Do’s and Don’ts of Getting a Business Loan

Do’s and Don’ts of Getting a Business Loan

Welcome back to another installment of the Zenith newsletter, where we bring you the latest in the business loan landscape in the Philippines! (please rewrite and add a summary of what’s included in this month’s newsletter)

This month, we wanted to show you some Do’s and Don’ts when getting a business loan in the Philippines.

Do’s

1. Thoroughly analyze the different kinds of financing so that you may pin-point the one that best suits your needs.

In determining the best type of funding, it is crucial to know your financial standing, credit score, the amount you will need, and the requirements for each type of debt. Will you use the money to start a small business, purchase an existing one, maintain your firm, or expand your enterprise? 

Having established what you want for your business, you can then explore short, medium, or long-term loans, business line of credit (LOC), a business credit card, asset-based loans, microloans, equity from investors, or crowdfunding.

1. Keep track of your financial records.

Your business’s receipts, statements of account, purchase orders, bills, tax returns, and invoices are crucial when borrowing money. Most lenders are particular about these records and paperwork because it proves your business’s financial ability to repay your loan in the future. It also allows lenders to determine if your business is worth investing in.

2. Identify and analyze how you will use the loan.

Planning is essential in attaining success for your business. To identify and analyze how you will use the loan, create a budget or forecast to determine what you will use the money for. To gauge your needed amount, make a business plan indicating how you will expand, your projected operational expenses, expected revenue, etc. Low-balling your loan could make your business struggle but overestimating your costs can leave you with considerable interest and debt. 

3. Get multiple quotes.

To find the right loan, compare quotes from prospect lenders. Evaluate their interest rates, terms and conditions, repayment options, repayment period, penalties, and if collateral or guarantor is needed. In deciding which lender to deal with, you may also choose to diversify your financers. Getting loans from different banks can spread the risks and give you the best deal that suits your needs.

4. Do borrow the right amount at the right time.

If you need the loan to make your business stay afloat or expand, apply for it as quickly as possible. Plan the specific time you will be using the money and where it must go. Borrowing too early can lead to unnecessary and high miscellaneous expenses, while borrowing too late can significantly pressure your business and undue the financial process. 

Use previous income statements to project how much you will need to borrow for marketing, operations, equipment, personnel, etc. 

Don’ts

1. Don’t make false representations to get approval.

If you can’t satisfy the requirements of a loan, don’t apply for it. You might be wasting your time. The chances of your potential lender detecting mismatched data and false documentation are high. Making false representations can also hinder your business credibility and lead to legal issues.

2. Don’t put your business assets at risk.

There are plenty of available, unsecured loan options on the market, meaning you don’t have to provide security or collateral for a loan. It minimizes the risks of your business. However, if you think this is out of the picture, and your only option is getting a loan with collateral, understand which assets are at stake. 

The risk of debt varies from business to business. Your lender can seize your business’s valuable property, inventory, or equipment, and sometimes, even your personal assets if you cannot fulfill your obligations. Nevertheless, the risk is an inherent and inevitable aspect of any firm. The case of the matter lies in determining if it’s worth your losses in case of a default.

3. Don’t focus too much on interest rates.

Interest rates are just a tiny fraction of your loan and do not show the entire story. You must also consider its terms, flexibility, and requirements. 

Ask yourself, what period for repayments is ideal for your business cycle. How much would the financier lend, given your company’s financial history and assets? Is the loan flexible with repayments? What guarantee is at stake in case your loan defaults? Answering these questions can help you better prepare your finances and plan the direction of your enterprise.

4. Don’t underestimate your expenses.

Underestimating your expenses or overstating your revenue can lead to devastating results that you cannot reverse. If you don’t take caution, you might not be able to break even, increasing the risk of your business from bankruptcy. Thus, carefully examine your expenses and estimations and adjust your figures according to inflation, industry trends, political threats, and rivalry among firms.

5. Don’t repay your loans too quickly.

Contrary to popular belief, loans are not always harmful. If your returns on investment are more significant than interests, then your loan is advantageous and can be leveraged to bring your company great returns. On the other hand, if you decide to repay your loan the minute you earn it, this can limit your company’s plans for expansion.

Getting a loan may be a necessary step in starting your own business, expanding your company, or fulfilling its current expenses. Following these tips is essential in increasing your loan’s likelihood of being approved and making sure that your repayment period is seamless. Additionally, finding the right company to help you get a loan is crucial to make your funding even more accessible.