Are you looking for new ways to finance your business in the Philippines? You’ll be thrilled to know that traditional bank loans aren't the only option, as other alternative finance providers offer a range of innovative financial instruments designed to meet diverse business needs.
These options range from crowdfunding and peer-to-peer lending options to invoice financing and venture capital and provide Philippine businesses with added flexibility and accessibility as compared to other funding solutions.
So, in this article, we will take a look at the various financing instruments available through alternative finance providers in the Philippines that businesses can utilize to meet their financial requirements without any hassle. So, without much ado, let us dive right into it.
What Is It Important For Businesses To Secure Capital in The Philippines?
Securing capital is crucial for the growth and sustainability of businesses in the Philippines because it not only enables them to start and maintain their operations but it also allows them to expand and compete in the dynamic yet volatile Philippine business market.
Still not sure why securing capital is important for a Philippine business? Here, take a look at the following reasons why securing capital is vital for businesses operating in the Philippines -
1. Facilitating Business Growth
Access to capital allows businesses to invest in new projects, expand operations, and enter new markets. For Philippine businesses, securing funding can mean the difference between stagnation and growth, as it enables them to scale up their business and seize future growth opportunities, both in local and international markets.
2. Maintaining Cash Flow
Adequate capital ensures that businesses can maintain smooth cash flow, which is essential for daily operations. It allows businesses to cover operational expenses, such as paying salaries, and manage inventory without any disruptions.
This stability is particularly important in the Philippines, where payment terms and economic conditions can be quite unpredictable.
3. Enhancing Competitiveness
With access to sufficient capital, businesses can invest in technology, research and development, and marketing strategies that enhance their competitive edge.
In the Philippines, possessing additional financial resources can be quite beneficial for businesses, as it will allow them to innovate and improve their operations to set themselves apart from their rivals.
4. Eliminate Risks Efficiently
Having a strong capital base helps businesses buffer against economic downturns and unexpected financial challenges, as it provides a safety net that can protect against market volatility, natural disasters, or other unforeseen events that could otherwise impact the business’s financial health.
5. Enabling Strategic Investments
Secured capital enables businesses to make strategic investments in assets, infrastructure, and human resources. This long-term planning and investment is not only crucial for sustaining the growth of the business but also for positioning it for future opportunities and success in the Philippine market.
6. Building Creditworthiness
Effectively securing and managing capital can not only improve a business’s creditworthiness, but having a strong financial foundation also makes it easier for the business to secure additional funding on favorable terms in the future, either through loans, investors, or any other financing options.
Also Read: Getting a Fast Loan in 15 Minutes in the Philippines
Traditional Loans Vs. Alternative Finance Options - Key Differences Between Two For Filipino Entrepreneurs To Consider
Making their way through the volatile financing landscape of the Philippines can be quite challenging for Filipino entrepreneurs, especially when it comes to deciding between traditional loans and alternative finance options.
It is no secret that each financing method offers distinct advantages and disadvantages, which is why carefully understanding the key differences between the two is crucial for Philippine businesses to make the right financial calls to support their enterprises.
So, to make sure Filipino entrepreneurs can better understand the opportunities and constraints of each type of alternative finance option available before identifying the best fit for their business needs and financial goals, let us first explore the key differences between traditional loans and alternative finance options.
Here, take a look at some of the key differences between the two popular financing options available in the Philippines -
1. Approval Process
Traditional loans typically have a lengthy and stringent approval process. Banks and financial institutions require extensive documentation, including business plans, financial statements, and credit histories.
This process can take several weeks to months, and the high level of scrutiny can result in lower approval rates, especially for new or small businesses.
In contrast, alternative finance options such as peer-to-peer lending, crowdfunding, and invoice financing often have a faster and more flexible approval process.
These platforms usually require less documentation and focus more on the potential of the business, making it easier for entrepreneurs to secure funding quickly.
2. Collateral Requirements
Traditional loans often require collateral to secure the loan. This basically means that businesses must pledge assets such as property, equipment, or inventory as security against the loan. If the business defaults, the lender can seize the collateral to recover the loan amount.
This requirement can be a significant barrier for startups or businesses without substantial assets, as they will have nothing of substantial value to offer as collateral.
On the other hand, many alternative finance options do not require collateral. For example, equity crowdfunding involves raising capital in exchange for shares in the business, and invoice financing involves selling unpaid invoices.
Since these options do not require any collateral, they act as excellent financing options for businesses that lack significant assets.
3. Interest Rates and Fees
Interest rates for traditional loans are generally lower than those for alternative finance options because they are backed by collateral and have more stringent approval criteria.
However, it must be pointed out that securing a traditional loan can involve various fees, such as application fees, processing fees, and early repayment penalties, so businesses must be prepared to incur them before applying.
Alternative finance options, on the other hand, while often having higher interest rates or fees, offer more flexibility and fewer hidden costs.
For instance, peer-to-peer lending may charge a platform fee, but it provides clear terms and quicker access to funds, which can be extremely beneficial for businesses needing immediate capital.
4. Flexibility and Terms
Traditional loans come with fixed terms and repayment schedules, which can be quite restrictive for businesses, especially those that experience fluctuating cash flows regularly.
These loans typically require businesses to make regular monthly payments, which may not align with the revenue cycles of some businesses and deter them from applying.
In contrast, alternative finance options offer more flexible terms. For example, revenue-based financing adjusts repayment amounts based on the business’s income, and invoice factoring provides funds to businesses based on their invoices’ due dates.
This flexibility of alternative finance options enables businesses to manage their finances more effectively and avoid cash flow issues from arising.
5. Control and Ownership
Traditional loans do not dilute ownership or control of the business, as they are debt financing options. In this type of loan, entrepreneurs retain full control over their operations and decision-making processes; however, failing to meet loan obligations can lead to severe financial consequences.
Alternative finance options, on the other hand, such as equity crowdfunding and venture capital, involve giving up a portion of ownership in exchange for funding.
This can lead to shared control and influence over business decisions, which might be beneficial if the investors bring valuable expertise and networks, but on the flip side, it can also limit the entrepreneur's overall control over their business’s entire operations.
6. Risk and Impact on Credit
Traditional loans impact the business’s credit rating, and failure to repay can negatively affect both the business’s and the owner’s credit scores, which in turn can make it much harder for them to secure any kind of financing in the future.
Conversely, alternative finance options, like crowdfunding or venture capital, do not affect credit ratings as they do not involve traditional debt, which can be extremely advantageous for entrepreneurs looking to preserve their creditworthiness.
However, they must remember that failure to deliver promised returns or manage investor expectations accordingly can harm the business’s reputation and put future funding opportunities at risk.
Also Read: Benefits and Disadvantages of Small Business Loans
Don’t let financial hurdles slow your Philippine SME down. Apply for N90’s fast financing solutions and receive quick approvals within 24 hours! Start today And Drive Your Business Forward!
What Are the Different Types Of Alternative Finance Providers in Philippines - Top Options For Philippines Businesses To Apply For
Alternative finance providers in the Philippines offer innovative and flexible funding solutions that cater to the diverse needs of businesses. These options can be particularly beneficial for Philippine SMEs and startups that may face challenges in securing traditional bank loans due to multiple reasons.
So, to make sure Philippine businesses that the most out of their loans, in this section of the article, we will take a look at the different types of alternative finance providers available in the Philippines that they can consider.
Here are the different types of alternative finance providers in the Philippines at a glance -
- Peer-to-Peer Lending Platforms
- Crowdfunding Platforms
- Invoice Financing Companies
- Venture Capital Firms
- Angel Investors
- Microfinance Institutions
- Revenue-Based Financing Providers
- Online Lending Platforms
- Supply Chain Financing
- Merchant Cash Advance Providers
Now that we know about the different types of alternative finance providers in the Philippines, let us dive a bit deeper and get an in-depth look at each one of them in greater detail -
1. Peer-to-Peer Lending Platforms
Peer-to-peer lending is an innovative financial service that connects borrowers directly with individual lenders through an online platform, thereby bypassing traditional financial intermediaries like banks.
This model allows individuals or businesses to obtain loans from multiple investors who are willing to lend their money at agreed-upon interest rates.
The benefits of P2P lending options are -
- Lower Interest Rates: Often offers lower interest rates compared to traditional bank loans.
- Flexible Terms: Provides more flexible loan terms tailored to individual needs.
- Faster Approval: A streamlined online process leads to quicker loan approval and disbursement.
- Accessibility: Available to a broader range of borrowers, including those with varying credit profiles.
- No Collateral Required: Many P2P loans do not require collateral, making it easier for borrowers to secure funding.
Popular Platforms include -
- Acudeen
- BlendPH
- SeedIn.
2. Crowdfunding Platforms
Crowdfunding is a method of raising capital through the collective effort of a large number of individual investors or contributors, typically via the Internet.
This approach encourages businesses to take advantage of the power of social media and online platforms to reach a wide audience, allowing entrepreneurs, artists, and small businesses to fund their projects or ventures by accepting small contributions from a large number of people.
Benefits of crowdfunding include -
- Access to Capital: Enables raising funds without needing traditional financial intermediaries like banks.
- Market Validation: Provides an opportunity to validate and refine ideas based on backer feedback.
- Marketing Exposure: Increases visibility and awareness through campaign promotion and social media sharing.
- Customer Engagement: Builds a community of early adopters and loyal customers who are invested in the project's success.
- Flexibility in Funding: Offers various funding models, such as reward-based, equity-based, and donation-based, to suit different project needs.
Popular Platforms are -
- Spark Project
- GoGetFunding
- Fundline.
3. Invoice Financing Companies
Invoice financing is a financial arrangement where a business borrows money based on its unpaid invoices, and these invoices serve as collateral for the loan.
It's a way to convert outstanding customer payments into immediate cash, helping businesses improve cash flow and manage working capital.
Benefits of invoice financing include -
- Improved Cash Flow: Access to immediate funds based on unpaid invoices to smooth out cash flow fluctuations.
- Accelerated Growth: Free up capital to invest in business expansion, new products, or marketing initiatives.
- Reduced Dependence on Overdraft: Less reliance on overdrafts to potentially save on interest charges.
- Improved Supplier Relationships: Maintain consistent payments to suppliers to strengthen business relationships.
- Focus on Core Business: Spend less time chasing payments and more time growing your business.
Popular Providers include -
- First Circle
- Acudeen
- Esquire Financing.
4. Venture Capital Firms
Venture capital (VC) is a form of private equity financing provided to startups and early-stage companies with high growth potential.
Venture capitalists invest in exchange for ownership equity in the company, and they often provide not just capital but also mentorship and industry expertise to help the company grow and succeed.
Benefits of venture capital include -
- Access to Significant Capital: Venture capitalists provide substantial funds essential for rapid business growth and scaling operations.
- Industry Expertise and Mentorship: VCs offer valuable guidance, leveraging their experience to help businesses overcome challenges and make strategic decisions.
- Expanded Networks: VCs connect startups with potential customers, partners, and investors, accelerating market penetration.
- Increased Business Valuation: VC investment can significantly boost a company's valuation, making it more attractive for future funding rounds or acquisitions.
- Accelerated Growth: With ample funding and strategic support, businesses can rapidly expand market share and achieve key milestones.
Popular Firms include -
- Kickstart Ventures
- Navegar
- Wavemaker Partners.
5. Angel Investors
Angel investors are individuals who provide capital to startups or small businesses in exchange for ownership equity. They are, more often than not, high-net-worth individuals who invest their own money and offer not just financial support but also mentorship and industry expertise to the businesses they support.
Angel investors typically focus on early-stage companies with high growth potential.
Benefits of angel investors include -
- Fast Access to Capital: Angel investors can provide funding quickly, often without the lengthy processes associated with traditional financing.
- Mentorship and Guidance: Many angel investors are experienced entrepreneurs who offer invaluable advice and support.
- Industry Networks: Angel investors often have extensive networks that can open doors to potential customers, partners, and employees.
- Flexible Investment Terms: Angel investors are typically more flexible with investment terms compared to traditional lenders.
- Validation of Business Idea: Securing funding from an angel investor can boost a startup's credibility and attract additional investors.
Popular Networks include -
- Manila Angel Investors Network (MAIN)
- AHG Lab
- PLUG and PLAY.
6. Microfinance Institutions
Microfinance institutions (MFIs) are financial service providers that offer loans, savings, and other financial products to low-income individuals and small businesses.
These institutions typically serve people who lack access to traditional banking services, empowering them to start or grow businesses, improve their livelihoods, and escape poverty.
Benefits of microfinance institutions include -
- Removing Poverty: Microfinance empowers low-income individuals to start or expand businesses, generating income and lifting themselves out of poverty.
- Financial Inclusion: MFIs provide access to financial services for those excluded from traditional banking, promoting financial inclusion.
- Women's Empowerment: Microfinance often targets women, enabling them to become economically independent and improve their families' well-being.
- Community Development: MFIs contribute to overall community development and improvement by encouraging entrepreneurship and economic activity.
- Eliminating Risk: MFIs often employ group lending and other risk management strategies to reduce the risk of loan default.
Popular Institutions include -
- CARD MRI
- ASA Philippines
- Tulay Sa Pag-Unlad Inc. (TSPI).
7. Revenue-Based Financing Providers
Revenue-based financing is a type of funding where investors provide capital to a business in exchange for a share of the company's future revenue.
Unlike traditional loans or equity investments, this method doesn't require collateral or ownership stake. Here, investors receive a percentage of the company's revenue until a predetermined amount is repaid.
The benefits of revenue-based financing include the following -
- No Equity Dilution: Businesses retain full ownership and control by avoiding equity investment.
- Flexible Repayments: Repayment is tied to revenue to allow for easier management during slow periods.
- Faster Access to Capital: Revenue-based financing often offers quicker approval and disbursement compared to traditional loans.
- Aligned Investor Incentives: Investors benefit from the company's growth to encourage mutual success.
- Focus on Growth: Without the pressure of debt repayment, businesses can allocate resources towards expansion.
Popular providers are -
- GroGadget
- First Circle
- Flex Capital.
8. Online Lending Platforms
Online lending is a process where borrowers can obtain loans from lenders through the Internet by bypassing traditional brick-and-mortar banks. They offer businesses faster, more convenient ways to access funds.
Moreover, online lenders often use technology to assess creditworthiness and streamline the loan application process.
The benefits of online lending platforms include -
- Convenience and Speed: Borrowers can apply for loans anytime, anywhere, with quick application and approval processes.
- Accessibility: Online lenders often cater to a wider range of borrowers, including those with less-than-perfect credit scores.
- Competitive Interest Rates: Lower overhead costs can lead to more competitive interest rates compared to traditional banks.
- Transparency: Online platforms often provide clear loan terms, fees, and repayment schedules.
- Faster Disbursement: Funds are typically disbursed more quickly compared to traditional loan processes.
Popular platforms are -
- Tala Philippines
- Cashalo
- Fuse Lending.
9. Supply Chain Financing
Supply chain finance is a financial arrangement that optimizes cash flow for both buyers and suppliers in a supply chain. It usually involves a financial institution providing early payment to suppliers against their invoices, with the repayment coming from the buyer at the agreed-upon payment terms.
This type of loan helps suppliers improve cash flow while buyers can potentially extend their payment terms.
The benefits of supply chain financing include the following -
- Improved Cash Flow: Suppliers receive early payments, improving their cash position and operational efficiency.
- Stronger Supplier Relationships: By offering early payments, buyers can build stronger relationships with suppliers, potentially leading to better terms and pricing.
- Reduced Financial Risk: Suppliers can eliminate the risk of non-payment by receiving funds upfront.
- Increased Purchasing Power: With improved cash flow, suppliers can invest in growth, inventory, and technology.
- Enhanced Supply Chain Resilience: By strengthening supplier relationships and financial stability, the overall supply chain becomes more resilient to disruptions.
Popular providers are as follows -
- First Circle
- UnionBank Supply Chain Finance
- Security Bank Supply Chain Financing.
10. Merchant Cash Advance Providers
A merchant cash advance (MCA) is a form of business financing where a lender provides a lump sum of money to a business in exchange for a share of future credit or debit card sales.
It essentially acts as an alternative to traditional loans, often used by businesses with inconsistent cash flow.
The benefits of merchant cash advances include the following -
- Quick Access to Funds: MCA provides quick access to capital, often within days, to help businesses address urgent financial needs.
- No Collateral Required: Businesses can obtain funding without pledging assets as collateral.
- Flexible Repayment: Repayments are based on a percentage of daily sales, making it much easier for businesses to manage their cash flow fluctuations.
- Minimal Documentation: The application process is typically less complex compared to traditional loans, requiring fewer documents.
- Suitable for Businesses with Short Operating History: Businesses with limited credit history may find MCA as a viable option.
Popular providers include the following -
- First Circle
- Esquire Financing
- Acudeen.
Also Read: 6 Things You Need for Small Business Loan Requirements
Combining Different Financing Options - Possible Benefits And Drawbacks For Philippine Businesses To Know About
Are you considering multiple financing avenues for your business? Combining different financing options can provide a flexible and long-lasting approach to meeting your financial needs. However, it must be noted that, like all other financing options, it comes with its fair share of advantages and challenges.
Here are the possible benefits and drawbacks for Philippine businesses to consider before they think of combining different financing options -
Potential Benefits
1. Improved Liquidity
Combining various financing options can significantly improve a business's liquidity. Businesses can ensure they have sufficient cash flow to cover operating expenses, invest in growth opportunities, and manage unforeseen costs by making use of different sources, such as traditional bank loans, P2P lending, and invoice financing.
2. Diversified Risk
Relying on a single source of financing can be risky, so by combining multiple financing options together, businesses can spread their risk across different financial products. This diversification can protect against the failure or withdrawal of a single funding source and provide a safety net during economic downturns or market volatility.
It also allows businesses to remove the impact of high-interest rates or strict repayment terms associated with a single financing method.
3. Enhanced Flexibility
Different financing options come with varied terms and conditions, so by combining them, businesses can tailor their financial strategies to match their specific needs. For instance, short-term financing can cover immediate operational expenses, while long-term loans can fund capital investments.
This flexibility helps businesses manage their finances more effectively and adapt to changing market conditions.
4. Access to Larger Capital Pool
Combining financing options can provide access to a larger pool of capital than relying on a single source. This is particularly beneficial for businesses with substantial capital requirements for expansion, new projects, or scaling operations.
5. Strengthened Credit Profile
Successfully managing multiple financing options and meeting repayment obligations can enhance a business's credit profile, as having a strong credit history can make it easier to secure additional funding in the future, often on more favorable terms.
This improved creditworthiness can open doors to better financing opportunities and lower the cost of capital in the future as well.
Also Read: How Does A Bridge Loan Work For a Small Business?
Possible Drawbacks
1. Complexity in Management
Managing multiple financing options can be complex and time-consuming, as businesses will need to keep track of different repayment schedules, interest rates, and terms and conditions.
This complexity can strain financial management resources and increase the risk of missing payments or breaching covenants.
2. Increased Financial Obligations
While combining financing options can provide more capital, it also increases the total financial obligations of the business, as multiple loans or credit lines mean multiple interest payments and fees, which can add up and impact the business's profitability.
Hence, it is crucial to assess the overall cost of financing to ensure that the business can comfortably meet its repayment obligations.
3. Risk of Over-Utilization
Accessing multiple sources of finance can lead to over-utilization if not managed carefully, as taking on too much debt can strain a business’s cash flow and financial health.
High utilization of loans can increase the risk of insolvency and reduce financial flexibility, so businesses must balance their financing mix and avoid taking on excessive debt to maintain their financial stability.
4. Potential for Dilution of Ownership
If equity-based financing options, such as venture capital or angel investment, are part of the mix, there is a real risk of ownership dilution, as bringing in external investors can mean giving up a portion of ownership and control over the business.
This trade-off needs to be carefully considered, especially if maintaining control is a priority for the business owners.
5. Regulatory and Compliance Challenges
Going through and matching the various regulatory and compliance requirements associated with different financing options can be quite challenging, as each financing source may have its own set of legal and regulatory obligations, which can potentially increase the administrative burden on the business.
To ensure that everything goes smoothly, comply with all relevant laws and regulations of the different types of financing options to avoid facing legal complications and financial penalties further down the line.
Conclusion
It is fair to conclude that by exploring the alternative finance instruments mentioned in this article, Philippine businesses can have access to a wide range of innovative and flexible funding solutions beyond the means of traditional bank loans to assist with their financial requirements.
These varied alternative finance options, ranging from peer-to-peer lending and crowdfunding to invoice financing and venture capital, can easily cater to the various needs and stages of growth of a business without any hassle.
So, by carefully understanding and taking advantage of these diverse financial instruments, Philippine businesses can improve liquidity, access larger capital pools, and drive sustainable growth.
However, it is worth remembering that, like any other loan provider in the Philippines, alternative finance providers also come with their fair share of drawbacks. So, it is essential for Philippine businesses to carefully evaluate each option's terms, benefits, and potential risks beforehand to ensure they align with their business's financial goals and capabilities before they go ahead and avail them.
Frequently Asked Questions (FAQs)
1. What are alternative finance companies?
Alternative finance companies are non-traditional lenders that offer funding options beyond traditional banks by utilizing technology to assess the creditworthiness of a business and provide them with faster, more flexible financing solutions.
These companies typically cater to small and medium-sized businesses that may have difficulty accessing traditional bank loans because they either do not meet the minimum revenue criteria or have not been in the market for long enough.
2. What are alternative financial services providers?
Alternative financial services providers (AFSPs) offer financial services outside traditional banking. They often serve underserved populations, providing options like payday loans, check cashing, pawnshops, and prepaid cards.
While they are quite convenient for Philippine businesses to avail, AFSPs often charge higher fees and interest rates compared to traditional bank loans. Although this is not a big issue, it is definitely something that businesses must keep in mind before applying.
3. What is another name for alternative finance?
Alternative finance is often referred to as non-traditional finance, alternative credit or fintech lending to highlight the obvious distinction between traditional banking loans and newer, technology-driven funding options
4. Is crypto an alternative finance option?
Yes, cryptocurrency can be considered an alternative finance option, as cryptocurrencies offer decentralized and borderless transactions which bypass the norms of traditional banking systems.
While they are still among the newer, emerging options, they already provide businesses with opportunities for investment, payments, and fundraising through initial coin offerings (ICOs).
However, like any other loan provider, the crypto market is highly volatile, and its rules and regulations keep changing regularly, so businesses should make sure they understand all the essential points regarding crypto, including its benefits and risks, before going ahead with their application.
