There comes a time in every entrepreneur’s journey when you want to expand the business but experience limited access to funding. Unless you’re sitting on a nest egg, it’s difficult to navigate this problem all by yourself. Which is why many see the value of taking out an SME business loan!
You may be a sari-sari store owner looking to replenish your inventory or a tech startup in Makati City aiming for the next big innovation, the right business loan can make or break your journey to growth.
While external funding is widely available, not all business loan applications get approved. For that, you have to prepare for an interplay of various factors so your loan request won’t be denied. This comprehensive guide from Advance PH will show you the whole nine yards of choosing the right business loan for 2025 and beyond, tailored to the Filipino business environment. Let’s go!
What is a Business Loan?
A business loan is a financial product that helps provide funding for businesses for a multitude of reasons - starting a new venture, financing a huge purchase order, or expanding the business through hiring more personnel, upgrading your equipment, or leasing a new plant. Business loans are different from personal loans in that business loans are structured with the specific needs, repayment capabilities, and credit-worthiness of the business applying for it.
Secured Loans VS Unsecured Loans
Regardless of its purpose, a business loan can either be secured or unsecured.
Secured loans are offered with lower interest rates but the business must provide a collateral to serve as assurance to the lender. Collateral is an important concept in secured loans, as it is the lender’s safety net in case you default on the loan. In the Philippines and anywhere else, when you take out a mortgage or an auto loan, the house or the vehicle acts as collateral. If you own a particularly valuable asset, banks and lending institutions can offer you a sizable loan amount and longer repayment terms.
On the other hand, unsecured loans don’t require collateral but charge higher interest, shorter repayment terms, and only fully rely on an entity’s income and credit-worthiness. Between the two, unsecured loans are more attractive for small businesses just starting out. In general, unsecured loans are best for businesses with immediate financial needs such as financing an invoice or a purchase order or fulfilling payroll while waiting for a handsome receivable. You can also use an unsecured loan if you don’t want to risk a valuable asset.
Types of Business Loans
Startup loan
This loan is designed for entrepreneurs intending to start a business. A startup loan is a financial grant extended to aspiring entrepreneurs who need capital for a sound, viable, and profitable business idea. In many cases, government agencies like the Department of Trade Industry (DTI), Department of Science and Technology (DOST), Department of Information and Communications Technology (DICT) provide startup loans through its different economic upliftment programs.
Startup loans are usually granted to very few entrepreneurs, and thus are extremely challenging to secure. Apart from a mountain of documentary requirements, you need to have a well-thought out business plan or a solid business pitch to curry favor from the loan approvers. On top of your own personal credit-worthiness, you must be ready to show your proof of concept, a viable business model, as well as sales projection.
For example: The owner of an artisanal + poetry coffee shop soon to open in Makati City can take out a startup loan to buy new espresso machines, furniture, and other equipment for his business.
Startup loans can come in different amounts, from P5,000 to P5 million. Loan tenure can be as short as a few months and up to 2 years, largely depending on the disbursed loan amount. Mind the fineprints - interest rates are often computed based on the profitability, and purpose of the business project!
Revolving line of credit
A line of credit is a type of business loan that gives entrepreneurs access up to a set credit limit. You may use it anytime or access just a portion of it depending on the business need. This means, you will only pay interest on the amount you took out.
As such, line of credit is often used to achieve short-term goals, such as gaps/ uncertainty in cash flow or immediate growth opportunities. Because a credit line is always available, business owners can use it as an emergency fund for unanticipated business expenditures like increased demand for products during peak season, purchase of new equipment, or equipment repair.
Once you pay off your existing loan, your credit limit is replenished and you can borrow again anytime sans the stress of applying again. In most instances, your credit line grows as long as you keep on using it and paying your dues on time.
For example: A gift shop in Baguio City could use a credit line to stock up on new holiday items or merchandise in preparation for the Christmas rush.
Term loan
One of the most common loan types available to businesses in the Philippines is the term loan. Term loans are often taken out by larger companies, and are disbursed as a huge lump sum, but only because it is exchanged for a valuable collateral.
Most of what we know as corporate loans, commercial loans, and real estate loans are actually term loans. They are available to support funding for a large one-time purchase or a big investment like building new stores, buying a piece of land for business, and even consolidating an existing debt.
A term loan can be as low as 2 million to 20 million pesos or higher, which depends on the collateral and repayment terms. In the Philippines, a term loan can be paid in a year to up to 25 years. Because of the huge sum of money involved, it’s the banks that most of the time sell this financial product.
For example: A Jollibee franchise owner takes out a term loan to finance a new branch along the U-belt.
Microfinance loan
A microfinance loan is a financial product offered to micro-entrepreneurs, usually from low-income sectors and who have limited access to traditional banking services. They are small-scale loans designed to reduce unemployment in the community and support entrepreneurship from marginalized segments of the society.
Microfinance loans have fewer requirements and don’t often require collateral. In corollary, microfinance companies charge a tad higher than bank loans. They can also charge service and processing fees, which impact the final borrowed amount. However, they offer more flexible repayment terms (daily and weekly) to somehow ease the financial burden of the debtor.
Take for example: A tricycle driver whose vehicle figured in a road accident could apply for a microfinance loan so he could purchase a new unit. Also, a farmer whose crops have been destroyed by the recent typhoon could take out a microfinance loan so he could buy sacks of seedlings for the next planting season.
Merchant cash advance (MCA)
A rare financing option is called a Merchant Cash Advance or MCA. Businesses that take out a merchant cash advance receive a lump sum in exchange for a percentage of future credit card sales or daily cash receipts. Repayments are made daily until the cash advance and agreed-upon fees are fully paid. Because repayments are heavily linked to sales performance, merchant cash advance is, more often than not, used by businesses with fluctuating revenue - particularly advantageous in retail, hospitality, and trade industries.
Alternative Lending Options
While very rare, some entrepreneurs resort to alternative options to get funding for their business idea or need. Most of them come from private, online, and government organizations.
Peer-to-Peer lending
Instead of approaching established financial institutions, some entrepreneurs join an online community where they can lend or borrow money from one another. Lenders have a chance to make more money through investments while borrowers can get quick access to loans for low interest rates. The main currency in this lending option is personal connection and trust, which is why you must be an active and visible member in the community before you try to request for a loan from your peers.
Crowdfunding
This unconventional option is for startup entrepreneurs seeking funding for a business concept that may be popular and beneficial to the society at large. Crowdfunding is practically a fundraiser campaign to get funds to develop a promising proof of business concept from individuals over the web who support the idea or the advocacy behind it.
Factors when Choosing a Business Loan
Now that you’re aware of the types of business loans, let us help you choose the right loan for you. Before you prepare the relevant documentary and reportorial requirements, these are several factors you must consider before applying for a business loan:
Loan Amount
Do not fall prey to the maximum loan amount you can apply for from the bank or any lending institution. Assess the business need and borrow only the right amount to fulfill that need. Overborrowing leads to problems in the future as repayment can be hard for you.
Interest Rates
Before choosing a business loan, scour the internet for options and compare interest rates offered by different lenders. Knowing the interests spread over the loan tenure will help you assess your repayment capacity and lead you to the best choice.
Repayment Terms
A loan’s repayment terms will inform you how to conduct financial planning and cash flow management once it’s taken out. Ask yourself: Will your business be able to make regular payments toward the loan while still keeping your operations moving smoothly?
Required Collateral
Will you go for a secured loan (those requiring collateral) or an unsecured loan? If you seek approval for a higher loan amount, will it be okay for you to lay down your house, vehicle, equipment, or real estate as collateral? Understand that providing collateral entails the risk of it being repossessed or foreclosed in the event you default on a loan.
Lender's Legitimacy & Credibility
Steer clear of loan sharks, and always go to a trusted lender or financing institution! When they charge exorbitant interest rates or impossible terms, they are likely committing predatory lending practices. Do your due diligence by verifying their SEC registrations and checking whether or not they follow regulatory standards.
How do you get Approved for a Business Loan?
Identify the purpose of a loan
A business stands to get approved quickly if there’s a concrete purpose behind the loan application. Identify your goal/s so that your loan will be prioritized for approval.
Historically, if the purpose for a loan involves building businesses that positively contribute to the economic growth of a community, there is greater likelihood that it will be approved. Of course, you can still get approved if you seek to upgrade your existing technology or machinery, hire more staff, invest in real estate, and many others.
Compare business loans from different banks/Institutions
Don’t squander your time knocking on every bank or lending company’s door: Not all cater loans specific to your need, business model, and industry. By comparing business loans from lending companies and reviewing their terms about loan amounts, interest rates, and repayment terms, you will know which lenders offer the best funding option for your business, as well as the fastest approval process.
If your business qualifies as an SME or small to medium-sized enterprise, you may consider applying for government loans as they usually offer non-collateral loans with lower interest rates and even longer payment terms.
Or if you immediately need a lower amount loan, you can consider microloans or other small business loans that provide instant approval. To easily review if you can comply with a particular lender’s repayment terms, try to run the numbers by their loan calculators - now a staple feature on banks’ websites.
Build a solid financial plan
Before you apply, create a strong financial plan which details how the loan money will be used and how you can repay. If you’re already running a business, forecast your spending and document your projected sales in a timeline. Your numbers must show that you have a healthy cash flow that is prepared for recurring loan payments.
If your financial situation is currently in the red, don’t lose hope. Even if your past credit history mars your chances, you can use your financial projections to show the lenders you will do better. The more detailed the report is, the more they will be persuaded that you hold concrete, actionable steps to improve the business. You can sway the loan officer’s view in your favor.
Check if you're eligible for the loan
Banks and financing institutions evaluate businesses differently. To save you the hassle of going through several loan application processes, choose a lender that traditionally provides funding to businesses that are similar to yours. This way, you can prepare the right documents and have increased chances of getting approved. There’s great possibility that they will check for the following aspects of your business:
- Registrations - Depending on the locality and industry, lenders might require you to present registrations from various government and regulatory agencies like Securities Exchange Commission (SEC), Department of Trade & Industry (DTI), business permits, Bureau of Internal Revenue (BIR), Mayor’s permit, etc.
- Years in Business - If your business has been operating for many years, your business loan will likely be approved. As a general policy, banks consider businesses running for at least 2 years as a good qualification. If you’re seeking a startup loan, it's better to be in business for at least 6 months before applying for one.
- Credit History/ Cash Flow - This goes without saying: When you apply for a business loan, lenders will access your credit history via a shared central database. The best predictor of future behavior is past behavior: if you religiously paid your previous loans, this assumes you will also do the same for future borrowings. They will also check your financial statements to assess if you can repay the loan amount being applied for.
- Debt-to-Income Ratio - On top of the above facets of the business, lenders might also examine your debt-to-income ratio. This number is a balance between how much the company makes against how much the business owes. A lower debt-to-income ratio means the business can take the burden of making payments toward the loan.
- Repayment Schedule - Also called “amortization schedule,” this means for how long the loan shall be paid and in what frequency (weekly, monthly, or quarterly). It’s an important factor that financing companies look at before approving the requested loan.
- Character - Do you believe in the adage, “The messenger is the message?” When you appear before the loan officer, do you exude both competence and confidence? All things considered, loan officers have the power to approve or deny your request just by your appearance. If you show lack of confidence in your plan or the marketability of your products, what message does that convey to the loan officer? A positive impression is the cherry on top for securing that business loan.
Complete your business loan requirements
Now that you’ve chosen where to apply for a business loan, it’s time to do your work, which is to prepare and complete the loan requirements for a faster approval process. Though lenders have different requirements, the most common include the following:
- Two valid IDs (select those that have your photo and signature)
- Passport
- Driver’s license
- Professional Regulatory Commission (PRC) ID
- United Multi-Purpose Identification (UMID)
- Income Tax Returns (from 3-5 years, if possible)
- Bank statements
- Company Profile
- Certificate of Business Registration from DTI (for sole proprietorships)
- Certificate of Registration from SEC (for partnerships and corporations)
- List of amended articles of incorporation and by-laws (for corporations)
- List of Elected Officers (for corporations)
- Board Resolution or Secretary’s Certificate (for corporations)
If you’re in business for quite some time now, you should already have some or several of the requirements listed above. You only need to consolidate them for the loan application.
It bears repeating: A complete set of documents doesn't mean you will receive approval outright. In the previous tips, lenders will examine different aspects of your business to determine loan eligibility.
What Happens When You Default on a Business Loan?
At this juncture, you have a strong foundation of what business loan to choose. As always, we recommend that you exercise prudence in apportioning your loan proceeds and managing your cash flow wisely so you’ll be able to repay promptly. But what happens when you default on a business loan?
Depending on the loan you took out, these scenarios are typical consequences when you default on a loan:
- Repossession and Foreclosure
For secured loans, not complying to the repayment terms or defaulting leads to repossession of the vehicle or foreclosure of the property as a way for the lender to recoup the losses.
- Negative Credit Score
If you happen to default on an secured loan, you will be on the receiving end of adamant collection efforts from third-party collection agencies, who will employ different means to contact and make you pay. Eventually, this will adversely impact your credit score - which makes it harder for you to get loans in the future.
- Limited Access to Future Financial Products
Delinquent loan accounts are usually reported to the Credit Information Bureau. If left on default, your loan records and information will be accessible by banks and financial institutions through a central database, all of which prevents you or your business from getting approved for loans and other financial products in the future.
With all those tips and caveats, choosing the right business loan is a decision you cannot trifle with, as it can either catapult your business to unprecedented heights OR weigh it down with massive debt. By knowing all the available options, you can make an informed decision and secure a loan that best aligns with your needs, goals, and repayment capacities.
With the right financial tool, you can turn your vision into reality. We’re rooting for you all the way, kabayan!
Advance PH is the leading credit solutions provider for Filipino SMEs looking to access funding for business growth, holistic operational support, and bridging of cash flow gaps through hassle-free services like salary advance, invoice financing, and payroll financing offered at lower interest rates in flexible repayment terms. With Advance PH, you can focus on what truly matters!
