Financing is crucial for any business, big or small. No matter the industry, companies need to spend money to generate income. Expenses are inevitable, from paying suppliers and employees to investing in new equipment and marketing campaigns.
If you’re running your own company, knowing how much money you need and when you need it is critical to keep operations afloat. Understanding the common types and sources of business financing can help you plan and manage your finances more effectively.
Learn about and explore the different types of business loans in the Philippines, from traditional bank loans to alternative options like crowdfunding and venture capital.
4 Types and Sources of Business Financing in the Philippines
Many companies turn to financing to obtain the necessary funds to operate or scale their businesses. Here are the different types of loans for businesses available in the Philippines.
1. Debt financing
Debt financing is a popular option for many businesses as it involves borrowing money you must repay with interest over a set period. Bank loans, government loans, and private lenders are common sources of debt financing.
Bank loans are a traditional source of debt financing for businesses, and most banks in the Philippines offer loans to qualified companies. You can also look into non-banking institutions like private financing companies.
With debt financing, you can still maintain control of your business with many small and midsize enterprise (SME) loans offering long- or short-term options to fit your needs.
However, failing to keep up with the payments could lead to the loss of your collateral. It’s best to allocate some of your monthly profits towards repaying debt financing.
2. Equity financing
Equity financing is another source of funds that involves selling ownership shares in a business to investors. The risk is significant here because the investor only gets their money back if your company profits.
Venture capitalists and angel investors are some of the common equity business financing sources, with many corporations in the Philippines active in several industries. A few of these industries include eCommerce, machine learning, and mobile entertainment.
Equity financing is ideal if you lack cash flow for loan payments or require significant funding to scale. It doesn’t need immediate loan repayment, allowing you to use your business loan for regular operations and emergency savings.
The drawback of equity financing is that you’ll lose some control over your business because of the shares you give to the investor. As such, you must take some time to find someone willing to invest in your company and partner with you and your staff daily.
3. Alternative financing
Alternative financing includes options beyond traditional debt and equity financing, such as crowdfunding and peer-to-peer (P2P) lending. It’s ideal for businesses struggling to secure funding from traditional lenders or wanting to test new products or ideas.
For crowdfunding, you must keep your audience updated online with records of the progress of your product, which may require a lot of time and investment. Moreover, the platform for P2P lending takes a percentage of your earnings, decreasing your overall profits.
4. Family and friends financing
In the Philippines, familial and friend bonds are highly valued and can finance flourishing enterprises. Borrowing from them for business funding is feasible, as they may be more willing and have fewer requirements than traditional lenders with high-interest rates.
Another benefit is that family and friends financing may come with flexible repayment terms, such as more extended repayment periods or lower interest rates.
Although borrowing from family and friends for business funding is possible, it poses the risk of damaging relationships if unable to repay the loan. Additionally, it may lack the business advice and mentorship professional investors provide.
How to Choose the Right Business Financing for Your Company
Selecting the appropriate financing options for your company is a crucial decision that can make or break your business operations. Below are some tips to help you pick the right financing option:
1. Consider your business goals and needs
Evaluating what you’re trying to achieve with your financing is essential. Are you looking to expand your business, purchase new equipment, or manage your cash flow? Understanding your business needs and goals will help you narrow your financing options.
2. Evaluate the pros and cons of each financing option
Each financing option has advantages and disadvantages. For instance, bank loans offer lower interest rates but require lengthy and extensive documentation. Meanwhile, online P2P lenders provide a quick and easy application process but with higher interest rates. Before you decide, research and evaluate each option carefully.
3. Review the interest rates
High-interest rates can increase the overall cost of your loan or credit line. For instance, a ₱1 million loan with a 3% interest rate over 10 years can cost your company ₱300,000 more than the same rate over five years.
As such, look for financing options with competitive interest rates that align with your budget and projections.
4. Assess your budget
Before applying for any financing, you must understand your budget clearly. Consider how much money you need and the monthly repayment amount you can comfortably manage. This information will help you find the best financing option for your business.
5. Seek advice from financial experts
Financial experts, such as accountants and advisors, can help you make informed financing decisions and understand the long-term impact of your spending on your business, which sets the trajectory of your operations.
Make the Right Choice for Your Business
You can obtain business financing from various sources, including banks, investors, and government agencies. Choose an option that aligns with your business goals, needs, and what you can sustainably afford.
If you’re looking for business loans in the Philippines, look no further than Zenith Capital.
Zenith Capital can assist you in exploring your financing options and making informed decisions for your business. We also offer quick and easy-to-access business loans to Philippine SMEs and corporations.
Rizza Templonuevo is not just an accomplished finance professional and business leader, but also a loving wife and a dedicated mother of two. With a passion for helping businesses grow and thrive, she brings her extensive knowledge and expertise as Vice President of Zenith Capital Credit Group Corporation to help countless SMEs and corporations across the Philippines access the financing they need to succeed.
When she’s not busy with work, Rizza enjoys immersing herself in the worlds of fashion and social events, as well as traveling to new and exciting places.