For entrepreneurs and business owners in the Philippines, securing a business loan is sometimes a necessary move to grow and expand your business without diluting your equity ownership in the business. However, understanding the intricacies of interest rates and fees that banks and lenders charge is key to ensure you don't make a costly mistake.
Interest Rates: The Cost of Borrowing
Interest rates on business loans can vary widely among lenders. There is no standard rate, especially among private lenders, fintechs, and NBFI's! However you can always check the Bangko Sentral ng Pilipinas benchmark interest rate for overnight lending which is 7.0% per annum as of March 2024.
It is important to understand the different variables when it comes to borrowing, such as the type of loan, loan term, origination fees, and creditworthiness. In the Philippines, interest rates can range from relatively low rates offered by government financial institutions to higher rates typical of unsecured loans from private lenders.
SME's can always assume borrowing rates will be significantly higher than the BSP overnight right. The cheapest rates will come from banks, however companies will sacrifice time to loan when borrowing from banks. As you move into the Fintech, NBFIs, and private creditors products, the rates are significantly higher but they are much easier and faster to work with.
- Fixed vs. Variable Rates: Fixed interest rates stay constant throughout the loan term, so that the borrower can predict repayment amounts ahead of time. Variable rates, on the other hand, can fluctuate based on market conditions and the movement of central bank rates which can affecting your monthly repayment amount and cloud predictability.
- Annual Percentage Rate (APR): Always ask for the effective rate! The APR encompasses not just the interest rate but also other fees and charges, providing a more comprehensive view of the loan's true cost to your business.
Fees and Charges on Top of Interest Rates
Understanding the fees of your business loan is essential, as these can add up and alter the overall cost of borrowing. Common fees include:
- Processing or Origination Fee: This fee is charged upfront. It is meant to cover the overhead costs for the borrower of processing the loan application.
- Late Payment Fees: Missed or late payments can create additional charges for you. It is important to pay on time and be aware of the contract's late payment fees and penalties.
- Prepayment Penalties: Some lenders charge a fee for early loan repayment, which will typically be charged against the interest savings you get from paying off the loan early.
Navigating Interest Rates and Fees
Here are some tips as you begin your search for business financing:
- Compare Lenders: Research and compare offers from multiple lenders, including banks, government institutions, and private lenders. Pay attention to both the interest rates and the APR to get a full picture of the loan's cost.
- Read the Fine Print: Carefully review the loan agreement to understand all fees and charges that may apply, including any conditions that might trigger additional fees.
- Negotiate Terms: Depending on your business's financial standing and relationship with the lender, you may be able to negotiate more favorable terms, including lower interest rates or waived fees.
Conclusion
For businesses in the Philippines looking to leverage loans to grow their business, understanding the interest rates and fees is a must. By comprehensively assessing these factors, business owners can make the right decision for their business by choosing the most cost-effective financing solutions for them.
