There’s a very common myth among Filipinos that if a business borrows money, it means that the business is failing. In reality, many businesses that get approved for loans are actually the most profitable! Think about it—banks and other lenders need to make money too. The only way they can do that is by lending to businesses that are making enough profit to pay back the loan, plus interest, with profit left for themselves.
Some of the fastest-growing businesses in the world use loans to improve their services, expand to new markets, negotiate better prices from their suppliers, and more. So why are Filipinos so against borrowing money? The simple answer is that most of them don’t understand loans and how they work. After all, how could they when it’s treated like such a shameful thing to talk about?
Today, we are going to try to make things a little bit clearer by setting the record straight on 3 of the most common misconceptions about business loans.
Lower interest rates are always better
When looking at loan offers, most business owners will immediately ask for the interest rate and go for the lowest one because they think it costs the least. Although the interest rate is important, it only shows a very small part of the bigger picture. It’s important to take the total cost of the loan into account aside from the interest you will be paying.
Most lenders will charge at least a few other fees including a processing fee, service fee, early repayment fee, and more. These can add up quickly and, in some cases, cost more than the interest on your loan.
It is also important to consider the terms of the arrangement and potential costs linked to those. For example, if you need to take a longer loan term in order to get a lower interest rate, then you are probably going to pay a larger peso amount in the long run. Another example is if you are offered lower interest rates in exchange for listing your house as collateral—is the risk of losing your house worth the decrease in interest? These are all important factors to consider when assessing the real cost of a loan.
You only need a business loan for big expenses
While business loans can definitely come in handy when purchasing new equipment, building a new office, or buying other big ticket items, it’s important to remember that they can also be used to solve smaller cash flow gaps that end up taking a big toll on your business. Missed opportunities, operational nightmares, and unhappy customers are just some of the things you could prevent if you had extra cash in your back pocket.
With products like First Circle’s Revolving Credit Line, taking out a loan doesn’t have to be a special-occasion only type of thing. Once you’ve set it up, you can get cash as soon as you need it, at a price that you already know beforehand, and with loan terms that you customize for your needs—it’s like having a credit card with a limit that’s proportional to your business!
Banks are the only “legit” loan providers
Banks do offer a lot of legitimate products, including business loans. But it’s no secret that traditional banking processes are often tedious and slow unless you’re a big client. Most people put up with it because they want to borrow from a trustworthy company, but the good news is that traditional banks are not the only trustworthy lenders out there!
First Circle, for example, is an official partner of the SEC and DTI in providing loans to help SMEs grow. You could even borrow straight from the government through projects like the DTI P3 CARES program. Even if you end up borrowing from a bank in the end, it doesn’t hurt to understand what options are available to you in the first place—information is key when making a decision as big as choosing the right lending partner for your business!