Securing external financing for your business can enable your venture to achieve a level of growth and success that may be impossible to do if you were to rely on your own financial resources only. If you’re shopping around for loans for businesses, it’s important to understand what each loan product you’ve shortlisted requires as well as the risks they represent. Make sure to consider these factors when choosing between different business loan programs:
1) Interest Rates
A business loan with a low interest rate is going to be easier to pay off than a similar one with a higher rate. Loan providers will usually only offer low interest rates to borrowers they trust or those that present a manageable level of risk. Lenders usually determine the level of risk based on the borrower’s history and their assessment of the external factors that might affect the borrower’s ability to pay.
Some neobanks and financial technology firms can make highly accurate risk assessments by primarily offering loans to current users of their products and services. In the Philippines, the fintech giant Maya Business offers favorable interest rates on its Maya Flexi Loan product to frequent users of its payment processing tools, using usage patterns as a way to gauge a specific borrower’s risk profile.
2) Application and Collateral Requirements
A high-quality business banking loan from a mainstream financial institution is usually going to have lower interest rates compared to loans from smaller providers. However, in most cases, these institutions will also have stringent application and collateral requirements, particularly if a borrower is seeking a large principal sum relative to their ability to pay. Fortunately, lenders may also offer easy applications and no-collateral requirements for small amounts to borrowers that are assessed to be good risks. Others, like the aforementioned Maya Flexi Loan, can provide business owners with up to PHP 2 million of extra capital with zero collateral.
3) Other Loan Repayment Terms
The cost of a business loan can go beyond its interest rates. Lenders may also require the payment of other fees and penalties depending on the situation. Some circumstances may also cause the interest rates themselves to change from their original values. The schedule of payments can also impact your business’s ability to pay back the loan. Make sure to always look past simple interest rates and look at the whole picture before deciding on a loan offer.
4) Lender Accreditation
In the Philippines, informal loans remain extremely popular. However, taking loans outside of the formal financial system presents several serious risks. Given this, it’s extremely important to choose lenders that are properly accredited.
In the Philippines, the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP) regulate and accredit lending institutions, and borrowers should verify a lender’s accreditation before engaging in a lending agreement. Choosing lenders regulated by these bodies will ensure that you’re adequately protected against abuses and unfair lending practices and give you avenues for resolution if there are any disputes.
5) The Purpose of Your Loan
Most lenders will want to know the purpose of your loan, as understanding your intent will help them assess the risks involved. For instance, all other things being equal, a loan to acquire fixed production assets is probably going to be more likely to be granted than one to update your store’s interior design, as the former directly relates to your business’s production capacity and, consequently, your ability to pay the loan back.
6) Your Business’s Current Performance
As a rule, lenders will almost always prefer to lend to businesses that are already somewhat successful, particularly those that have a good positive cash flow. Even if your business owns a lot of assets and has no other debts, lenders might be hesitant to give you favorable terms if you’re unable to show a sufficiently strong performance.
It’s worth remembering that not all lenders will be familiar with what constitutes “good” performance for your specific industry. This is part of the reason why some institutions specialize in lending to specific sectors, such as agriculture or small business. If your business is qualified, it may be able to get better deals from these lenders than it would from institutions that focus on a wider market.
7) Customer Support
Business loans can be very complicated instruments, so it’s great to have guidance throughout the life of a loan. Lenders with good customer support can provide you with prompt service as well as the transparency and knowledge that you need to pay back your loans on time. If you need to take out a loan for a large amount, make sure to only shortlist institutions that have a reputation for transparency and good service.
8) Funding Timeline
Finally, it’s important to take stock of the release schedule included in a loan offer. A low-interest, easy-to-pay loan is all well and good but it isn’t of much use if the funds are not released on time. Whenever possible, opt for loans that swiftly provide the funding amounts your business needs.
Taking out a business loan is often necessary to help your business reach critical mass, cover emergencies, and take advantage of fleeting opportunities during cash-poor times. Lending institutions that understand your industry and offer customer support are often the best bets during the earlier stages of your business. However, they are not necessarily the only places to get secure funding. By understanding the factors above, you can secure better, safer loans from a wider variety of sources, ensuring your business’s resilience and continued growth.