Starting a business is only the beginning; you need to work on making it sustainable. If you have a burning desire to start a profitable business and give it your best shot, taking out a business loan is the right step to take.
When approached strategically, business loans can be a valuable resource, empowering you to achieve your business goals and navigate challenges with financial flexibility.
Also read: 10 Tips for Effective Cash Flow Management
What are business loans, exactly?
It’s a form of funding issued to a business to finance specific business needs like operating expenses, new equipment or expansion projects. At the same time, it’s crucial for investments with clear revenue potential.
While loans can act as a safety net, relying solely on them for day-to-day operations can hinder long-term growth. After all, business operations should be sustained by the business itself. The primary goal of borrowing should be to invest in growth initiatives that ultimately lead to increased revenue.
Responsible borrowing can contribute to building a positive credit history for your business. By making timely repayments, you can improve your creditworthiness, potentially unlocking access to more favorable loan terms in the future.
It’s, therefore, crucial to do thorough research, assess your business’s financial health and develop a realistic repayment plan before taking a loan.
Types of small business loans in the Philippines
Term Loan
This is perfect for businesses needing help in jump starting or expanding operations, and often intend to have longer repayment plans. Term loans usually include a lump sum that you need to pay back with interest.
The “term” in term loan refers to the agreed-upon timeframe within which the borrower must repay the loan.
The repayment schedule may vary depending on business needs – there are short-term, intermediate and long-term options. Since this is often loaned out by banks, expect extensive requirements and stricter approval.
- Loan Amount: Ranges from ₱100,000 to ₱20 million.
- Loan Team: Short term loans are usually paid within a year, while long term loans may range from 5 to 15 years.
will lead to increased revenue for your business.
Credit Line
With a credit line, an amount is assigned to a business that they can loan within a certain period. Works just like a credit card, you can easily take out loans as long as it’s within your available balance.
The drawback here is the banks often charge higher interest rates, but this will be perfect for small amounts and unanticipated business expenditures you need to cover.
- Loan Amount: Ranges from ₱500,000 to ₱20 million.
- Loan Team: Credit lines are usually valid only for one year and can be renewed annually.
Secured or Collateral Loan
Straightforward, secured or collateral loans require real estate, equipment or high-value assets as collateral. These often allow the borrower to get large sums with little interest compared to other loan types.
The collateral serves as a guarantee for the lender that if the borrower fails to repay the loan according to the terms of the agreement, the lender can seize the collateral to recover the outstanding debt.
The catch here, of course, is you risk losing the collateral if you fail to repay the loan. Risky but if you’re confident enough, this is the way to go.
history for your business.
Unsecured Loan
Basically the opposite of secured loans, unsecured loans don’t require collateral. Unsecured loans are approved based on the borrower’s creditworthiness, financial history and ability to repay the loan.
But before you celebrate and go for this, know that your unsecured loan amount will be at the institution’s discretion and often come with higher interest rates, because it’s riskier for the lender.
How to apply for a business loan?
Applying for a business loan in the Philippines can be a smooth process if you’re well-prepared. Here’s a step-by-step guide:
1. Assess your needs
Why do you need a loan? Define your specific purpose, whether it’s expansion, equipment purchase, inventory acquisition, or working capital.
How much do you need? Calculate the exact amount required, factoring in buffer for unexpected expenses.
2. Choose the right lender:
- Banks: Traditional option with various loan programs but might have stricter requirements.
- Thrifts & cooperatives: Offer competitive rates and flexible terms, but loan amounts might be lower.
- Online lenders: Faster application process and some cater to micro-businesses.
- Government agencies: Provide subsidized loans for specific sectors with stringent eligibility criteria.
so your loan can get easily approved.
3. Prepare your documents
Requirements for application may vary depending on the bank or institution, but here are the general documents you need to prepare beforehand:
- Valid government-issued ID (Passport, Driver’s License, TIN ID, PRC ID, Postal ID, or National ID)
- Proof of business billing address (Business Permit, Lease Contract, or Utility Bills)
- Business permits and licenses
- Business background or company profile
- BIR Certificate of Registration
- Bank statements
- Latest Financial Statements
- Accomplished application forms
- Business plan (A concise plan outlining your business goals, strategies, and financial projections)
- Collateral or proof of ownership of the collateral, if applicable
For start-ups with no financial statements or collateral available, you can check with your preferred bank or institution about their guidelines.
4. Compare loan options
- Interest rates: Compare annual percentage rates (APR) and understand other associated fees.
- Loan terms: Repayment period, grace period, balloon payments, prepayment penalties.
- Loan requirements: Ensure you meet all eligibility criteria of the chosen lender.
Complete the application form accurately and provide all required documents. Attend any interviews or meetings requested by the lender and be prepared to answer questions about your business and loan purpose.
Processing times vary depending on the lender and loan amount. You may be required to submit additional documents. Once approved, review the loan agreement carefully before signing.
Don’t be afraid of business loans
Entrepreneurs and business owners often hesitate to consider business loans due to fears of having debt and the financial risk. However, understanding the benefits and responsible use of business loans can alleviate these concerns.
Firstly, a well-thought-out business loan can serve as a strategic financial tool to fuel growth, expand operations or bridge temporary cash flow gaps.
Rather than viewing it solely as a burden, you should see it as an opportunity to leverage external capital to enhance your business capabilities and seize growth opportunities that might otherwise be challenging.
Check out more tips to boost your small business:
Effective Strategies for Scaling a Business
PESONet vs InstaPay: Which is Best for Your Business?
How 3PLs Help Your Ecommerce Business Grow
