Finding good sources of funding is an essential step in starting a business. A small business loan in the Philippines offered by institutions like the government, bank, or a private lender is a viable financing option for business organizations. A recent report from a cloud-based business banking platform that surveyed Filipino SMEs on securing sufficient business funding revealed something exciting. The report says that among businesses lacking financing, 48% had issues with cash flow, and 50% were unable to launch new products. To avoid experiencing such common problems, securing a loan for starting or expanding your business is an excellent option.
What is a business loan?
A business loan is specifically intended to offer financial assistance to businesses. Organizations need funding to begin their operations or expand them by purchasing equipment, inventory, and many additional add-ons. How much cash is necessary would depend on the applicant's business plan and needs. Lenders like banks, credit unions, financial institutions, or other small business lenders loan this money in advance to these organizations through business loans. In turn, they get repayments with additional interest depending on their loan agreement.
Business loans are financing opportunities in which lenders give borrowers access to funds to help them fulfill their business requirements. Whatever purpose they may serve, business loans relieve Filipino entrepreneurs who require extra funding for their operations.
What are the major types of business loans?
There are several business financing options available in the Philippines that can meet different requirements. Before you begin searching for the right loan provider with the ideal terms, it will be better to understand the different types of business loans available in the market.
Secured loans
As the name suggests, a secured loan requires you to peg collateral against the borrowed money. The collateral can be either a real estate property, a bank deposit, or anything the lender approves. The lender then uses the collateral to recover their losses if the borrower defaults on the loan. Collateral cuts down the risk for lenders, which makes secured loans come at lower interest rates, better loan terms, and offer a huge loan amount compared to unsecured loans. These elements make a secured business loan inexpensive and favorable for startup businesses that require funding at a time since they're just starting up their operations. For secured business loans, lenders charge additional collateral-related fees such as appraisal and collateral registration fees. Top secured loan options available to businesses in the Philippines are:
- BPI SME term loan. This loan offer usually demands a real estate mortgage, deposit, or investment as collateral. The minimum loan amount starts at ₱300,000, and the maximum loan term offered by the bank is five years.
- Esquire financial business loan. With this type of loan, the potential lenders require real estate properties or investments as collateral. It is ideal for SMEs who want big loans to operate their business. The loan amount ranges from ₱100,000 to ₱10,000,000 with high-interest rates of 3.5% per month. The available loan term is 3 to 36 months.
- Security Bank SME business mortgage loan. This secured loan requires borrowers to use collateral like a residential, commercial, or mixed-use property and hold-out deposits. The loan term offered here can go up to 20 years, with its loan amount ranging from ₱1,000,000 to ₱30,000,000. The minimum interest rate charged by the bank is 7.75% per annum.
Unsecured loans
These are the opposite of secured loans. Here, the borrower is not required to attach collateral to apply. The lack of security for lenders comes with higher interest rates, lower loan amounts, and shorter loan terms. One can mainly secure this loan from private lenders as only a few significant banks offer unsecured business loans. Unsecured loan options for Filipino businesses are:
- Security Bank SME business express loan. This bank offers loan amounts from ₱1,000,000 to ₱5,000,000. Its loan term ranges from 12 to 36 months. Depending on the loan term, it accrues a monthly add-on rate of 1.50% to 1.95%.
- DTI Pondo sa Pagbabago at Pag-Asenso (P3) program. With loan amounts from ₱5,000 to ₱200,000 at a 2.5% monthly interest, this is another viable business loan in the Philippines.
Term loans
A term loan allows entrepreneurs to get extra funding while keeping their financial resources intact. With a traditional term loan, you borrow a set amount of money upfront and pay back the money, with interest, every month for a certain period. These loans can support short and long-term business needs and are ideal for financing a small business. They are designed to make loan payments more manageable by spreading them across regular installments. Term loans offered by lenders in the Philippines range from ₱100,000 to ₱20,000,000. Short-term loans are payable within a year, while long-term loans are payable in 5 to 15 years.
Term loans are typically used to purchase equipment for enhancing production or expanding a business. They are also helpful to buy inventory and construct and renovate properties like office space, stores, or warehouses. Term loans add fixed working capital to a business and fuel it. A term loan may be secured or unsecured. Secured loans, as we know, require interested applicants to provide assets as collateral. However, unsecured loans do not require any such collateral. Securing a loan with collateral could result in lower interest rates, which makes unsecured loans a potentially costly funding option. Following are some of the best term loan options for businesses in the Philippines.
- BPI SME term loan. BPI offers SMEs a viable term loan option. The loan provides a minimum of ₱300,000 with up to 5 years of the loan term. The applicable interest rate varies depending on the prevailing market interest rates.
- PSBank SME term loan. PSBank also offers term loans designed to meet the requirements of SMEs. They provide a minimum loan amount of ₱2,000,000 with real estate property as collateral and up to ₱500,000 with bank deposit as their collateral. The loan terms are up to 7 years, and its interest rate depends on the prevailing rate at the time of loan application.
- Robinsons Bank Go Small Biz. This institution offers loan amounts between ₱500,000 to ₱20,000,000. Its loan term ranges from 1 to 10 years. The interest rates are not fixed and depend on the loan amount and the market rates.
Credit lines
A credit line is a short-term loan that provides quick access to money on-demand as long as it's within the borrower's assigned credit limit. With a credit line, lenders fund the borrower's business checking account, with the loan amount accessed by issuing checks. In this arrangement, interest only starts accumulating when you purchase against the credit line and is charged only on the amount used. In the Philippines, small and medium businesses generally borrow between ₱500,000 to ₱20,000,000 through a line of credit, and these loans are valid for one year. Still, they can be renewed annually upon the lender's approval.
Like a term loan, lines of credit can be secured or unsecured. A secured line of credit would require the pledge of specific assets as collateral, while an unsecured line does not. Interest rates can be high, and the amount can be small for an unsecured line of credit. Some of the best credit line options in the Philippines are:
- Metrobank SME credit line. The bank offers loan amounts from ₱1,000,000 to ₱20,000,000 with a yearly renewable loan term. The interest rate is not fixed and can be volatile depending on the market scenario.
- First Circle revolving credit line. The First Circle revolving credit line offers a line of credit ranging from ₱250,000 to ₱5,000,000 that is renewable yearly. The applicable interest rate ranges between 1.39% to 3.49% per month.
Commercial real estate loans
Commercial real estate loans are similar to home mortgages but finance retail property purchases or renovation. To qualify for this loan, a business must occupy at least 51% of the financed property. Commercial real estate loans are available from traditional banks, retail, and online lenders. The general loan-to-value ratio ranges from 60% to 80%, which means you will have to invest the remainder of your funds. For a commercial real estate loan, the property being financed could serve as collateral on the commercial loan. A potential lender would review the business credit score, the property's documentation, and your personal and business financial information.
SBA loans
An SBA loan is a government small-business loan that covers startup costs, working capital needs, expansions, real estate purchases, and more. This type of small business financing is usually issued by a private lender but backed by the federal government. An application for an SBA loan is made through a lending institution like a bank or a credit union. The lender then applies to the SBA for a loan guarantee, which means if you default on an SBA loan, the government pays the lender the guaranteed amount. SBA loans require a personal guarantee from everyone with at least 20% company ownership. A personal guarantee puts an individual and their assets on the hook for payments if their business can't make them.
Merchant cash advances
A merchant cash advance is not technically a loan but is a viable option for businesses who need quick access to cash, a relatively huge loan amount. Rather than lending money, an MCA provider issues a lump sum of capital in exchange for a portion of the business's future receivables. This includes instruments like credit cards, which could be used to purchase equipment, secure inventory, etc.
Invoice financing
Invoice financing allows business owners to unlock cash tied up in unpaid invoices. A business can use outstanding invoices to secure funding, getting a cash advance in the form of either a one-time loan or an ongoing line of credit. When customers pay their invoices, a fee for the financing company will come out of that payment.
Financing companies could offer small businesses loans up to 60% of the value of their invoices. Invoice financing may be attractive for risk-averse business owners because you'd be borrowing from the money your business has already made but not received. You wouldn't have to worry about making payments based on the income you have yet to earn.
The main requirements for getting a business loan
Banks and financial institutions have different eligibility criteria. However, most of these institutions have similar requirements for business loans application. Lenders would usually prefer that the business meets the following criteria:
The business should be owned by Filipino aged 21 but not older than 65 when the business loan matures.
The business should be an SEC, or DTI registered business having at least three years of profitable business operations.
The business must meet a minimum annual gross sales or should be profitable in its operations.
These loan requirements aren't necessarily steep and reasonably obtainable, although they may vary from lender to lender.
All these requirements go hand in hand. For example, before qualifying for a business loan, you must build a good credit score, which is your ability to repay personal debts, including mortgages, credit cards, and car loans. This is because lenders will check your business' credit scores to see how good you are at paying off debts. Therefore, companies with bad credit may not be given loans. Aside from that, you should also meet the yearly revenue required for your business. However, many lenders are flexible in this area, especially if there are some aspects where you overperform. Remember that all lenders need you to complete a wide array of paperwork before your loan is evaluated. Still, if you have the requisite credit score and business history, you can easily find a loan that perfectly fits your needs.
Actual business loan requirements may vary a bit from bank to bank. Small business online lenders could have varying needs as well. However, these are the usual requirements.
Eligibility
The applicant must meet the lender's criteria to be considered eligible for a business loan.
The applicant must be a Filipino citizen.
Borrowers must be 21 years of age at the point of the application process and less than 65 at the loan's maturity.
The business must be registered for at least 1 year.
The monthly income must be a minimum of ₱40,000
It is also essential to have the following documents ready:
For a sole proprietorship
Completed and signed application form.
Copy of two valid IDs with a photo from the primary applicant.
Valid Department of Trade (DTI) business registration documents.
Recent income tax returns with BIR stamp.
Latest audited financial statements (at least 12 months) or audited balance sheet.
Latest bank statements (last three months).
List of customers/suppliers and details about their dealings.
Valid business or mayor's permit
For corporations
Signed and completed the application form.
Copy of two valid IDs with a photo from the primary applicant or owner.
Valid Department of Trade (DTI) business registration documents.
Latest income tax returns (ITR) with BIR stamp.
Latest audited financial report (at least 12 months).
Latest bank statements (last three months).
List of customers and suppliers and details about their dealings.
Valid business or mayor's permit.
Partnership or board resolution.
Continuing suretyship agreement (for corporations).
Note that where potential lenders demand collateral; proof of collateral may be indispensable.
How to apply for a business loan?
A business loan application can be made easily by taking these steps.
Make sure your business is eligible
To qualify for a loan, whatever loan you have in mind, lenders typically like to see at least two years in business, solid annual revenue, and a good credit score, which starts around 690. If your business is struggling, borrowers need to meet these requirements and whatever the lenders require more.
Consider repayment terms
A borrower's next step is deciding how they'll repay their loan. Be realistic about the amount you can afford to pay each month. Consider external factors such as seasonal lulls, supply chain interruptions, and social changes. A lender will determine your payment terms based on various factors, such as:
Loan type
Business profitability
Business type and how long it's been operating
Business owners' income
Credit history
Talk to a financial adviser
Speaking to a financial adviser before you choose a loan is usually beneficial. They will have insight into the various financial institutions and their loan programs. As a result, they can provide you with more expert advice on which financing options are best for your business, plus they help you create a plan to repay any debt you take on and stay profitable in the long run.
Gather application documents
Loan applications can vary based on the loan type, but lenders should be able to help you prepare your paperwork.
To apply for a loan, an applicant must have these documents ready.
Statement of personal history
Financial statements
Income tax returns
Business tax returns
Business license
Lease agreement if applicable
At least a one-year cash flow projection
Once you've considered these, you can apply for a loan online from the lender's website or by following the physical loan proceeds where a bank processes the loan. One will typically have to fill out online forms when the loan is from an online lender. Requirements for such a loan will be available on such websites. Please, note that it is essential for an applicant to confirm and finalize the type of loan they intend to take.
How to repay a business loan debt?
Reading loan agreements carefully to understand how the repayment works cannot be overstated. It will inform you of the payment timeline. However, lenders may allow you to pay in person when the loan is due.
A company's debt may also be returned using a monthly paycheck, a personal bank account, credit card, or any other method agreed upon by the interested applicant and lender. Payback terms vary by lender: some need 12–36 months of repayment, while others offer borrowers a longer repayment time. The loan amount may well determine this.
Payments can also be made online through partner firms or in person. This is entirely at the lender's discretion. With online lenders, you could agree to terms and conditions when you take a business loan, and the lender will be required to deposit the check or take the funds from your account electronically. This signifies you've given the lender ACH permission to debit your account on the loan's due date electronically.
Pros and cons
As part of due diligence in comparing the lending options available to one from banks and other sources, it's good to consider the pros and cons of securing a business loan with a bank and what other sources come to mind.
Pros
Offers cash flow boost. One of small business owners' top cash flow struggles is irregular revenue streams. However, periodic revenue streams don't have to be an issue with business loans. A commercial business loan provides the cash you need to invest in new equipment, meet payroll, or afford other business expenses.
Offers business ownership. In the short term, selling shares in your company to raise cash may seem inexpensive compared to a commercial business loan. However, this funding method carries a different kind of expense. Many small business owners have found themselves on the outside looking in on their own company after raising funding through equity. Acquiring a commercial business loan retains ownership of the business instead of having investors or board members making the decisions for yourself instead of depending on a proud member of your board.
Offers multiple products. There are several loan and credit products to pick from, which distinctly help a business.
Offers flexible use-case. If an investor funds you, there's the possibility that they will have a say in how you use the cash. They can also restrict what it can and cannot be used for. However, if a lender funds you, so long as the loan isn't specifically for business equipment or real estate, there is no bar on how to use the funds for business purposes.
Cons
Requires extensive paperwork. Since financial institutions extend financing options based on a company's ability to pay, they'll require extensive paperwork.
Comes with a risk of loss. To ensure security in investments, many financial institutions require business owners to provide them with a form of collateral as a guarantee against defaults. If you use an asset for collateral, you risk losing it if you default on the loan. New business owners sometimes need to use personal assets (such as a house) as collateral. In that situation, one stands the risk of losing a home.
Offers no repayment flexibility. Commercial business loans are not so flexible. B
This is because the borrowers take out a set amount, make regular pre-determined monthly payments, and are also expected to repay the loan at an agreed time frame, which can be challenging.
Delays in loan disbursement. The underwriting process for loan approval is typically longer for a business loan than for other loans. It can take several months for the highly desirable SBA loans to get approved and receive any funding from the lender. A business loan may not be the best option for an immediate need for cash.
Legal regulation of business loans in the Philippines
Within the Philippines, there aren't any interest rate restrictions on loans. However, the Securities and Exchange Commission (SEC) has agreed to limit consumer interest and other costs to avoid predatory lending. After discovering that certain corporations had added 2.5% to their additional charges, the SEC requested the Bangko Sentral ng Pilipinas (BSP), the nation's central bank. In its October 2021 statement, the authority decided to impose a maximum interest rate, thereby curbing exorbitant rates.
Also, according to Section 7 of Republic Act No. 9474, or the Lending Company Regulation Act, these institutions can provide loans at the amounts, rates, and charges agreed upon with borrowers. The Monetary Board can also regulate the maximum rate or range of purchase discounts, lease rentals, fees, services, and other costs payable by financing firms under Section 5 of the Financing Company Act (Republic Act No. 8556, the Financing Company Act. The Bangko Sentral ng Pilipinas advises lenders to deny credit with payment terms that surpass 35% of monthly income and may also refuse credit with payment terms that exceed 28% of monthly profit.
The actual cost of a business loan
Once an individual commits to financing as a business owner, they will likely have to repay the principal plus interest. On top of that, you may accrue other fees to cover various costs. Business loan fees vary by lender and loan type.
Application fees. To take out a loan, you'll need to fill out a loan application. Since it takes time to review loan applications, some lenders charge application fees.
Origination fees. It costs money for lenders to review and originate loans. That's where origination fees come in. Some origination fees are flat, while others are a percentage of the loan principal. Origination fees for small business loans could be anywhere between 1 to 6%.
Administrative fees. Depending on the business financing lender you select, some lenders charge small business administration charges to cover the cost of your loan's upkeep. Sometimes, these are included as monthly payments.
Late payment fees. If borrowers cannot make payments when due, there could be late fees. These late fees are usually flat or charges as a percentage of your missed payments. Automatic deductions or calendar reminders on your phone can help you avoid late fees.
Annual fees. Depending on the agreement with the borrower, lenders may charge an annual fee to keep the business line of credit open and active.
Many fees get folded into a loan's annual percentage rate or APR. So, when you compare the APR on your loan financing options, you can easily see if you're paying a lot of fees and interest.
Conclusion
Credit support is one effective measure for the economic health of a nation. Not only does a good financing landscape help meet individual financial needs like personal loans and mortgages, but it also enables and promotes entrepreneurship, creating greater social mobility among the populace.
To take advantage of business loans, you'll need to determine what kind of financial need your business has at that point. Short loan terms may allow companies to even out cash flow. However, longer loan terms will allow them to generate enough revenue for years to come. Having recognized this, picking business loan offers based on priorities would be profitable. Business loans provide business owners the opportunity for startups and ongoing businesses to continue being in the market. Not oblivious to the 'cons' associated with getting business loans, they are a viable source of business funding.