’ll be better able to fill capital gaps that may occur between the shipment of your goods and the actual payment of your goods by the customers that import them.
Pros:
- With an export bills purchase line, you’ll be able to shorten the turnaround time for receiving the proceeds from your exports.
- Borrowers typically enjoy a significant margin of financing, covering as much as 100% of the value of the exports.
Cons:
- An export bills purchase line is only available to businesses that engage in the export of goods.
Ideal For: An export bills purchase line is ideal for B2B export businesses that desire to accelerate their capital turnover. These are companies that usually have to wait a long time to get paid by importers.
Peer-to-Peer Lending
Peer-to-peer lending, otherwise known as P2P lending or crowd lending, is a way of obtaining credit by tapping a pool of money that individual investors or members combine together. Here in the Philippines, peer-to-peer lending is typically offered by companies or online fintech platforms that facilitate the process.
When you take out a loan through peer-to-peer lending, you are essentially eliminating the bank, credit union, or some other financial institution from the equation. The setup is almost like that of a mutual fund, but instead of investing the money in stocks or in corporate and government debt instruments, it is instead lent directly to other individuals, who can then use it as additional capital for their business. Those who pool their money into the fund, on the other hand, earn through the interests paid by those who borrow cash.
Pros:
- The interest rates of loans offered by peer-to-peer lending companies or platforms are very competitive, and they’re often lower than those offered by banks and other financial institutions.
- Compared to obtaining traditional term loans, getting approved for a P2P loan is usually a process that is faster and more straightforward.
- Creditworthiness still matters when you go the P2P route, but the requirements of P2P lending companies are usually not as stringent as those of banks.
Cons:
- The risk of default is virtually borne by the lenders in a P2P pool, but as for borrowers, the same disadvantages of having to pass credit checks and paying fees still apply when they are borrowing from a P2P lending company.
Ideal For: Peer-to-peer lending is a great choice even for small business owners that may not have a lot of credit history or who—for one reason or another—may not be ideal candidates for traditional types of loans.
Pro tip: Note that just like other loan types, your loan rate can vary based on your credit history or credit rating. Those with a better rating or history would be more eligible to take out a P2P loan so look for documents that can help strengthen your credit history/ rating.
Equity Crowdfunding
Crowdfunding is defined as the process of raising money from the contributions of a large number of people. Often, the word is used within the context of charitable causes and raising capital for passion projects, as is the case when people support entries on tech platforms such as GoFundMe and Kickstarter. Unlike rewards-based crowdfunding, however, investors in equity crowdfunding are given a stake in the company.
Crowdfunding is essentially how stock exchanges work. Publicly listed companies raise business capital from the public by selling equities or shares of stocks. However, most businesses in the Philippines would never have the chance of being listed on the Philippine Stock Exchange, considering an enterprise has to have several hundred million pesos’ worth of capital stock in order to be publicly listed.
As such, small business owners consider options like peer-to-peer lending and investment crowdfunding. A common differentiator between the two is that with peer-to-peer lending, people will be lending you money in exchange for interest payments, whereas with investment crowdfunding, people will be buying shares of equity from your company.
Recently, the Securities and Exchange Commission (SEC) approved the set of rules and regulations for investment crowdfunding initiatives in the Philippines. With the guidelines in place, smaller business ventures and startups can now hope to obtain easier access to finance while safeguarding the rights of individual investors.
Pros:
- If you have a very good business idea, there’s a good chance that you’ll pique the interest of a good number of investors. It can be quite easy to raise the fund you need within a regulated environment.
- With the new rules set up by the SEC, equity crowdfunding is now a more transparent process in the Philippines, inspiring confidence among both investors and business owners.
Cons:
- Naturally, if you’re giving investors shares of equity of your company, you’ll be answerable to these individuals in the long run.
Ideal For: Equity crowdfunding is ideal for startups or those that belong in industries that are a special focus of particular crowdfunding platforms. In the Philippines, for example, there are quite a few crowdfunding platforms that support agricultural enterprises.
Pro tip: Building your brand is an important step before deciding to go out to get crowdfunding. Investors or funders need to be compelled by your brand’s values and narrative before trusting you with their hard-earned cash. This type of financing is also about marketing your brand and building a following before you can create a successful crowdfunding campaign.
Getting the business loan you need for your business can be challenging, but securing it to be able to grow an enterprise that is essentially your brainchild and the fruit of your passion and hard work will definitely make everything worth the while.
Need a business loan today? Apply for one with First Circle by clicking here.
