Launching and running a small business is an exciting journey filled with challenges and triumphs, but one hurdle many entrepreneurs face is securing the necessary funding to fuel their ambitions. That’s where small business loans come in.
Small business loans can be a powerful tool to bridge cash flow gaps, invest in growth initiatives, or seize unexpected opportunities. However, navigating the world of loan options and terminology can feel overwhelming.
Hence, to help you make the right choice, this article will serve as your roadmap to understanding the typical small business loan terms. We'll explore key terms like loan amounts, repayment terms, interest rates, and collateral requirements that will enable you to choose the right type of financing solution that best fits your business needs in the Philippines!
What Are the Repayment Terms of Loans?
The first term on our list of typical small business loan terms is repayment terms. This refers to the conditions under which a borrower agrees to repay a loan to the lender.
These terms outline the schedule, duration, and structure of payments, providing a clear framework for how the borrowed funds will be returned.
Some of the important components of repayment terms include -
1. Repayment Period
The repayment period, or loan term, is the length of time over which the borrower agrees to repay the loan. This period can range from a few months to several years, depending on the type and amount of the loan. Longer repayment periods typically result in lower monthly payments but may incur more interest over the life of the loan.
2. Payment Frequency
Payment frequency specifies how often payments are made. Common intervals include monthly, bi-monthly, or quarterly payments. Some loans may also offer weekly or bi-weekly payment schedules, particularly short-term loans.
3. Payment Amount
The payment amount is the sum that the borrower must pay at each interval. This amount typically includes both principal and interest. Fixed-rate loans have consistent payment amounts, while variable-rate loans may have fluctuating payments based on interest rate changes.
4. Interest Rate
The interest rate is the cost of borrowing the money, expressed as a percentage of the loan amount. Interest rates can be fixed, i.e., remaining constant over the life of the loan, or variable, i.e., changing periodically based on market conditions. The interest rate directly affects the total repayment amount.
5. Principal Repayment
Principal repayment refers to the portion of each payment that goes toward reducing the original loan amount. Over the life of the loan, the principal gradually decreases as more payments are made.
6. Amortization Schedule
An amortization schedule is a table detailing each payment's breakdown into principal and interest over the loan term. It shows how much of each payment goes toward interest and how much reduces the principal, providing a clear picture of the loan's progression.
7. Prepayment Terms
Prepayment terms outline the conditions under which a borrower can pay off the loan early. Some loans may have prepayment penalties, while others may allow early repayment without additional fees.
8. Late Payment Penalties
Late payment penalties are fees charged if a borrower misses a scheduled payment. These penalties can increase the overall cost of the loan and negatively impact the borrower’s credit score.
Also Read: Finding Low-Interest Business Loans in the Philippines
What is a Loan Maturity Date, And What is Its Significance?
Moving on to the next typical small business loan terms, the loan maturity date is the final date by which all outstanding principal and interest payments on a loan must be fully repaid.
This date marks the end of the loan term and signifies the conclusion of the borrowing agreement between the lender and the borrower. On or before this date, the borrower is required to pay off any remaining balance to satisfy the terms of the loan.
Here, take a look at the significance of the loan maturity date as per loan terms -
1. End of Repayment Obligation
The maturity date signifies the end of the borrower’s repayment obligation. Meeting this deadline ensures that the borrower has fulfilled their financial commitment to the lender.
2. Financial Planning
Knowing the maturity date helps borrowers plan their finances more effectively. It allows them to schedule payments and manage cash flow to ensure they can meet the final payment deadline without financial strain.
3. Interest Calculation
The maturity date is crucial in calculating the total interest paid over the life of the loan. Longer loan terms typically result in more interest payments, while shorter terms usually lead to less interest but higher monthly payments.
4. Loan Terms and Conditions
The terms of the loan, including the interest rate and repayment schedule, are structured around the maturity date. Understanding this date helps borrowers comprehend the full scope of their repayment obligations.
5. Impact on Credit Score
Successfully repaying a loan by its maturity date positively impacts the borrower’s credit score. Timely repayment demonstrates financial responsibility, which can enhance the borrower’s creditworthiness for future loans.
6. Prepayment and Refinancing Options
Borrowers may have the option to repay the loan early (prepayment) or refinance the loan before the maturity date. Understanding the maturity date helps borrowers evaluate these options to save on interest or secure better loan terms potentially.
7. Penalty Avoidance
Failing to repay the loan by the maturity date can result in penalties, additional interest charges, and potential legal actions. Knowing the maturity date helps borrowers avoid these negative consequences.
Also Read: Understanding Interest Rates and Fees for Business Loans in the Philippines
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Prepayment Penalties And Considerations To Know When Applying For a Small Business Loan in The Philippines
When applying for a small business loan in the Philippines, it is crucial to understand the various typical small business loan terms and conditions that can impact the overall cost and flexibility of the loan.
One important aspect to consider is the presence of prepayment penalties, which are fees charged by lenders if you decide to repay your loan before the agreed-upon maturity date. While early repayment can save you money on interest, prepayment penalties can offset these savings.
In this section of the article, we will take a look at the entire concept of prepayment penalties and highlight key considerations for small business owners to be aware of when applying for a business loan in the Philippines for optimal loan management.
What Are Prepayment Penalties?
The next term on our list of typical small business loan terms used in the Philippines includes prepayment penalties. They are fees charged by lenders when a borrower pays off a loan before its scheduled maturity date.
These penalties are designed to compensate lenders for the lost interest they would have earned over the loan's full term. While prepaying a loan can save on interest costs, the penalties may reduce or negate these savings.
Key Considerations To Know When Applying for a Small Business Loan in The Philippines
1. Understand Prepayment Terms
Before signing a loan agreement, thoroughly review the terms related to prepayment. Understand how the penalties are calculated and under what circumstances they apply. Some lenders may have a sliding scale, where the penalty decreases over time.
2. Compare Lenders
Not all lenders charge prepayment penalties. Compare loan offers from multiple lenders to find those with favorable terms regarding prepayment. Some may offer loans without penalties or with minimal fees, making early repayment more advantageous.
3. Calculate Total Costs
Consider the total cost of the loan, including interest and potential prepayment penalties. Use loan calculators to estimate the total expenses over the loan term and if repaid early. This helps in evaluating whether the savings from early repayment outweigh the penalties.
4. Negotiate Terms
During the loan application process, negotiate with the lender to reduce or eliminate prepayment penalties. Highlight your business’s creditworthiness and repayment reliability to secure better terms. Some lenders may be willing to adjust terms to attract and retain customers.
5. Evaluate Financial Flexibility
Assess your business’s financial situation and cash flow to determine if you might benefit from the option to repay the loan early. Flexible repayment terms can provide financial relief during strong cash flow periods, reducing long-term debt burden.
6. Consider Loan Alternatives
Explore alternative financing options that may not have prepayment penalties, such as lines of credit, where you only pay interest on the amount borrowed and can repay early without additional fees. This flexibility can be beneficial for managing your business’s finances.
7. Understand the Impact on Credit Score
Repaying a loan early can positively impact your credit score, demonstrating financial responsibility. However, ensure that the benefits of a higher credit score outweigh the costs of prepayment penalties in your specific situation.
8. Plan for Growth
If you anticipate needing additional financing in the future, consider how prepayment penalties might affect your ability to manage new loans. Avoiding or minimizing penalties can free up capital for future business expansion and opportunities.
Also Read: Financial Planning for Small Businesses: Navigating Debt and Cash Flow Management
Types of Small Business Loans Available in The Philippines
Small business loans play a crucial role in empowering entrepreneurs in the Philippines, providing the financial resources necessary for them to start, grow, and sustain their businesses.
With a diverse range of loan products available, business owners can find solutions tailored to their specific needs, whether it’s for expanding operations, purchasing new equipment, managing daily expenses, or seizing new opportunities.
Hence, understanding about the various features and benefits of the different types of small business loans is essential for entrepreneurs to align with the unique goals and challenges of their businesses.
Here, take a look at the various small business loan options available in the Philippines and get to know about their key features and advantages -
1. Term Loans
Term loans are traditional business loans where a lump sum amount is borrowed and repaid over a set period with fixed or variable interest rates. They are ideal for significant investments such as purchasing equipment, expanding operations, or acquiring other businesses.
- Loan Amount: Up to PHP 5 million
- Repayment Terms: From 1 to 25 years
- Interest Rate Offered: Starts from a monthly interest rate of 2.42% to 10%
- Approval Time: 1 to 3 days
- Requirements: Age requirement of18 up to 65 years, CIBIL score of 750+
2. Lines of Credit
A business line of credit provides flexible access to funds up to a predetermined credit limit. Borrowers can draw and repay funds as needed, making it suitable for managing cash flow fluctuations and covering short-term operational expenses.
Interest is charged only on the amount borrowed, and the credit limit is typically renewed once the borrowed amount is repaid.
- Loan Amount: From PHP 300k up to PHP 30 million
- Repayment Terms: From 5 to 10 years
- Interest Rate Offered: Starts from a monthly rate of 1%
- Approval Time: Within 2 days
- Requirements: Must have a credit history with no defaults, a CIBIL score of 670+, and reliable income.
3. Equipment Financing
Equipment financing is specifically designed to help businesses acquire necessary machinery and equipment. The equipment itself often serves as collateral for the loan, which can lead to lower interest rates.
This type of loan allows businesses to upgrade their technology or machinery without a large upfront investment, spreading the cost over time through regular repayments.
- Loan Amount: Starts from PHP 100k up to PHP 10 million
- Repayment Terms: From 12 to 36 months
- Interest Rate Offered: Starts from an annual interest rate of 10%
- Approval Time: Within 1 day
- Requirements: A minimum 6-month-old pre-existing account at a security bank with a balance of PHP 50k.
4. Invoice Financing
Invoice financing, also known as accounts receivable financing, allows businesses to borrow against their outstanding invoices. This type of loan improves cash flow by providing immediate funds while waiting for customers to pay their invoices.
The lender advances a percentage of the invoice value, and repayment is made when the customers pay the invoices.
- Loan Amount: Starts from PHP 100k up to PHP 15 million
- Repayment Terms: From 6 to 48 months
- Interest Rate Offered: Between monthly interest rates of 2% and 4%
- Approval Time: Within a couple of hours to a few days.
- Requirements: The borrower’s business must be at least 1 year old and must possess a high credit score to get a decent loan amount at a reasonable interest rate.
5. Microloans
Microloans are smaller loans designed for startups and small businesses that may not qualify for traditional bank loans. Non-profit organizations and government programs typically offer these loans.
Microloans can be used for various business needs, such as purchasing inventory, equipment, or working capital, and usually come with flexible terms and lower interest rates.
- Loan Amount: Starts from PHP 1k up to PHP 20k
- Repayment Terms: From 6 to 36 months
- Interest Rate Offered: Starts from an annual interest rate of 9% up to 36%
- Approval Time: Within a few minutes
- Requirements: Must be a resident of the Philippines and must be 18 years of age or above.
6. SBA Loans
SBA (Small Business Administration) loans are partially guaranteed by the Philippine government, reducing the risk for lenders and resulting in more favorable terms for borrowers. These loans can be used for various business purposes, including working capital, equipment purchases, and real estate investments.
SBA loans are known for their competitive interest rates and long repayment terms, making them a popular choice for small businesses.
- Loan Amount: Starts from PHP 50k to PHP 5 million
- Repayment Terms: From 5 to 25 years
- Interest Rate Offered: Starts from an annual interest rate of 8.5% to 16.5%
- Approval Time: Within 1 - 2 business days
- Requirements: Borrowers must be above the age of 21 years and must possess a FICO score of 620+
7. Merchant Cash Advances
A merchant cash advance provides businesses with a lump sum of capital in exchange for a percentage of future sales. This type of financing is often used by businesses with high credit card sales volumes and can be a quick way to access funds.
However, it typically comes with higher costs compared to traditional loans, as the repayments are tied to sales performance.
- Loan Amount: From PHP 15k to PHP 300k
- Repayment Terms: Starts from 3 to 24 months
- Interest Rate Offered: Starts from an annual interest rate of 24.99% to 29.99%
- Approval Time: It typically takes 5 to 10 days
- Requirements: Borrower’s business must be at least 6 months old and must possess a credit score of at least 525.
8. Business Credit Cards
Business credit cards offer a revolving line of credit with a credit limit, similar to personal credit cards, but designed for business expenses. They are useful for managing short-term expenses, making small purchases, and improving cash flow flexibility.
Regular use and timely payments can also help build the business’s credit history, providing a foundation for future borrowing.
- Loan Amount: Starts from PHP 1 million and can go up to PHP 20 million
- Repayment Terms: From 18 to 55 days
- Interest Rate Offered: Starts from a monthly interest rate of 3% or 36% annually.
- Approval Time: From a few minutes to a few days.
- Requirements: Borrower’s business must be operational for at least 3 years and must not have any outstanding debts that surpass 40% of the business’s monthly income.
Conclusion
Now that you've explored the diverse landscape of small business loans in the Philippines, you're well on your way to securing the perfect financial fuel for your entrepreneurial ambitions.
Always remember to carefully consider your business needs, financial situation, and repayment capabilities when choosing a loan, and don't hesitate to compare options, negotiate terms if possible, and consult with a financial advisor if needed.
By carefully evaluating the typical small business loan terms, you can ensure that the chosen financing option supports the business's growth and stability, ultimately contributing to its long-term success.
Frequently Asked Questions (FAQs)
1. What are typical loan terms offered in the Philippines?
Loan terms in the Philippines vary depending on the loan type and lender. Typically, expect loan amounts from microloans to be under PHP 100k and term loans in the range of 2 million.
Interest rates can start from a single-digit monthly add-on rate of 2% to around 10% annual rates, with shorter terms often having higher rates. Repayment terms can stretch from a few months, around 3 months to 10 years for term loans.
2. How much loan interest is allowed in the Philippines?
The Philippines doesn't have a single maximum interest rate for loans. The Usury Law sets a legal maximum of 6% interest per annum, but exceptions exist. Certain loans might have different interest rate ceilings depending on the type of loan and regulations by governing bodies. It's crucial to compare offers and ensure all fees and interest rates are transparent before committing to a loan in the Philippines.
3. What are the main terms used in a loan agreement?
Loan agreements typically include key terms like -
- Borrower & Lender: Identifies the parties involved.
- Loan Amount & Interest Rate: The total amount borrowed and the cost of borrowing.
- Repayment Term & Schedule: Duration of the loan and how you'll repay it, either monthly, quarterly, or annually.
- Collateral (if applicable): Assets securing the loan in case of default.
- Fees: Origination, processing, or late payment fees.
- Default & Prepayment Clauses: Consequences of missed payments and early repayment terms.
4. How is a business loan calculated?
Calculating a business loan involves two main parts: total repayment and monthly payments. The total repayment considers the loan amount multiplied by the interest rate and the loan term (often in years).
This is then divided by (1 + interest rate per period x loan term) to find the number of periods. Monthly payments are the total repayment divided by the number of payment periods, e.g., months. It's best to use a loan calculator for specifics, as some loans have additional fees included too.
