Private sector or government: which source of business lending is better?

FOR many small and medium-sized enterprises (SMEs), business loans are a lifeline. These can supplement cash gaps, allowing opportunities and business growth. If you’re up for one, you’ll find tons of legitimate government and private sector options.

Many SMEs choose government loans by default, assuming it works the same way as state aid: with zero interest and low payment obligation. Others choose banks without considering other options. However, you can lose savings or have trouble with refunds if you don’t at least research other options.

To help you narrow down your choices, here is a general guide to legitimate Filipino lenders:

Banks. These are the main sources of private funding in the country. Most have online banking and thousands of branches nationwide. Business loans can be obtained from BDO, BPI, Security Bank and Unionbank, among others.

Independent lenders. These are non-banking entities authorized to provide financing. Some are traditional lenders while others are fintech companies that conduct most of their business online. Their capital comes from venture capitalists or private investors. First Circle and Investree are examples.

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Government providers. These are financial institutions owned or managed by the government. Their capital usually comes from public taxes and investments from other governments or economic entities. Examples are Small Business Corp., the financial arm of the Department of Trade and Industry (DTI), and Land Bank of the Philippines.

Credit unions. Also called credit unions, these are sources of financing that operate similarly to banks, except that they are owned by customers who pay a membership fee. They also exist for a specific purpose and do not operate for profit. Because there are thousands of credit unions, many of which keep loan details limited to members, it is difficult to assess their business loans. Legitimate cooperatives are registered with the Cooperative Development Authority.

Before transacting with any lender, always make sure that you are dealing with their official channels and that they are registered with the Securities and Exchange Commission (SEC) and the Bangko Sentral ng Pilipinas (BSP).

Better interest rates: government providers

Government loans are targeted primarily to underserved, low-income sectors or priority sectors such as micro-enterprises. Thus, they generally have lower interest rates and more lenient terms. For example, DTI’s RISE UP loans have an interest rate of 12% per annum. DTI Turismo loans, on the other hand, only require an 8% service fee.

Banks can also offer low interest rates – some as low as 6% per annum – if you provide collateral. Although this seems low, secured loans are much riskier for SMEs because assets can be lost in the event of default. Most banks also reassess their interest rates after the initial loan fixation period. Repricing is based on market rates set by the BSP. This means that your interest rate is likely to rise, especially if you are borrowing at a time when the BSP is trying to control high inflation.

Among independent lenders, the most affordable unsecured business loan is the First Circle Revolving Line of Credit, which goes down to 1.39% per month. In addition, the fintech (financial technology) company has a best price guarantee: if you have a better offer for non-collateral SME financing, it is ready to beat the price by 10%.

Fastest Processing: Independent Lenders

Many independent lenders can process loans much faster thanks to online application processes, fewer document requirements and proprietary underwriting models. First Circle, for example, provides a conditional line of credit offer to qualified borrowers in three to five business days. In addition, applicants are only required to submit two initial documents and respond to a consultation call to obtain an initial offer.

In contrast, government loans can take 10 days or more due to the huge volume of applications. Some applicants say they waited months after submitting their documents. Banks, on the other hand, usually take five to seven business days to make a loan decision.

Largest loan amounts: Banks

Bank-backed loans offer up to 20 million pesos or more in financing, making them the best option for high-growth SMEs planning major purchases. Some are even intended to help SMEs buy property or another business.

In contrast, unsecured government loans have the lowest loan amounts – usually between 10,000 and 300,000 pesos. Indeed, the government is focusing on funding more micro-enterprises to help citizens create sustainable sources of income.

Unsecured loans from private lenders are usually between 100,000 and 5 million pula. However, unsecured loans are more difficult to obtain as they expose lenders to a higher risk of losing their capital. Lenders only grant them to companies in good financial health to reduce the risk of default.

Longest loan terms: It depends

The length of your loan depends on the amount and type of loan, rather than the lender you choose. Term loans and secured loans can have repayment periods of up to 25 years; the higher the amount of the term loan, the longer the repayment term can be.

In contrast, lines of credit and unsecured loans have shorter loan terms even if you get millions in funding. Indeed, the longer the term of the loan, the higher the risk of missing repayments. Lines of credit often have a renewable one-year term; the durations of unsecured loans are from one to three years. An exception is for unsecured government loans. For example, DTI Turismo loans offer 100,000 to 5 million pesos, which borrowers can repay in up to four years.

There is no single answer to which lender is best for you – it all depends on your business needs. Before borrowing, consider the following:

– How much money do you need?

– What is the highest monthly interest rate you can afford?

– How much are you willing to pay per month and for how long?

– Is the application process quick and easy?

– How soon will you need the money?

Government loans generally have the lowest interest rates and the most lenient terms. However, demand is generally slower and loan amounts are lower than what private lenders can offer.

Banks offer the highest loan amounts and sometimes even lower interest rates. However, to obtain this last guarantee, a guarantee is necessary, which exposes you to a higher risk in the event of default.

Independent lenders have the fastest loan processing, as they generally have fewer requirements, an online application process, and focus on unsecured loans – eliminating the need to assess collateral. However, they have a higher barrier to entry and can be difficult for applicants who are not digitally savvy.

Jess Jacutan is Head of Content Marketing for First Circle, an SEC-registered fintech company that has been empowering SMBs with free funding and growth tools since 2016.

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