Personal Loans vs. Business Loans: Which is best for your business?

Business Growth
October 20, 2022

Capital is the biggest concern for any SME (small and medium enterprises). Your personal savings might be sufficient for developing a product or service, but soon you’ll need labor, tools, utilities and inventory to keep going. For these expenses and more, people can turn to personal loans or small business loans as financing sources.

While you can use either one for funding, personal loans and business loans in the Philippines have very different purposes, interest rates and terms. Read on to see which will fit your project financing needs better.

Business loans in the Philippines

There are very few business loans in the Philippines for startups.

What is a business loan?

A business loan, also known as an SME loan, is money lent out by the government and private sector to fund business expenses. While there are several types of business loans, the primary ones are term loans, which provide a lump sum of cash, or revolving credit lines, which lets the user borrow any amount from a pool of funds. You can check out this article for an in-depth comparison of term loans vs. revolving credit lines.

Legitimate providers mostly extend business loans to established SMEs with at least 1 to 3 years in operations, business registrations with SEC and BIR, and annual revenues of at least ₱1 million and above as shown in their financial records. For these reasons, most business loans in the Philippines are not an option for entrepreneurs launching a new business.

A startup business loan is a type of SME loan specifically for new entrepreneurs. However, startup business loans in the Philippines are not common. They also have higher barriers to entry: the borrower needs to have a high personal income and a profitable business idea with good sales projections. More often than not, collateral in the form of real estate or bank deposits is also required.

Advantages and disadvantages of SME loans

Entrepreneurs who qualify for an SME loan will find that they provide higher loan amounts, lower interest rates, and longer repayment periods than personal loans. 

Non-collateral business loans in the Philippines start at 12% annual interest rate for up to ₱10 million in funding. Meanwhile, collateral business loans in the Philippines can go for as low as 6.25% per annum, with loan amounts going up to ₱20 million or more. Loan terms can go as long as 10 years or more, depending on your type of SME loan and loan amount.

Another advantage of SME loans over personal loans are tax write-offs for your business. Declaring a loan in your financial statements can lower your business tax. In addition, an SME loan can build your credit history with lenders – which will eventually enable you to get funding faster in the future, should you maintain a good credit history.

One disadvantage of business loans in the Philippines is that they have a slower approval process than personal loans. Aside from reviewing your business revenue and assets, SME loan providers will also review the finances of business owners and partners named in the business. Meanwhile, a personal loan application will only check the applicant’s capacity to pay.

When you apply for an SME loan, lenders will also check your business partners' personal finances.

If you choose to proceed with a business loan application, you’ll find plenty of options from the government and private sector. Your best options are: 

  • DTI business loans. At 8-12% interest rates per annum, DTI loans are one of the most affordable business loans in the Philippines. Some only require a one-time service fee of 8% in lieu of collateral. The downside of government business loans in the Philippines is that the application process is slower, and loan amounts are mostly limited to ₱2 million.
  • First Circle’s Revolving Credit Line. A non-collateral SME loan, First Circle offers up to ₱5 million in revolving credit to new clients for as low as 1.39% monthly interest rate. The application process is free and takes only 2-5 business days; loan terms can go up to six months to a year.
  • BPI Business Loans. BPI SME loans have non-collateral options that go at least 14% per annum; and collateral options that go up to 10% per annum. After the initial fixing period, the interest rates for both options will be repriced annually – which means your interest rates may go up depending on the prevailing lending interest rates set by the Bangko Sentral ng Pilipinas (BSP). BPI business loans go from ₱300,000 to ₱15 million. 
  • BDO Business Loans. Like BPI business loans, BDO business loans have non-collateral and collateral options. Both options start at 6.25% interest rate per annum; after the initial fixing period, the interest rate will be repriced annually.

See our full comparison of 20+ business loans in the Philippines here.

Personal Loans: For startups and new businesses

Personal loans can work as a startup business loan if you have no other funding sources.

What is a personal loan?

A personal loan is money borrowed from a bank, online lender, or credit cooperatives to fund personal expenses. You can get a term loan for high-cost personal expenses, such as a car or gadget, or opt for a personal credit card to fund multiple small expenses.

With business loans in the Philippines being mostly limited to stable, established businesses, a personal loan is the best alternative to new entrepreneurs. Just remember that personal loans, like any other kind of loan, is a risky source of startup funding. You'll still be required to pay a loan back plus interest even if your business fails.

Advantages and disadvantages of personal loans

If you only need a small amount to start your business or spend on small business expenses, personal loans are faster and more accessible than SME loans. Most personal loans are non-collateral, and some legitimate providers even provide 24-hour processing. To qualify for a personal loan, you only need to provide a valid ID and proof of your personal income – such as pay slips, income tax returns, and BIR Form 2316. 

A major disadvantage of personal loans over SME loans is their higher interest rates for smaller loan amounts. This is because the risk of non-repayment for individuals is much higher than businesses. Personal loans in the Philippines provide ₱10,000 to ₱2 million, with the standard interest rate ranging from 1.25% to an eye-watering 32.05% per month. For higher amounts, a commensurate level of income and good credit score is needed.

Personal loans also have shorter repayment periods, starting from 3 months to 3 years. One exception is CIMB Personal Loans, which can be paid for as long as 5 years. In the case of credit cards, which are computed differently from term loans, you may end up paying higher interest plus fees if you only pay the minimum amount per month. Personal loans will also affect your own credit score – so if you encounter repayment difficulties, you’ll have a hard time availing funding under your name.

Some banks do not allow the use of their funding for business purposes, so ensure you clarify the terms of use with your lender to avoid penalty fees or surcharges. 

Another disadvantage of personal loans over SME loans is the risk of commingling your personal and business finances. Commingling will make it difficult for you to apply for SME loans and keep track of your business performance. Worse, you can also encounter legal problems and BIR audit issues down the line.

If you choose to proceed with a personal loan application, your best options are: 

  • BPI Personal Loans. You can borrow ₱20,000 to ₱2 million, with a monthly add-on rate of 1.24% and a repayment period of up to 3 years. 
  • BDO Personal Loans. Loan amounts start at ₱10,000 to ₱2 million, with a monthly add-on rate of 3%. 
  • CIMB Personal Loans. Loan amounts go from ₱30,000 to ₱1 million, with repayment terms of up to 60 months. 

You can use the BPI personal calculator and BDO personal calculator on each bank’s websites to determine your monthly payments and final interest rate.

Summary 

If a loan is your only choice in funding, personal loans in the Philippines are best for startups or new businesses trying to augment their capital. With loan amounts going up to ₱2 million max, high interest rates, and short repayment periods, they are not the best choice for long-term funding or big business purchases. The upside is they are easier to obtain, since applicants only need to show their personal proof of capacity and income.

Personal loans are easier to obtain, since you won't have to present business revenues and business partners' proof of income.

SME loans are a better fit for businesses operating for at least 1-3 years – especially if you can present complete business registrations, financial records, and an annual revenue of ₱1 million or more. SME loans have lower interest rates, longer repayment terms, and bigger loan amounts than personal loans. Business loans in the Philippines start at 8% per annum for government loans and 1.39% per month for privately-sourced business loans. Loan amounts go from ₱300,000 to ₱20 million if you can provide collateral. The larger funding means you can truly scale your business beyond its current capacity by quickly plugging cash flow gaps and investing in more inventory, bigger equipment, or real estate.

Whichever financing source you choose, remember to do your research before availing any loan, as this is a huge financial responsibility that can make or break not just your personal credit history, but your future business plans. Lastly, ensure that you only borrow from legitimate lenders by dealing with their official channels and checking their credentials with the SEC.

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