4 tips that can lower your business loan interest rate

Business Growth
April 30, 2024

Business loans in the Philippines are a varied bunch. You’ll find that every legitimate financing source has something different to offer in terms of loan amount, processing speed, and customer service. The great equalizer, therefore, is interest rate, which determines how affordable your business loan is going to be.

Interest rate is the amount that loan companies charge in exchange for giving you immediate access to funds. Providers use different terms to describe their interest rates, but in general, a lower interest rate means that a small and medium enterprise (SME) will pay less for taking out an SME loan.

What can you do to lower business loan interest rates?

There are many factors affecting your SME loan’s final interest rate: your chosen lender, your type of loan, loan terms, processing fees, the collateral you are willing to provide. In addition, external factors such as government policies and economic changes can also make an impact – especially if you are borrowing during a high-inflation period.

The biggest factor you have control over, however, is your company’s capacity to pay. Legitimate lenders will look at your length of operations, annual revenues, and other financial records to determine this, as well as you and your business partners’ personal finances.

If lenders are consistently quoting high interest rates on your business loan offers, your business financials may be painting you as a high-risk borrower. This is because the higher your risk of non-repayment, the higher your interest rate will be. So aside from improving your company’s financial performance – which is the goal of all SME owners anyway – here are other things you can do to get more affordable business loans in the Philippines.

#1. Change your loan requirements

Restructuring your loan requirements is a good way to lower your SME loan interest rate.

If you need project funding now, the easiest way to get a better interest rate is to ‘restructure’ your business loan requirements. You can do the following in order:

  1. Shop for alternative funding sources
  2. Shorten your preferred loan term
  3. Reduce the loan amount you are borrowing
  4. Change your loan type – collateral loans have a lower interest rate, but since you are putting up an asset, you are also taking on higher risk in case you miss repayments.

Shopping for alternative funding sources is the first step because with so many SME loans in the Philippines, you can also get wildly-differing rates depending on the sector you approach. For instance, independent lenders are the best to borrow from during high-inflation periods. This is because unlike banks, independent financing sources do not borrow capital from the Bangko Sentral ng Pilipinas (BSP), and are therefore not affected whenever the BSP raises its lending interest rates in order to control inflation. 

An example of this is fintech company First Circle, which declared that they are maintaining their pre-inflation interest rates of as low as 0.99% per month for the duration of 2022. The announcement goes for both their new and existing clients. While other independent lenders have not made similar announcements, businesses can take this piece of information and use it to negotiate for more favorable business loan pricing with other lenders.

#2. Take care of your credit history

Financing sources check your business and personal credit history when you apply for a business loan.

For the long-term, work on making your business more attractive to lenders. There are many ways to do this, but the most important is taking care of your credit history. 

The first thing lenders do for new applications is to run a credit check on the company’s owners and partners. The Credit Information Corporation is the centralized source of credit information for Filipinos, but some lenders have more sophisticated underwriting processes that can catch even the slightest sign of financial instability. Any pending loan obligations and financial discrepancies will be counted against your ability to repay on time. 

So pay down any existing personal loans and SME loans, and ask your business partners to do the same. In addition, keep your daily bank balances on business and personal accounts as high as possible; this reinforces your financial capacity.

#3. Show consistency in your business cash flow

Legitimate lenders request company bank statements, tax returns, cash flow projections, and audited financial statements for this very reason. Your cash flow doesn’t need to be positive – in fact, cash flow gaps are one of the most common reasons why SMEs take out business loans – but unexplainable consistencies will raise red flags. If you have too many negative-balance days, irregular income, and huge losses or gains, your business loan application may even be denied. 

This is also why businesses in industries with inconsistent cash flow, such as the restaurant industry and property development, have a harder time getting loans. Even if they can show a high annual income, an unpredictable dip in income will easily derail regular repayments.

So how can you keep your business cash flow steady? If you are securing project financing to prepare for future cash flow gaps, you’re already doing it right. In addition, you can also send your invoices as soon as you can, adjust your inventory depending on what sells best and least, and eliminate efficiency gaps that may be costing your business.

Consistent cash flow signifies that you are capable of making regular repayments on your SME loan.

#4. Keep your records and filings clean and up-to-date

Completing your business registrations and keeping your records and document filings straight and up-to-date seems like a no-brainer. However, these can easily slip from an overworked business owner’s mind, especially if you are knee-deep in day-to-day business operations. 

Aside from not having to pay penalties, businesses with a clear paper trail and complete business registrations get approved for loans much faster. It signals that your business is legitimate, and has nothing to hide.

This goes especially for businesses with parent companies, subsidiaries, and name changes. Your audited financial statements, articles of partnership, and general information sheet must clearly reflect your business history and relationships. Lenders vary in their underwriting and risk assessment systems; for many, it’s more efficient to deny your loan application outright rather than take the time to reach out and untangle your record inconsistencies.

The price of SME loans are heavily dependent on factors that may or may not be in any business owner’s control. However, if your business simply cannot afford to defer borrowing for a few more months, there are short-term and long-term ways to make your loan interest rates more affordable. You can choose independent lenders such as First Circle, or adjust your loan amount, term, and type. More importantly, you can work on your personal financials, business credit history, cash flow, and records as early as now to improve your future borrower rating.

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