Things to Consider Before Getting a Loan

To launch a business and begin generating a profit, startups require money or capital. Companies without money and requiring immediate funding apply for a loan.

These businesses receive an advance loan from banks and other financial institutions in the form of a business loan. On the basis of agreeing to a set of terms and lending arrangements, lenders then collect payments with interest.

Due to the higher startup costs, business loans often offer larger loanable amounts and have stricter documents and requirements. Here are the things you will have to consider before applying for a loan.

1. Loan Amount

Consider the budget allotted for your business and the reason why you are going to need a loan. You must come up with the exact amount of loan you would want to apply for. Then, you can search for banks and their requirements so you can prepare and lay out everything you’re going to need.

2. Interest Rates

It is ideal to choose a business loan with the lowest interest rate available to focus on repaying the borrowed money rather than paying for the additional charges. The usual interest rate ranges from 6% to 9%, depending on the bank or lender. Note that your credit score, loan amount, and loan duration affect your interest rate.

Here are the different types of business loans you can apply for: 

• Term Loan - This works best if your company has a solid credit history. Having a fixed asset that may be used as collateral is also helpful. On the other hand, this loan cannot cover any short-term capital shortfalls or needs you may have. Term loan amounts range from ₱100,000 to ₱20 million.
• Credit Line - Credit lines offer you more financial control because interest is only charged when you transact with them. This can work well for short-term objectives and serve as a great emergency fund. Owners of small and medium-sized businesses can apply for ₱500,000 to ₱20 million in loans.
• Secured Business Loans - Technically, this includes both term loans and credit loans. It requires collateral as long as it has sufficient monetary value. Collateral may be a piece of real estate, a car, or bank accounts on which the money a business can borrow will depend on.
• Unsecured Business Loans - If you do not have any collateral, you can apply for an unsecured business loan. In contrast to secured loans, it has a higher interest rate, shorter loan durations, and smaller loan amounts, while some lenders can lend ₱1 million to ₱5 million.

3. Business Purpose

Even though taking a loan sounds frightening, a loan can help you finance changes in your company that could have a high return on investment. You must consider the things that can help your business improve. 

Here are some examples:

• Business Expansion: When business is good, maintaining your business afloat can ensure that your profits don't decline. 
• Equipment Purchase: Every business needs specific tools to get the work done or equipment that can improve service. 
• Increase Inventory: One of every business's major expenses is inventory. For those businesses that operate seasonally–purchasing inventory in advance will be necessary. 

4. Loan Term

The loan term is important because this will affect your monthly payment and the total interest you have to pay over a certain period. Lenders usually offer a short-term loan because you are likely to repay them sooner.

This would also mean paying interest for fewer years but with higher monthly payments throughout a shorter loan period. 

5. Repayment Mode

When you apply for a loan, lenders usually give you options on how to repay them and offer you a plan that works best for your income level and cash flow.
 

However, you should consider your other financial responsibilities and debt payments before applying for a loan because that may impact your ability to repay. Make sure you have paid off any outstanding debt from prior loans before applying for a new loan.

6. Collateral

In the event that you are unable to make your loan payments, you agree to provide the bank with collateral. Secured loans involve collateral, whereas unsecured loans are those without collateral because the bank has a strategy to get its money back if you fail to repay them. 

A business loan is a form of financing wherein lenders provide financial assistance to borrowers so they can launch or grow their firm or pay off debts and other obligations. 

7. Guarantor vs. Surety

A guarantor is a person who guarantees to repay a borrower's debt. They ensure that it will be paid in full, regardless of the circumstances. 

But unlike a guarantor, a surety is someone who takes others' responsibility. Someone who might be required to make the initial loan payment and ensure the debt. It is unnecessary to provide evidence that the debtor lacks the means to pay.

What are the qualifications? 

It may differ for different banks, but here are the common requirements:

• Must be a Filipino citizen aged 21 

• Good credit standing

• Should operate a profitable business registered with the SEC or the DTI, which has been in operation for at least three (3) years.

Basic Requirements when applying for a business loan

• Valid government-issued ID (Passport, Driver's License, TIN ID, PRC ID, Postal ID, or UMID)

• ITR/ Financial Statements

• Proof of business billing address (Business Permit, Lease Contract, Utility Bills)

• DTI or SEC Certificate

• BIR Certificate of Registration

• Photocopy of audited financial statements

• Accomplished loan application form

Whatever your intended purpose, business loans benefit business owners who might require more financing for their operations. If you are looking for ways to get funding, you can read Getting Funds For Your Business, and you may also get legal advice from our legal experts.