Most entrepreneurs, especially those who are just getting started, view taking business loans as a daunting task.
While this could be true, knowing what the requirements are could lighten your burden since you already know what you need, and how you can prepare them.
It is also important to note that different lending institutions have varying lists of requirements. Still, regardless of their differences, they are similar in the way that they aim to measure 3 things: the current state of your personal and business finances, the legality of your operations, and your capacity to pay back the loan.
We scoured the internet and crafted an in-depth guide on the most common business loan requirements you might encounter so you can better prepare for them.
Types Business Loans
Before jumping onto the requirements, it is important to understand the different types of business loans first:
Term Loan
A Term Loan, simply put, is the type of business loan that helps entrepreneurs meet their short or long-term funding needs without having to touch their funds. This is usually done by taking out a loan and repaying the lender in installments.
This type of loan is ideal for budding entrepreneurs looking to construct their office space or small entrepreneurs looking to expand their business or buy new equipment.
Line of Credit
Meanwhile, a Line of Credit gives business owners more financial control as the interest rates in this type of loan only start to accumulate when a purchase is already made, or the credit line is used.
While the interest rates are still paid in monthly installments, the principal amount can be paid anytime as long as it is still within the agreed-upon loan term.
One of the advantages of this type of business loan is that entrepreneurs can have access to the funds without having to apply for it repeatedly.
Most Common Eligibility Criteria for Business Loans
Here are some of the most common eligibility criteria for business loans in the Philippines:
Business registration and legality of operations
Before approving your business loan application, lenders would first have to check the legality of your business.
Is it registered with the Department of Trade and Industry (DTI) or the Securities and Exchange Commission (SEC)? Do you have the necessary permits (Mayor’s Permit or Barangay Permit) and licenses to run a business?
These documents are necessary to ensure that your operations are legitimate and that the money you would be borrowing would truly be used to fund your business expenses.
Length of operations
Once the legality of your operations has been established, it’s time for lenders to check how long you’ve been in business as this can determine your business’ stability and perceived longevity.
While more traditionalbig banks like Security Bank require businesses to operate for at least 3 years before they are deemed qualified for a loan, there are some which only require 1 - 2 years of business operations.
Financial health and profitability
Lenders would also need to gauge how profitable your business is by reviewing your financial statements and cash flow records. This is essential for them to determine if you can pay your loan back.
How to apply for a business loan
- Identify your needs
Before you go to the bank or any lending institution for that matter, you must first identify your specific needs.
Why will you be applying for a loan? Do you need to purchase new equipment or buy real estate and expand your business? Or do you need additional capital while waiting for a receivable from your client to be repaid? Make sure that your reason for applying for a business loan is solid enough and justified.
If all you need to buy are unnecessary assets (a.k.a those things your business can do without) or fund business losses, then hold off on applying for that loan because you might be creating bigger problems than those you intend to solve.
- Check the requirements of the lending institution
Various lending institutions have different requirements. Here are some of the criteria they have in common:
For sole proprietors
- At least 2 years of profitable operations
- Good credit standing
- Business owners should at least be 21 years old but not older than 65 years old upon maturity of the loan
For partnerships and corporations
- DTI or SEC registration and at least 2 years of profitable business operations
- Good credit standing
- With minimum annual gross sales (depending on the requirements of the lending institution)
- Prepare the required documents
From loan application forms, valid government IDs, income tax returns, and bank statements, there are various documents you have to prepare, depending on what type of entrepreneur you are.
If you’re just starting a business for the first time, you’d need to prepare your updated resume, certificate of employment, and latest payslip.
Meanwhile, if you’re a long-standing business owner, you have to prepare your business permits, DTI or SEC registration certificate, latest audited financial statements, and company profile.
If you’re a corporation, you would also need to present your Articles of Incorporation.
Let’s dive into each document one by one to ensure you’re well-prepared.
Documents to prove your identity
These documents aim to satisfy the Philippines’ KYC Protocol (Know Your Client).
This process helps deter crimes like identity theft and money laundering, and at the very least, screen out loan applications not authorized by the business owners themselves.
To help facilitate this process, you must prepare the following documents and present them to the lender:
- Government-issued ID. This includes Driver’s License, NBI Clearance (recent/not expired), Passport, UMID, Postal ID, and other valid IDs from government agencies
- Application form. You can get this online at the lender’s website or grab a physical copy from traditional lending companies and banking institutions.
- Marriage certificate (in some cases, if applicable)
Documents to prove your legitimacy
Aside from the documents to prove your identity, documents proving your business legitimacy are also essential. Here are some of the things you have to prepare:
- TIN Number. All businesses, whether you’re managing a physical or online store, are required to register with the Bureau of Internal Revenue (BIR). After successful registration, you will be issued a Certificate of Registration, Authority to Print (for your receipts), and a Books of Account.
- Mayor’s Permit. This can be obtained from the Business Permit and Licensing Office (BPLO) of your local government unit. All you have to do is fill out a form and submit various requirements.
- Proof of billing. Whether it’s utility bills or an official receipt address to your business, the name and address on these documents should match your name, the name of your business, and the current address where your business is located.
- Photos of business premises. Make sure to prepare photos that clearly show the facade of your business and your inventory/storage. It would also be better if you could show a photo of the premises with you standing in the foreground to prove that the photos you submitted are actually yours.
Aside from these requirements, you should also be properly identified, whether you’re a Sole Proprietor, Partnership, or Corporation.
Additional requirements for Sole Proprietors
- Certificate of Registration from DTI. You can now generate this online without having to visit DTI’s Office.
Additional requirements for Partnerships
- Certificate of Registration from SEC. Like DTI, you can also register your business at eSPARC (SEC’s online system).
- Articles of Partnership. This notarized contract of agreement must be submitted to the SEC for you to obtain your SEC Certification.
Additional requirements for Corporations
- Articles of Incorporation and By-Laws. The Articles of Incorporation bear the name, address, purpose, incorporators, and the terms of a Corporation when it was established. Meanwhile, the by-laws are drafted by the Board of Directors and guide how the Corporation should be managed.
- Latest General Information Sheet (GIS). A GIS usually contains your latest company profile (e.g., where your business is located, the type of Corporation you have, and the dates of your annual meetings, among a few).
- Certificate of Registration from SEC. Like Partnerships, you can register your business online at SEC’s online system (eSPARC).
Documents to prove your financial capability
Lenders can also ask for the following documents to establish if you’re financially capable of paying back your business loan:
- Latest Income Tax Return (ITR). Your ITR contains your annual income and the equivalent taxes you should pay to the government. While there are lenders who only require the latest ITR, there are those who ask for a borrower’s ITR for the last 2 to 3 years.
- Personal and business bank statements. You can prepare your bank statements for the last 6 months by requesting them from your local bank. Lenders usually ask for this to ensure that you have a good credit history, and so they can gain an insight on your pre-existing loans and if you make your payments on time.
Documents to prove your business’ profitability
To help lenders gain a projection of how profitable your business could be, the following documents must be prepared:
- Audited Financial Statement (AFS). If you’re a business earning 3 million pesos and above annually, then you have to comply with this document required by BIR. Before you can achieve this, your business must be audited by a Certified Public Accountant (CPA) so make sure that you will be hiring a trusted firm that can do this daunting yet important task.
- Official receipts, or those invoices you have issued to your clients or customers.
- List of your top suppliers and customers. A.k.a your trading relationships. Some lenders require the latest summary Alphalist of Withholding Tax at Source (SAWT) or a summary of your latest sales and purchases.
In Conclusion
While having to comply with all these business loan requirements may seem difficult, especially if you’re an SME that’s just starting to grow your businessa Small - Medium-sized Enterprise, they all serve an important purpose: to establish the fact that you can repay your loan.
It’s a good thing that there are lending companies like Advance PH that can cater to you and your business needs, no matter what your business size is.
Whether you’re a budding entrepreneur or an established business looking to grow and expand, Advance PH offers invoice and payroll financing, and even salary advances by helping you overcome cash flow disruptions, all thanks to their flexible line of credit.
Manage your business without having to worry about your funds running out by checking what Advance PH has to offer!