Part of the hustle that’s involved in starting or growing a business is finding where to get a business loan. Whether you’re looking to jumpstart your business or expand it to greater heights, getting funding could be the next best step for you and your business. Now comes the big question: where can you get a business loan in the Philippines? What are your options, and which is the best one? Let’s explore the options and identify the appropriate funding for your business.
Evaluate Your Loan Purpose
Before delving deeper into your business loan options, it’s important to establish exactly why you need a loan. Entrepreneurs seeking to finally turn their business ideas into reality might need a loan for brand new business needs, such as inventory, equipment, and staff.
Businesses that are already up and running could also need extra financing for various reasons. Entrepreneur Asia Pacific lists six good reasons to take out a business loan:
1. You’re ready to expand your physical location.
2. You’re building credit for the future.
3. You need equipment for the business.
4. You want to purchase more inventory.
5. You’ve found a business opportunity that outweighs the potential debt.
6. Your business is ready to expand and hire more people.
Taking out business loans in the Philippines can be tricky, and it’s not for a lack of options—it’s actually quite the opposite. Opportunities are everywhere, and the trick is finding the loan that suits your business’ needs. It might be worthwhile to ask yourself the following questions:
1. Do you need a short-term loan to meet urgent business demands (e.g., inventory, supplies)?
2. Do you need an open, reliable line of credit to attend to the needs of your business as they come (e.g., you need funding for 2 months every year to boost inventory for your retail business during Christmas, you own a design company where the influx of tasks comes during specific months)?
3. Will the loan serve a long-term goal such as expanding your office or space (usually this includes purchasing of hard assets - buildings, land, computer equipment, office equipment, etc.)?
Your specific need for a loan will determine which loan is best to take.
Types of Business Loans in the Philippines
1. Bank Term Loan
2. Bank Business Credit Line
3. Invoice Financing
4. Purchase Order Financing
5. Bank Short Term Loan
6. Private Company Loans
7. Personal Loan
8. Quick Cash Loan
Bank Term Loan
Bank loans are the go-to option for many entrepreneurs looking for business loans in the Philippines. Most major commercial banks have provisions for business loans, with both flexible and fixed payment schemes, and secured and unsecured collateral arrangements.
Even though there are many more business financing options now than in years before, bank loans are still going to be the cheapest loans you can get. Although sometimes it can be quite difficult to secure. If you are a brand new business or you don’t have a good credit score this option might not be available.
Bank loans can also be very time-consuming, so if you need the money fast this may not be the best option. With a traditional bank term loan, you borrow a set amount of money for a given time period and then you pay that back plus interest every month. Bank term loans are generally larger and have a longer payback period.
Bank Business Credit Line
The other most well-known type of business loan is a line of credit. This is where a bank lends the business a set amount of money that they can draw from at any time it is needed. Lines of credit can provide a much-needed cushion in case of some cashflow emergencies. This could come in handy if you need cash quickly.
However, lines of credit are the most difficult form of loan to get for your business. You will need to have excellent financing and credit score to be able to get one. In some instances, you need to secure a collateral to make a draw. Once your business is mature and you have a good relationship with the bank, this is something you could consider.
If you are a growing or a relatively new business still building up profit, revenue, and credit, there are still some great options for business financing.
One very popular type of loan for new businesses is invoice financing. This is a small business loan type that is used to finance outstanding invoices of your B2B customers.
With invoice financing, the lender advances you the total invoice amount so that you are able to cover business expenses while you wait for your customer to pay the invoice. This is a great option if you have cash flow issues because you billed multiple customers and they all pay at different times. Ideally, you can use the loan to cover a new project that complements your business growth plans. Some business owners use this to cover payroll, rent, and other business expenses when they’ve maxed out their working capital fund.
Purchase Order Financing
Purchase order financing is similar to invoice financing, but instead of an invoice you have one or more purchase orders that are used to secure the loan. This is a good option for any type of business that may have a sudden influx of orders but doesn’t have the means to fulfill them.
Sometimes, you might receive an unexpected amount of purchase orders that you cannot fulfill because it requires more capital than you have available. This creates a number of issues for your business that can be solved with financing. With purchase order financing, you will get access to the capital you need to meet increased demand and keep your business growing.
Bank Short Term Loan
Some banks offer short term loans that are designed for newer businesses. There are also lenders that specialise in short term loans but these are usually at a much higher interest rate.
Short term loans are usually paid back within 18 months. They are usually easier to apply for and have looser requirements, however they have the trade off of being more expensive. When applying for a short term loan you should make sure that your cash flow can handle the payments and that you really understand the cost of the loan.
These are just a small sample of the various business loans you can receive from banks in thePhilippines. There are many banks and they all have different terms and types available. The main point here is to do the research and understand which option might be best for you.
Private Company Loans
For some entrepreneurs, bank requirements (in terms of documentation and credit history checks) are too inflexible. For this reason, many entrepreneurs turn to private lenders. Private company loans offer online application procedures and are generally more accessible.
While greater accessibility is highly desirable for many business owners, it’s not entirely without pitfalls. Private loans often require a hefty collateral, which you risk losing the moment you fail to pay back. Lack of ample research could also leave you susceptible to lending scams, as bogus lending companies often pose as DTI-registered companies on social media.
Another option for new businesses is to take out a personal loan. Both banks and private lenders offer personal loans, these are based on your own personal financing; on whether or not you have good credit and personal income. Although these are called personal loans you may still use them for business. Usually these are for smaller amounts. If you need more you will likely need to combine it with other types of financing.
Quick Cash Loan
A lot of the time people think that the only option available to them is a bank loan. If you don’t qualify for a bank loan you might view yourself as unbankable you might think that an informal quick cash loan is your only option. There are many other options available, and if you don’t qualify now that doesn’t mean you won’t qualify later.
The most common type of informal quick cash loan in the Philippines is a 5-6 loan. They get their name from the outrageous interest rates. If you borrow 5.00 pesos you need to payback 6.00 pesos. This is 20% interest a month, you need to be very careful if you take out this type of loan as the results can actually cause more financial troubles for you instead of helping with your business.
Timing Your Loans
When it comes to getting a business loan, impeccable timing could spell the difference between growth and failure. Check out the effects of timing when it comes to getting a business loan:
- Too early: Risk of making premature loans—loans that are not properly researched to meet your business needs causing accumulation of interest debt and payment requirements before you have been able to setup the incoming cash flows.
- Too late: Getting a loan too late might pose a possible strain at critical moments in your business, such as acquiring new assets or hiring new employees, with a direct negative impact on your ability to deliver your products and services.
The ideal timing is just before the business desperately needs the money, leaving room for timely settlement and usage of the funds.
A thorough understanding of your business strategy (for starting businesses), or the business’ current financial standing (for existing businesses) is key to making critical loan decisions. It’s also important to do in-depth research on the loan that you’re planning to apply for, setting in-person appointments with banks or companies if possible.
It’s important to account for how every peso of the loan would be used. If a loan is the only thing that can save a sinking business that is already neck-deep in debt, or if a loan is something you’re planning to get just because it seems like a good idea(lacking a concrete plan for the funds), it’s probably time to step back and examine the business.
At First Circle, we aim to change the local SME landscape by offering online business financing options to cover your working capital gaps.
For quick and easy financing to stabilise your business cash flow, apply for one with First Circle by clicking here.