Private vs. Government Business Loans: Which is Better?

Business Growth
September 30, 2022

For many small-to-medium enterprises (SMEs), business loans are a lifesaver. They can supplement cash flow gaps, enable you to take more opportunities, and bring business growth.

If you’re ready for a business loan, you’ll find tons of legitimate options from both the government and private sector. A lot of SMEs choose government loans such as DTI loans by default, assuming it works the same way as government assistance. Others choose business loans from popular banks without entertaining other options. 

However, different financing sources have different advantages – and you can lose out on savings or have a harder time with repayments if you don’t do prior research. To help you narrow down your options, we’ll try to answer which financing source can best meet your needs. 

Common business loan providers in the Philippines

The financing sources mentioned below are regulated by the Bangko Sentral ng Pilipinas and the Securities and Exchange Commission. This is to ensure your rights as a borrower are also protected.

Remember that before transacting with any financing source, you must ensure that you are dealing with their official representatives or channels. Check out our guide on how to recognize fraudulent lenders.

Banks

These are the largest private financing sources in the Philippines. Most have an online banking service and thousands of branches nationwide. You can get a business loan from BDO, BPI, Security Bank, and Unionbank, among others. 

Independent lenders

These are non-bank entities with a license to provide financing. Some are traditional lenders, while others are financial technology firms that accept loan applications through websites or mobile apps. Independent lenders provide financing that they sourced from venture capitalists or private investors. Examples are First Circle, Investree, Esquire Financing, Radiowealth Finance, and Seekcap.

Government providers

These are financial institutions owned and/or managed by the Philippine government. Their capital funds come from public taxes, investments with other governments, or even private entities. Examples are Small Business Corporation (SB Corp), the financing arm of Department of Trade and Industry (DTI); Development Bank of the Philippines; Land Bank of the Philippines; and Philippine Guarantee Corporation. 

Credit cooperatives

Also known as credit unions, these are financing sources that work similar to banks, except they are owned by customers who pay a membership fee. They also exist for a specific purpose and do not operate for profit. Because there are thousands of credit cooperatives, it’s hard to evaluate their business loans. While we will not cover them in this article, you should only deal with cooperatives with a Cooperative Development Authority (CDA) registration.

Best interest rates: Government providers

DTI business loans and DTI SME loans are affordable for

Government financing sources have the most affordable interest rates, since their mission is to boost SMEs into being more competitive and resilient.

An example is DTI loans, which cater to all SMEs but focus on certain sectors such as tourism and micro-enterprises. DTI RISE UP Loans, for instance, have a low interest rate of 12% per annum. DTI Turismo Loans do not charge interest, just an 8% service fee.

Banks, however, can also offer lower interest rates if you provide collateral. BDO business loans, for instance, can go as low as 7.25% per annum. While this seems low, collateral loans are much riskier for SMEs, as you can lose your collateral asset in case of default. BDO business loans – and other banks, for that matter – also re-price their interest rates after an initial fixing period. The repricing is based on the market rates set by BSP, so your interest rate is likely to increase – especially if you are borrowing during a period of high inflation.

From independent lenders, the most affordable non-collateral business loan is First Circle’s Revolving Credit Line, which goes as low as 1.39% per month. In addition, First Circle has a best price guarantee: if you have a better offer for non-collateral SME financing, they are willing to beat the price by 10%.

Fastest application processing: Independent lenders

Independent financing sources provide financing faster, often due to their online application processes and more sophisticated underwriting systems.

Many independent lenders have one advantage over well-known government lenders and banks: they can process loans much faster. Aside from mostly-online applications and more streamlined underwriting systems, some also require fewer documents.

First Circle, for instance, provides a conditional credit line offer to qualified borrowers in just 3-5 business days. Furthermore, applicants are only required to submit two initial documents and complete a consultation call to get their initial offer. Meanwhile, Seekcap – a business loan app with multiple offers from different private lenders – has a fully in-app loan application process. You’ll get real-time updates on your application through the app.

In contrast, DTI loans and other government loans can take over 10 days or more due to the volume of applications that they receive. Some applicants following up on SB Corp’s Facebook page report waiting for months after submitting their documents. BDO business loans and other bank loans, meanwhile, can take up to a week before giving a loan decision.

Biggest loan amounts: Banks

BDO SME loans and other similar bank loans require collateral but provide millions in financing.

Collateral loans from banks offer millions in financing — making them the best option for high-growth SMEs planning big-ticket purchases. BDO business loans, for instance, offer up to ₱20 million or more. Some banks also specifically offer loans for buying property or another business.

In contrast, government providers have smaller loan amounts, usually at the range of ₱100,000-₱300,000 for non-collateral options. This is because most government business loans, such as DTI loans, are focused on financing micro-enterprises and small businesses.

Non-collateral loans from banks and independent lenders are usually in the ₱100,000-₱5 million range. Some providers, such as First Circle, can offer up to ₱10 million. However, non-collateral loans are more difficult to obtain. Lenders only grant them to businesses in good financial standing to reduce the risk of default.

Longest loan terms: It depends!

Loan terms are not decided by financing sources; rather, it is determined by the type of business loan and loan amount. Term loans and collateral loans can have repayment periods of up to 25 years. The larger the term loan amount, the longer your repayment can be. 

In contrast, credit lines and non-collateral loans have shorter loan terms, even if you are granted millions in funding. Credit lines have a 1-year renewable term. Non-collateral loan terms are from 1 year to 3 years.

One exception is DTI loans. Their DTI Turismo loans offer ₱100,000-₱5 million; even if you borrow on the lower end, you can choose to pay in up to 4 years.

Summary

With a lot of options for business loans in Philippines, you'll have to do research before choosing a financing source.

Every type of financing source has different purposes and processes for providing business loans. To know which provider is the best for you, consider the following:

  • How much money do you need?
  • What is the monthly interest rate that you can afford to pay?
  • How much are you willing to pay monthly, and for how long?
  • Is the application process fast and easy?
  • How soon will you need the money?

Government offers, such as DTI loans, usually have the lowest interest rates and most lenient loan terms. However, application is typically slower and loan amounts are less than what private lenders can offer.

Bank offers, such as BDO business loans, offer the biggest loan amounts and sometimes even lower interest rates. However, a collateral asset is required – putting you at a higher risk in case you default.

Independent financing sources have the fastest loan processing, since they usually have fewer requirements, an online application process, and focus on non-collateral loans – eliminating the need to evaluate collateral. However, they have a higher barrier to entry, and may be difficult for applicants who are not digitally savvy.

If a non-collateral business loan sounds like a great fit for your needs, consider First Circle’s Revolving Credit Line. It has the following benefits:

  • Up to ₱10 million of re-usable credit
  • Interest rates as low as 1.39% per month
  • Processing of applications in 5 business days
  • Exclusive account manager
  • Minimal document requirement

‍First Circle is a multi-awarded lending company supporting SMEs since 2016. To apply for a Revolving Credit Line, click here.

Ready to get your own revolving credit line?

Apply 100% online, and get a credit line worth up to ₱5M. Use and re-use your credit limit anytime you need a business loan.

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