Online Lending vs. Banks: A Guide to Business Loans in the Philippines
Running a business poses a lot of questions that need to be answered and decisions that beg to be made. From getting more clients to deliver the best product or service to keeping your operations running smoothly and efficiently, it’s difficult to consistently make sound choices for your company.
One of the toughest decisions a business owner would encounter is during times when working capital is negative, which signals a bottleneck to business sustainability and growth. To get you out of that tight spot, the first step involves choosing which source of financing would fit your business. Should you apply for a loan in a bank or to an online lending company?
Determining which option to go for will greatly affect your financial stability as a business and that is why it is important to make a wise and informed decision. Below are comparisons between banks and online lending companies to help you arrive at the best option for your business.
One of the main differences between a bank and an online lending company is the collateral requirement. Banks typically ask for a collateral which can be any valuable property you might have – land, house, office building, equipment, etc. Even though some banks have recently launched their own non-collateral loan products, these usually come with more stringent requirements and might also require you to have a guarantor to co-sign your loan contract.
Meanwhile, online lending companies offer loans which are completely collateral-free. This allows businesses with limited properties for collateral to still get access to a loan. If you only have a few properties or you simply do not want to put your property on collateral, looking to online lending companies as another legitimate source, might be the best for your business.
Most banks offer a minimum loan amount of Php1 million up to a maximum of around Php15-20 million.
On the other hand, online lending companies usually give a maximum loan of up to Php10 million. However, they mostly vary on the minimum amount that they require. An example would be First Circle which has no minimum amount and solely bases on how much you need at the moment while other online lending companies require a minimum amount of around Php50,000 to Php100,000 for the loan.
Loan duration and payment scheme
If your business needs a loan for a longer period, like a year or more, it would be more appropriate to take a loan out from a bank. Banks typically offer short- to medium-term loans which last for a minimum of 1 year to a maximum of 3 years. This entails monthly interest payments with the principal payment at the end. For some banks, they have an amortising payment scheme where they apply your monthly payments to cover both the interest and the principal.
However, if your business only needs a loan for a few months, you may try online lending companies. They offer short-term loans with a duration of 2 weeks to 1 year. Some offer a bullet payment scheme where you only pay the principal and interest at the end of your loan duration. Some offer a payment scheme of bi-weekly or monthly payments in interest and principal.
Online lending is better for shorter loan durations as banks typically charge a fee for an early repayment or termination of the loan. Thus, if you plan to only have your loan run for a few months, it will be best to apply for online lending. These companies, like First Circle, also usually do not charge for early repayments and allow their clients more flexibility in paying out their loan.
Application process / How to apply
To apply for a loan in a bank, you first need to go to the branch nearest you or call the one who is handling your bank deposit account and tell them your intention to take a loan. Banks typically have Relationship Managers or Account Managers in their branches who will handle the processing of your loan application. They will give you an application form and ask about the nature of your need so that they can gauge how much and how long your loan should be.
It usually takes two to three months for a bank to approve a loan and set up the credit line for a business. Within this period, the relationship manager would meet with you to collect the documents, help you comply with the necessary requirements, and assess the credit standing and the risk of lending to your business.
On the other hand, applying for an online loan from an online lending company is as easy as Googling the firm you had in mind or simply searching “online lending Philippines,” for example, which will lead you to their website. The entire application process can be done online. This includes filling out the application form, uploading necessary documents, getting your loan approved, and getting a notification of your loan disbursement. They also have relationship managers and customer support teams who will handle your application and guide you throughout the process.
One benefit of online lending companies over banks is that they can process and approve a loan in as fast as three to seven business days. After this time, you can already access the funds which they will send to your bank account. In case your need is urgent and you already need the funds within a short amount of time, a loan application to an online lending company is the way to go.
Business and Documentary Requirements
Banks require a business to be in operations for a minimum of two to three years with one year of profitable operations. Online lending companies typically do not have this requirement or at the very least will ask for a minimum of one year in operations.
In terms of documentary requirements, banks usually ask for the original or hard copies of all the documents needed for your loan application. Meanwhile, most online lending companies only need you to upload a picture or scanned copy of your documents. Below are the typical documentary requirements required by banks and online lending companies:
*The list includes the most common minimum requirements. Some banks and online lending companies may or may not ask for other additional documents not on this list.
Interest rates and fees
Another major difference between banks and online lending companies are the interest rates and fees. Banks would normally have lower interest rates ranging from ~0.50% to 1.5% per month. This is because they would have access to cheaper sources of funds (i.e. deposits from customers) and maintain their risk at a lower level given the collateral on the loan.
Online lending companies tend to have higher interest rates given the nature of their source of funding (i.e. local or international investors). Interest rates normally range from ~1.99% to 4% per month. This is also because they take on a higher level of risk since they do not ask for a collateral on the loan.
When it comes to processing fees, banks charge around 0.75% of the loan amount while online lending companies charge around 1.99% of the loan amount.
In both types of lenders, there might be other charges or fees which could be included in your loan. These fees might not be always clearly communicated to you by the bank or by the online lending company. This is why it is important to ask your Relationship Manager or customer support about the fees and charges aside from the interest rate. For banks, they normally provide a schedule of payments for the whole duration of the loan. On the other hand, most online lending companies publish their fees and charges on their website to ensure transparency with their customers.
It is only but natural to opt for a lower interest rate in choosing which lending institution to take out a loan from. This is why most businesses, if they could and if they qualify, go to a bank for financing. However, most of the time, the bank can only give up to a certain loan amount and it still would not be sufficient to cover your business’ working capital needs.
This is where most online lending companies step in to fill the gap experienced by businesses in the Philippines, especially Small and Medium Enterprises (SMEs), in terms of getting access to financing.
Legitimacy and regulation
In terms of legitimacy, you can always be assured of banks because all banks are regulated by the Bangko Sentral ng Pilipinas (BSP). A bank could not operate within the Philippines if it does not comply with the rules and policies of the BSP. Rest in the knowledge that the bank you are lending from has implemented secure data policies and credit check policies in its loan application process.
Online lending companies, on the other hand, are not regulated by the BSP. Instead, they are registered with the Securities and Exchange Commission (SEC) and must be given the authority to operate as a financing company to be able to offer loans to businesses. They are also put under the careful watch of authorities although they are not as heavily regulated as banks.
Online lending companies also invest heavily in securing their technology and the information that they collect online. Since everything is done online, they ensure that the data they capture is secure and that they comply with the Data Privacy Act imposed by the National Privacy Commission (NPC) on institutions.
It is important to assess whether the online lending company you are getting a loan from is legitimate. They normally publish the relevant business documents and authorizations, which are issued to them by the SEC to show their legitimacy, on their website. If an online lending company does not have this on their website, it is important to double check from other sources such as the SEC website itself or to ask around other business owners you might know. You may also search online and look for articles from reliable sources showing a list of the top legitimate online lending companies in the Philippines.
To summarise, here is a table showing side-by-side comparisons of banks and online lending companies.
As technology and innovation rapidly progresses by the day, it is extremely imperative to be informed about the different products and services your business can avail of to help keep it running smoothly. Knowing the difference between the benefits of banks and online lending companies will enable you as a business owner to determine which type of lender to go to in times of need for working capital finance.