It's very common for both newbies and seasoned business owners to think that borrowing money is not a good idea, especially in the Philippines. But understanding loans and how they work can actually lessen the risk to your business and even help it grow faster!
A loan is money you borrow today, with a promise to pay it back in the future, plus interest. It’s a very simple idea, so why do loan plans and loan features always seem so complicated? It’s because the lenders are trying to do two things:
When deciding who to lend money to, banks and other financial institutions want to choose people who will pay them back. They can’t predict the future, but they can ask for information to help them make their decision. That is why they ask for so many requirements—they are doing research to make sure you are someone who will pay them back. For business loans, banks or lenders will usually look at your current revenue, business age, borrowing history, collateral assets, and more.
Once the bank or financial institution has decided that you’re a good borrower, their next step will be to convince you to borrow from them instead of someone else. Lenders will usually try to sell to you based on three things:
Lower interest rates are generally better, and many lenders will highlight this. But make sure you also check the terms used when applying this rate, because they can make a big difference!
Lenders will usually give you either a monthly flat rate (also called add-on rate) or monthly diminishing balance rate. As the names suggest, a flat interest rate is computed based on the total amount you initially borrowed as long as the amount is not yet fully paid. This means you pay the same interest every month until the loan is fully paid back. A diminishing balance interest rate is applied only to the part of the loan which you have not yet repaid at that point in time, so your interest payments will lessen each month as you pay back your loan.
Philippine law requires that interest should be explicitly written on your loan contract or else no interest can be charged on your loan—so make sure to read your contracts from start to finish! You may even find some nice surprises by asking lenders for more details about the loan terms. Some lenders, like First Circle, offer interest rebates and other promos that can lower your total cost for the loan.
Aside from the interest rate, you should also pay close attention to the fees that come with each loan offer. These can add up quickly, especially for loans with strict penalties for changes in your repayment schedule in the future. Below are a list of common fees you may encounter when thinking about getting a business loan:
Time is one of the most important factors when considering a loan. Most people know to look at how fast they can get cash, but the term length of the loan is just as important—you don’t want to be paying interest on a loan for 2 years when you only needed the cash boost for 6 months.
This is one of the reasons why First Circle offers revolving credit lines instead of fixed term loans. A credit line is like having a credit card for your business. Not only do you have a pre-approved credit limit that you can get a loan from anytime, but you can also choose how long you want to use each loan. You can borrow the money only for as little as 1 month, so you only pay interest for as long as you actually need the money. No early repayment fees here!
Loan offers might look complicated, but don’t let that scare you. Once you have a basic understanding of how loans work, it is much easier to compare your options based on the practical benefits to your business. Just don’t forget to take your relationship with the lender into account because that has some very practical implications too!
You want to find a lender that will not only give you a good price, but also continue supporting your business through its ups and downs. When the pandemic hit for example, First Circle worked with its clients to restructure their loan agreements and ease the burden of repayments rather than pressuring them to pay up despite the lockdowns. Running a business is hard enough, so you want to find a lending partner who will make things easier for you, not harder.
Time is valuable—having what you need exactly when you need it is valuable. This is especially true in business because great opportunities are often taken by those who can act the fastest. If a customer offers you a multi-million peso project but you can’t deliver because you don’t have the cash to buy enough raw materials at that time, that will be a huge loss for your company. Not only do you have millions in lost revenue, but you are much less likely to be given similar projects in the future because the customer thinks you won’t be able to deliver.
Generally speaking, you should consider taking a business loan if it can help you take advantage of growth opportunities like the one mentioned above. Many people think that loans are for failing businesses that are running out of money, but in reality it’s the exact opposite! Remember—banks and other lenders want to give money to people and businesses who will pay them back. If you apply for a loan and get approved, chances are that the lender thinks your business is strong enough to pay back the loan and make even more money in the process.
In reality, the issue many good businesses run into is that they can’t get access to credit or a loan even if they are doing well and able to pay it back easily. This is the result of a complex web of factors, but if you find yourself in this situation then feel free to contact us and we’ll be happy to assist.
If you just need some guidance on how to evaluate your loan options, then here are some helpful questions to think about:
Finding the right loan product for your business can be difficult and choosing the right financing partner for your business is a big decision. You are the only one who can decide what’s best for your business, but these questions can steer you in the right direction.
Many business owners think that banks are the only places where they can borrow money safely, but that’s not true anymore. Here’s a list of 5 options to consider when you are looking for loan offers.
Loans can be a big help to your business if you know how to use them, but one of the issues you will often run into with traditional loan products is the processing time and lack of flexibility. The entire point of a loan is to get money when you need it, but traditional loan applications can take months and the terms of each offer are final once you sign—no edits allowed unless you want to pay the penalty fees.
If you really want to take advantage of the opportunities coming your way, you need to find a financing partner that moves as fast as your customers do. Not only does First Circle process new applications in as fast as 3 working days, but our Revolving Credit Line also lets you withdraw any amount within your credit limit anytime you need it in the future.
Trusted by the Philippine government as an official finance partner of the Department of Trade and Industry (DTI), our mission is to enable SMEs to achieve their full potential through fast, fair and flexible financial partnership.
For questions on how to get your own Revolving Credit Line, you can contact our team between 8AM-6PM, Mondays to Fridays. More information is also available on the Revolving Credit Line product page.
