According to the Philippine Statistics Authority PSA (2018 List of Establishments of the Philippines), there are over a million businesses operating in the country. If you are looking to add to this number, one of the first things you need to solidify is your business capital. A reliable source of funding is a critical aspect of owning and managing a business. And usually, this source of financing in the Philippines comes from either banks, government, or private financing firms: offline and online.
Bank loans remain one of the top sources of business capital. The primary advantage of bank loans is that they offer easier and flexible payment methods and loan terms. As long as you make payments on time, you are good to go. Many business owners prefer to secure loans from banks to take advantage of lower interest rates.
If you plan to apply for a bank loan, keep in mind that they have very strict requirements. Banks require a good credit line, a personal guarantee, collateral, and a good credit standing. In addition, the application process is also time-consuming. The entire application to approval process may take months to complete.
In the event that you get approval for your bank loan, you can start building your business credit. Banks in the Philippines normally offer repayment terms of 6 to 48 months for business loans, depending on the amount of the loan and your credit history. Some banks may offer up to 60 months. Clearly, banks offer longer repayment terms that work well for significant capital expenditures that also serve as collateral for the loan. Banks will want to see that your business is stable and generating a healthy cash flow.
The government helps provide additional funding to local businesses in the form of a government loan. For you to qualify for this type of loan, you have to be an active member of the government agency you’re seeking to get the loan from. If not, your loan application has less chance of getting approved. Membership requirements include registration and regular contributions. Once the borrower receives money from the approved loan, payments shall be deducted every month from their salary and will be forwarded to the government agency.
Private Company Loans
Private lenders in the Philippines are usually companies with investors that provide personal and business loans. FinTech lending companies fall in this category of business loans. People and business owners who usually do not qualify for a bank loan often turn to private lending companies. As opposed to bank loans, private lenders usually have a simpler application process. They attract more borrowers because they offer easy access to funds, a simplified process, and a faster turnaround time to receive your cash.
If you are just starting up or have a small business, you may opt for this type of financing because some of these funding companies will only ask borrowers to submit proof of identification, proof of billing, and proof of income.
Depending on the type of loan and the lender, some private companies can also approve loans within 24 hours. This is a lot quicker than the approval of traditional bank loans which take time in collecting data, verification of submitted documents, character or background investigations, and even financial checks. There are also private lenders that can release the funds on the day of application and approval, depending on the amount loaned.
However, private lenders typically offer loans with higher interest rates, making the total cost of the loan more expensive, especially if you need the funds for a longer period of time.
As these companies may get their funds from investors who are seeking profits, they have a higher cost of acquiring funds to lend. But at the same time, they can provide easier and faster loans to business or people with higher credit risk. Frequently, private lenders will also ask for a co-guarantor. A co-guarantor is another person who will be liable for your loan in case you are unable to make timely payments. They can also ask for collateral, wherein a failed payment means they may take ownership of your valuable assets. Private lenders compensate for the high credit risk by charging higher interest rates.
In terms of payment, private lenders may not be as flexible and you’ll be expected to repay your loan within a short period, typically ranging from 2 to 18 months. The longest would be 24 months (depending on the financing company). Higher interest rates and short repayment terms suggest that this loan should be used for short-term cash requirements that will significantly improve your short-term, working capital cash flows.
Regardless if you secured your business financing in the Philippines, the universal truth is that they come with repayment obligations that can put your assets at risk. To make the most of the extra capital you will borrow, you need to think critically. Here are some of the questions to sort out before deciding to get a loan:
• What is the purpose of your business loan?
• Is it for short-term needs like buying supplies, adding to your inventory, or funding a new project?
• Is it for a long-term goal like building or renovating your commercial space?
Plan and identify your short-term and long-term goals and use it as your guide in choosing the right business loan for you.
• How much do you need?
You have to determine how much money you need for your business. Loanable amounts depend on the lender and the type of loan. Research your options and determine how much funding you need versus your projected future cash flows that will be used to repay the loan you are considering.
• What are the repayment terms?
There are options available for fixed or flexible monthly payments. Determine which loan repayment options best fit your projected cash flow and your business’s financial status.
• Do you have an asset to use as collateral?
To qualify for most business loans, you need to have collateral. You can declare any hard assets, such as a house, a lot, business equipment, or a vehicle as collateral. More valuable collateral provides you with greater flexibility to borrow more and it streamlines the approval process. Conversely, unsecured loans do not require collateral, but are considerably more difficult to qualify for, especially for loan applicants with bad or no credit history.
• What is the interest rate?
One of the most important deciding factors business owners consider before settling for financing in the Philippines is the interest rate. Lenders have different interest rates depending on the type of business loan and the borrower’s business profile. To get the best possible rate for your business loan, compare all the options you have so you can make an informed choice about which one best fits your business needs.
• How much are you willing to pay to secure a business loan?
Aside from the interest rate, you must also consider the application and processing fee associated with your business loan. These fees cover basic loan administration, expenses used to check a company’s credit line history and financial status, etc.
Processing fees differ from one financial institution to another, but 2%-4% of the total loan amount is standard.
A Note of Caution
Admittedly, there is a widespread phenomenon involving fraudulent private lenders in the Philippines. Most of these scammers use social networking sites like Facebook to trick people. For security purposes, we recommend checking the Securities and Exchange Commission (SEC) to see if a private lender is registered and has legitimate operations in the country.
To make it easier for you to identify the right funding to meet your needs, we listed 18 of the most common business loans and other financing options for SME owners. This summary should help you decide which option best suits your financial requirements.
Top Types of Financing in the Philippines
Bank Term Loans
A bank term loan works best for businesses that have established a good credit standing. It is usually preferred by SMEs that need extra capital to expand their business, acquire new property, or renovate their commercial space. However, note that you cannot effectively manage your short-term capital gaps through this type of loan if you are a novice business owner who is yet to build their credit. Banks enforce strict credit checks for term loans; they are not likely to approve loan approvals from newly launched businesses.
With a traditional term loan from a bank, you borrow a set amount of money upfront, and pay back the money, with interest, every month for a certain number of years. Bank term loans tend to have larger loan amounts and longer terms.
In general, a bank is still one of the best places to get a loan if you need a large sum. Despite recent changes in the world of small business lending, banks still offer the lowest interest rates. However, qualifying for a bank loan for your business could be a challenge because of the strict requirements. Moreover, banks are very meticulous with personal and financial checks, so even if you meet their standards, you have a long time for approval. The loan application process is quite tedious and may take months to complete.
Bank Lines of Credit
A bank business line of credit is a type of loan wherein business owners can get money at any point, as long as it’s within their credit limit. Business owners who opt for this type of loan can choose between a fixed or a revolving line of credit. Similar to a credit card, a revolving line of credit resets when the balance is paid in full.
This type of loan is ideal for businesses that periodically need a reliable source of cash. It is often used to pay for seasonal or emergency financial situations. However, it might not serve your business well if you have a bad credit standing. Similar to a bank term loan, a line of credit is not suitable for newly established SMEs. Moreover, it may take just as long as a bank term loan in terms of approval.
If you are considering a business line of credit, note that this type of loan is not limited to banks. Different types of lending companies may offer this type of loan as well, although banks would typically offer better rates. You may choose between unsecured and secured credit line. Note that if you choose the latter, you may need to pledge your personal assets as collateral.
As the name suggests, an equipment loan is a business financing option used to purchase or lease equipment (including vehicles). One particularly attractive feature of this business loan is that the equipment being purchased can usually serve as collateral for the loan.
Invoice Financing is a useful financing option for small, growing businesses. This commercial loan requires businesses to submit their invoice to the lender so that they may advance cash against future invoice payments. Since Invoice Financing uses your accounts receivable to secure payments, it’s not suitable for businesses that do not issue invoices to their customers.
The main advantage of invoice financing is that it allows business owners to get cash quickly without significantly impairing their ability to borrow in the future. Since they are merely advancing cash from future invoice payments, they are useful to address short-term cash flow requirements.
Invoice financing makes it possible to pay recurring expenses such as employee salary and overhead, especially if you need to invest in these types of expenses to fulfil commitments for new contracts. Invoice financing also helps balance your incoming cash with your business expenses. It’s also often the best fit to fund business growth opportunities.
Purchase Order Financing
Purchase Order Financing is much like Invoice Financing. But in this case, you will need a purchase order to secure the loan. PO Financing offers a great financing option for businesses that have growth opportunities with new or existing clients, but are hesitant to commit to those clients due to the significant cash requirements for fulfilling their orders. With this type of loan, businesses can fulfil more client orders than their current cash flow allows.
PO Financing works by simply sending your purchase order to the lender. Then, the firm will disburse funds to you directly, while you wait for your customer to pay you based on your agreed payment terms
Personal Loans for Startups
While it is called a personal loan, this type of loan can be used by startup owners to launch a new business. The main advantage of securing a personal loan for startups is that personal assets may be used to secure the loan. This means that the banks will primarily look into your personal credit score.
That said, personal loans for startups work best if you were able to establish a strong personal credit standing. Take note that these personal loans do not typically offer a large sum. The interest rates will vary from one lender to another. So it is in your best interest to research several banks and other alternative financing companies.
Short-term loans are designed for businesses with short-term capital gaps. To qualify, you will need to have at least an average credit standing. Short-term loans are frequently offered online with a simplified application process and lesser requirements. Keep in mind that even though it is generally easier to qualify for this type of loan, the interest rates are usually higher
Online short-term loans are usually payable within 3 to 6 months. As the interest rates are somewhat higher than traditional loans, business owners should use these loans sparingly to cover urgent cash flow gaps.
Merchant Cash Advances
If you do not meet the minimum qualification requirements for other business loans, you may consider a Merchant Cash Advance. This type of commercial loan is one of the more expensive loan products as the annual interest rate could spike up to 100%, or sometimes even higher.
With Merchant Cash Advances, business owners receive a cash advance. A portion of your credit card sales will also be purchased by the lender. Business owners then repay the advance with a percentage of their daily credit card sales.
One of the benefits of this type of loan is the flexibility to repay the loan based on how your business is doing. You are able to make repayments better aligned to business performance, minimising payments when credit sales are slow and making larger repayments when credit sales pick up again.
Business Credit Cards
A credit card offers convenience, be it for personal or business use. For one, it allows you to make a purchase on the spot, even without cash on hand. Credit cards also come in handy when you need to buy items online.
While these cards are not intended for long-term financing, it goes without saying that credit cards make it easy for business owners to borrow money. Moreover, many credit cards have 0% interest rates in the first year, so that’s another perk you should consider. Note that once the introductory 0% interest rate expires, the average interest rate on business credit cards will be around 13%.
Online Term Loans
Online term loans are similar to the term loans offered by banks. But when it’s coursed online, the terms are usually shorter. In addition, online term loans typically have higher interest rates than the average bank loan.
It’s easier to qualify for online term loans compared to bank term loans. However, most businesses decide against borrowing via an online term loan unless it’s absolutely necessary because of the high interest rates. The interest rates for online term loans can range anywhere from 7% to 80%.
Online Lines of Credit
As a business owner, it pays to have a reliable source of cash during emergencies. If you do not have a good credit standing, one of the options you can research are online lines of credit.
Like the bank lines of credit, online lines of credit give business owners access to capital which they can tap anytime. These are usually revolving so they will reset once paid in full. Given that it’s easier to qualify for online lines of credit compared to bank lines of credit, expect the interest rates to be higher.
Domestic Bills Purchase Line
Domestic bills purchase line is a financing option for business owners who do not want to miss out on business opportunities that require a purchase while waiting for the bank to clear their checks. With this financing option, you can access funds immediately by crediting the amount of your check to your bank account.
Qualifications for the Domestic bills purchase line depend on which bank you are using. Note that the requirements for this type of funding are quite extensive. Certain fees and charges will also apply.
Loans Against Hold-out in Deposits
To cover your short-term capital gaps, you can secure all-purpose funding in the form of Loans Against Hold-out in Deposits. This type of loan allows you to borrow from your Peso or USD Savings or Time Deposit Account. The deposits equivalent to your loan amount will be held until maturity of the loan.
Sole proprietors, as well as partnerships and corporations, are eligible to apply for the Loans against hold-out in deposits.
Peer-to-peer lending or P2P pools money from its members and lends them to borrowers.
Unlike the lending process employed by traditional banks wherein the bank is the exclusive source of funds for the borrower, P2P lends money chipped in from a group of investors.
With P2P loans, instead of simply taking turns in getting lump sums of accumulated cash from borrowers, lenders earn from interest payments associated with the loan. P2P lending makes it easy to access money quickly and requires a small amount to get started. However, investors in the P2P pool still bear the risk of borrowers defaulting on their payment obligations.
Franchising is an easy way to own a business. For those who want to start and run a business through franchising, there are loans which can help you buy a franchise. Some of the banks that offer franchising loans are BPI Family Savings Bank, Banco De Oro, Land Bank of the Philippines, Philippines National Bank, and Philippine Savings Bank.
When looking for a franchising loan, choose one that suits your income and matches well with your projected future cash flows. As a rule of thumb, monthly payments on your loan should make up less than 40% of your net income or estimated revenues.
OWWA (Overseas Workers Welfare Administration) Loans
The OFW Reintegration Program, also referred to as the OWWA Loan is a loan that supports enterprise development among migrant workers and their families and is promoted as an alternative to overseas employment. It is intended as working capital or for fixed asset acquisition.
This loan, funded by a partnership between the Land Bank of the Philippines and the Development Bank of the Philippines, is exclusively available to active members of the OWWA. According to the OWWA website, an eligible borrower can either be individual (sole proprietorship) or by group (partnership, cooperative, or corporation). Loanable amount ranges from ₱100,000 to ₱2,000,000
GSIS Enhanced Conso-Loan Plus
Active Government Service Insurance System (GSIS) members who want to start their own business have the option to apply for an Enhanced Conso-Loan Plus.
Under the Enhanced Conso-Loan Plus Program, members who have at least 15 years of service with paid premiums may borrow a 12-month salary loan while those with at least 25 years of service will be eligible for a 14-month loan. GSIS also extended the maximum payment term from 6 years to 10 years for members with at least 10 years of paid premiums.
The Social Security System (SSS) offers a loan for private individuals who want to start their own business. This loan is designed to contribute to the nation's economic growth and development by providing financial assistance to the business sector for the purpose of increasing productivity and enhancing potential earnings through expansion, diversification, and other business development projects. The loan shall be secured by any collateral acceptable to both Private Finance Initiatives and the SSS, provided the loan is fully secured.
Loan Repayment Basics
While you have every intention of paying on time, some unforeseen events may cause payment delays and other problems. There’s also the danger of poor business financial planning, which could wreak havoc on your finances. To help you manage your loans, here’s a quick rundown of some best practices for paying your loans:
1. Create a Budget
Whether you choose to pay by check or have your payments deducted automatically, you have to ensure that funds are there when you need them. To ensure cash is always available to meet your repayment obligations, it’s best to adopt a disciplined budgeting process, where you create your budget with realistic cash flow projections and periodic reviews. Good discipline in this process will give you greater financial headlights—enabling you to spot cash flow problems well in advance and plan accordingly.
A budget should include your revenues, your costs, and most importantly, your profits and cash flow. A good budgeting process helps you better project your financial position to support desired capital improvements and expenses.
By keeping track of where your money is coming from and going to, and how much you’ll need for each month, you’ll be better positioned to manage your cash flows and ensure sufficient funding for all your business needs, including loan payments.
2. Know Your Lender’s Late Payment Policy
Due to unforeseen circumstances, you may not be able to make your payments. From time to time, lenders understand that problems may arise; many have a late payment policy for that reason. Make sure you know your lender’s late payment policy, so you can make adjustments and get back on track while minimising late fees and credit score hits.
3. Communicate With Your Lender
Finally, do not hesitate to reach out to your lender. Lenders don’t like to be left in the dark. If your payments become irregular or stop, and they don’t hear from you, they’ll eventually assume that you’ve defaulted.
If you’re having difficulty making payments as scheduled, call your lender before you start missing payments and let them know what’s going on. Often, lenders are willing to work out an alternative payment schedule, assuming you have established a pattern of reliability and you communicate proactively.
A Strategy for Success
What do you want your business to achieve? Do you have a clear, well-researched financial strategy to help you get there?
A good financial strategy will provide you with a plan or a roadmap of how you are going to achieve your goals and objectives. It should demonstrate a clear path to profitability from the services you offer, how much those services will cost you, and how you will price them to earn a profit. And finally, how you intend to use various financing options to fill working capital gaps and continue to grow your business.
You should now have a better understanding of eligibility requirements and characteristics of the various types of business loans. However, this will not be enough to seal your success as a business owner. You need to think critically and know your financial position. Determine your strengths and acknowledge your vulnerabilities. Use the opportunities around you and your business to make well-informed, strategic decisions that will fuel your business growth.
First Circle is a private FinTech company that opens doors to working capital financing opportunities so Filipino SMEs can reach the full potential of their business. Apply for business financing with First Circle by clicking here.