Finding good sources of funding is a critical step in starting a business. A small business loan in the Philippines from the government, a bank, or a private lender is one viable financing option for budding business owners.
However, three in four or 77% of 100 Filipino micro, small and medium-sized enterprises (MSMEs) surveyed by cloud banking platform Mambu[1] are unable to secure sufficient business funding. Of these businesses that lack funding, 48% went on to have cash flow issues and 48% failed to launch new products.
To avoid experiencing such common start-up problems, secure a loan for starting a business instead of using up your savings or borrowing money from family and friends.
Below are the basics of business loans in the Philippines and the different types of loans for every kind of business. In this guide, you'll find different government and bank loan options for a start-up or small business.
What is a Business Loan?
Start-ups need funding or capital to begin their operations and start earning a profit. Banks and financial institutions lend this money in advance to these businesses through a business loan. In turn, lenders collect payments with interests based on the agreed-upon payment schedule and lending agreement.
A business loan in the Philippines is a financing opportunity in which lenders provide the funds to borrowers who will start a business, expand it, or pay off debts and other expenses. For whatever purpose they may serve, business loans are a relief to entrepreneurs who may need extra funding for their operations.
What is the Difference Between a Business Loan, Consumer Loan, and Personal Loan?
The purpose of a business loan is to fund a business need. It may be used for business expansion or to help pay for operating expenses.
A business loan typically offers higher loanable amounts and has more documentary requirements because of the larger funding required to set up a business.
A consumer loan, on the other hand, is a general type of loan. Personal loans, housing loans, and auto loans are examples of consumer loans. You can apply for any of these consumer loans to purchase items or services for personal consumption or even to refinance debts.
When it comes to interest rates, personal loan interest rates are usually higher compared to business loan interest rates. This is because personal loans are considered riskier for lenders.
Business loans have a longer and more thorough application process, as well as stricter eligibility requirements. Because of this, lenders have more confidence in business loan borrowers to pay off the entire loan with lower interest and a longer repayment period.
How Do I Qualify for a Business Loan in the Philippines?
Banks and financial institutions have different eligibility criteria. However, most of them have the following requirements:
- Must be a Filipino citizen aged 21 but not older than 65 when the business loan matures
- Should have an SEC-registered or DTI-registered business with at least 3 years of profitable business operations
- Must meet a minimum annual gross sales
- Good credit standing
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Basic Requirements When Applying for a Business Loan
Prepare the following documents when applying for a small business loan in the Philippines.
- Valid government-issued ID (Passport, Driver's License, TIN ID, PRC ID, Postal ID, or UMID)
- Proof of business billing address (Business Permit, Lease Contract, Utility Bills)
- DTI or SEC Certificate
- BIR Certificate of Registration
- Photocopy of audited financial statements
- Business background/company profile
- Accomplished loan application form
Related article: Sample Business Plan for a Small Business Loan Application
What are the Four Types of Start-up Business Loans in the Philippines?
A business loan in the Philippines comes in a variety of types that suit different business requirements. Before you start searching for the right start-up business loan, it helps to have an idea of the types of business loans for starters. Doing so helps you understand your options better and easily find the loan that matches your needs.
1. Term Loans
What is a Term Loan?
A term loan allows entrepreneurs to meet their short-term or long-term business funding needs while keeping their own funds intact. This is a great small business loan option in the Philippines for startup owners who want to make their loan repayments more manageable by spreading them out in regular installments.
Is a Term Loan Right for My Business?
Term loans are ideal for short-term or long-term funding for the following purposes:
- New equipment for increasing production or expanding a business
- Construction, renovation, or purchase of office space, store, warehouse, and other properties
- Adding fixed working capital to a business
- Loan for a franchise business
Loan Amount
Lenders provide term loan amounts ranging from ₱100,000 to ₱20 million.
Method of Funding
Borrowers receive the full loan amount as a lump sum credited to their deposit account.
Loan Term
Short-term loans are payable within a year, while long-term loans can be paid up to five to 15 years, depending on the lender.
Repayment Mode
Most term loans for businesses are paid back in fixed or equal monthly payments that include both the principal and interest.
Term Loan Options for Startups in the Philippines
DTI also offers loans for start-up businesses in the Philippines.
2. Credit Line
What is a Credit Line?
A credit line is a short-term loan that provides quick access to money on demand. It allows greater financial control, as the interest starts accumulating only when you purchase against the credit line. You pay the interest just on the amount that has been used.
Also known as evergreen loan,[2] a credit line or a line of credit allows you to repeatedly access funds without applying again and again. An evergreen loans lets you pull out money from your fund, make payments, and then pull out some money again.
Is a Credit Line Right for My Business?
A credit line is ideal for short-term, recurring, or working capital financing for the following purposes:
- Purchase of additional supplies, inventory, or both to meet seasonal demand
- Increasing working capital for financing daily business operations
- Accounts receivable financing
- Contract financing[3]
Loan Amount
Small and medium business owners can borrow from ₱500,000 to ₱20 million against a line of credit.
Method of Funding
For credit lines, lenders fund the borrowers' business checking account to the approved loan amount, giving them access to funds through issuing or encashing checks. The BPI Family Ka-Negosyo Loan provides additional ways to access loan proceeds such as ATM withdrawals, EPS (Express Payment System) transactions, and fund transfers via the BPI Online.
Loan Term
Credit lines are valid for one year and can be renewed annually upon the lender's approval.
Repayment Mode
Paying off a credit line is more flexible than that of a term loan. While the interest is paid in monthly installments, borrowers can repay the principal anytime or as often as they can within the loan term. This makes managing cash flow a lot easier for business owners.
Credit Line Options for Startups in the Philippines
3. Secured Business Loans
What is a Secured Business Loan?
A secured loan for business requires collateral—such as real estate properties and bank deposits—that the lender will claim to recover its losses in case the borrower defaults on the loan.
The collateral reduces the risk for lenders, which is why secured loans generally have lower interest rates, longer loan terms, and higher loan amounts than unsecured loans. These features make a secured business loan affordable and suitable for startup businesses that need funding at a time when they're just beginning to make profits.
For secured business loans, lenders charge several collateral-related fees such as appraisal fees and collateral registration fees.
With the exception of a few, term loans and credit lines in the Philippines have secured business loans.
Secured Business Loan Options in the Philippines
4. Unsecured Business Loans
What is an Unsecured Business Loan?
As opposed to secured loans, an unsecured business loan can be acquired without collateral by start-up businesses in the Philippines. They're more difficult to qualify for, especially for those with bad or no credit history. No-collateral business loans come with higher interest rates, shorter loan terms, and lower loan amounts than loans secured by collateral.
Private lenders typically provide unsecured business loans in the Philippines, while only a few major banks have this type of business loan. The big banks tend to focus on collateralized loans and it can be quite a difficult process to get approved for an unsecured business loan with a decent interest rate.
If you find yourself in this situation, consider reputable private businesses such as First Circle, Esquire, or Acudeen. While they have not reached the brand recognition of major banks yet, their processing time is often a lot quicker compared to some banks, and depending on your company's credit profile, their interest rates are sometimes even cheaper.
Here are some startup business loans without collateral in the Philippines that you may want to consider.
Unsecured Business Loan Options in the Philippines
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7 Considerations When Choosing a Business Loan in the Philippines
Which startup business loan in the Philippines best fits your financing needs? Consider these seven important factors first.
1. Your Purpose for Borrowing Money
What do you need the money for? Is it for a short-term need like buying inventory and supplies to meet seasonal demand? Or you're looking to fund a long-term investment like building your shop?
The types of business loans in the Philippines cater to a specific purpose, be it short-term, long-term, or both. Be clear about your goals from the get-go.
Business Loan Purposes
Before applying for a business loan in the Philippines, decide what you’re going to use the funds for.
Business Expansion
The business expansion reflects an entrepreneur’s vision to grow. Banks are more likely to approve most loan applications for purchasing land, a working space, or any form of real estate to accommodate a growing operation.
If you think your business is on track for growth, then you can apply for any of those available business loans. Just remember that most lenders require your assets as collateral for the loan.
Equipment Purchase
Some business owners borrow money to upgrade or add equipment. Equipment purchases may need a smaller amount of loan compared to business expansion. However, you still need to make a cost-benefit analysis[4] to determine whether it’s more practical to buy a new tool or to lease it for the long term.
Increase Working Capital
A term loan is usually one of the best options if you’re looking at increasing your money for day-to-day operations. Some business owners apply for a business loan in the Philippines until their profits and sales reach a certain volume.
Take note that business loans for working capital are considered riskier than loans for business expansion. This may result in higher interest charges depending on your negotiation with the lender.
Improve Marketing Strategy
Marketing strategies can make or break a business, and entrepreneurs need to adopt new techniques to improve their visibility and credibility among potential customers. Take out a business loan in the Philippines to invest in employee training, software, new staff, and technology.
2. Loan Amount
Next, determine how much you need to borrow for your business. Loanable amounts vary according to the type of loan and the lender.
For example, secured business loans for startups typically have higher loan amounts than unsecured loans. The higher the value of your collateral, the better your chances of qualifying for a higher loan amount. Also, most banks lend higher amounts to entrepreneurs than government agencies and private lenders in the Philippines.
Determining your loan amount is crucial because this comes with interest and repayment depending on the sales and revenues of your business. Before deciding on the final loan amount, you can check your balance sheets to know how many monthly amortizations your business can cover.
3. Method of Funding
How do you prefer to access your funds? Do you want to receive the loan proceeds as a one-time lump-sum amount? Or you'd rather access the money only when you need it? Business loan types largely differ in the way the loan proceeds are released to the borrower.
4. Loan Term
How long can you realistically pay the business loan? Can you pay it off within a year? Or you need a longer time to complete your loan repayments?
The loan tenor can either shorten or prolong your agony of making monthly repayments. Again, deciding on the loan to be paid in one year or 10 years depends on the status of your business.
Short-Term Loans vs Long-Term Loans Comparison
5. Repayment Mode
What mode of loan payment will work better for you: fixed or flexible monthly payments? The right choice depends on the cash flow of your business.
Fixed-Rate Loans vs Variable-Rate Loans
6. Collateral
Do you have a valuable asset you’re willing to put up as collateral for a secured business loan? If so, the amount you can borrow will depend on the appraised value of your collateral. Borrowing money through secured loans using your properties and assets as collateral can be both advantageous and disadvantageous to you.
Advantages of Borrowing Money with Collateral
- Increases your chances of approval - Having collateral improves your eligibility for a business loan for start-up business in the Philippines. If you have a low credit score or if you haven’t borrowed before, then the collateral is enough to guarantee your loan repayment.
- Gives you the chance to explore more lenders - With an on-hand asset to offer, you have the chance to apply with different types of lenders and choose the best loan offer. If you don’t have collateral, you might settle for the lender that approves your credentials even if the interest rates are high and the loan terms are not convenient for you.
- You can get lower interest rates - A piece of property reduces the loan risk for the lender. Thus, there is a reason to reduce the interest rates of the loan.
Disadvantages of Borrowing Money without Collateral
- Your options are limited. Again, without an asset to guarantee a loan, you might just settle with lenders that approve your loan application even when the loan terms are not easy.
- The interest rates are potentially high. Unsecured loans usually come with hefty charges and high interest rates because there’s no guarantee that the loan can be paid off.
- The loan amount can be low. Most of the time, the maximum loan amount is up to 80% of the property value. Unsecured personal loans for startups in the Philippines might provide lower loan amounts because of the higher risk.
7. Interest Rate
Of course, you want to get the best business loan at the lowest rate possible. But it can be quite tricky because interest rates vary according to the lender's prevailing rate, loan term, and type of loan. For instance, lenders charge higher interest rates on unsecured business loans than secured loans.
Knowing the difference between effective interest rates and APR will give you a visible benchmark when comparing loans. Lenders usually just advertise the interest rate of a loan but may not reveal the APR, which is the true cost of the loan that includes everything charged against you.
Effective Interest Rates vs Annual Percentage Rates
Final Thoughts
After you've considered all factors when choosing a business loan in the Philippines, take a look at each type of loan. As an entrepreneur launching a startup in the Philippines, you have four choices: term loans vs. credit lines and secured vs. unsecured loans. Use this guide to help you find the best business loan for you.
Money is a serious matter when it comes to running a business of any size, startups included. Do your research to determine the suitable type of business loan in the Philippines for your business needs. Spare yourself the trouble by using a free online comparison tool that can help speed up your search for the right loan for funding your business.
See also: Crowdfunding 101: How It Can Help Finance Your Business
Compare Other Loan Options for Starting a Business in the Philippines
Below is a list of trusted personal loan companies and their loan features. Compare your options and apply through Moneymax!
| Personal Loan Provider | Features |
|---|---|
Citibank Personal Loan |
|
| EasyRFC Multi-Purpose Loan |
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| SB Finance Personal Loan |
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| TALA Personal Loan |
|
Sources:
- [1] Filipino MSMEs turn to friends and family amid business funding roadblocks (BusinessWorld, 2022)
- [2] Evergreen Loan Definition (Investopedia, 2021)
- [3] Can Contract Financing Work for Your Small Business? (Kassar, 2014)
- [4] Selecting a loan and doing a cost benefit analysis (Loan Market)
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