THERE IS a very common myth among Filipinos that if a business borrows money, it means the business is failing. “Maraming utang ‘yan”, some will say. But in reality, the businesses that get loans are actually the most profitable! After all, banks and other lenders also need to make money, and the only way to do that is to lend to companies that make enough profit to repay the loan, plus interest.
Some of the fastest growing companies in the world are using loans to improve their services, expand into new markets, negotiate better prices with suppliers and more. So why are Filipinos so against borrowing money? The simple answer is that most of us don’t understand loans and how they work. After all, how could we talk about it when it’s treated like such a shameful thing?
So today I’m going to share three of the most common misconceptions about business loans that I learned during my time at First Circle.
Lower interest rates are always better
When reviewing loan offers, most business owners immediately ask for the interest rate and go for the lowest rate because they think it costs the least. Although the interest rate is important, it only shows a small part of the big picture. It is important to consider the total cost of the loan in addition to the interest you will pay.
For example, did you know that the government offers subsidized loans at 0% interest but with a 6% processing fee? And it’s not just the government. Most lenders will charge at least a few other fees including processing fees, service fees, prepayment fees, etc. These can add up quickly and in some cases cost more than the interest on your loan.
It is also important to consider the terms of the arrangement and the potential costs associated with them. For example, if you need to take out a longer loan in order to get a lower interest rate, you will likely pay a higher total peso amount at the end of your loan term. Another example is if you are offered lower interest rates in exchange for listing your home as collateral – is the risk of losing your home worth the lower interest rate? These are all important factors to consider when assessing the true cost of a loan.
You only need a business loan for big expenses
While business loans can certainly come in handy when buying new equipment, building a new office, or purchasing other big-ticket items, it’s important to remember that they can also be used to resolve smaller cash flow discrepancies that end up weighing heavily on your business. Missed opportunities, operational nightmares, and unhappy customers are just a few of the things you could avoid if you had some extra cash in your back pocket.
With products like First Circle’s Revolving Line of Credit, taking out a loan doesn’t have to be reserved for special occasions. Once you set it up, you can get money from just two businesses, at a price you already know in advance and with loan terms that you customize to suit your needs – that’s like having a credit card with a limit proportional to your business!
Banks are the only “legitimate” lenders
Banks offer many “legit” products, including business loans, but it’s no secret that traditional banking processes are often cumbersome and slow unless you’re a big customer. Most people accept it because they want to borrow from a reputable company, but the good news is that traditional banks aren’t the only reputable lenders!
First Circle, for example, is an official partner of the SEC (Securities and Exchange Commission) and the DTI (Department of Trade and Industry) in providing loans to help SMEs (small and medium-sized enterprises) grow. You could even borrow directly from the government through projects like the DTI P3 Cares program. Even if you end up borrowing from a bank, it doesn’t hurt to understand what options are available to you in the first place – information is key to making such an important decision as choosing the right lending partner for your company !
You can also check the SEC website for a list of registered loan companies and registered online lenders to make sure you are dealing with a legitimate company.
It’s no secret that the world of finance and lending can be very confusing, but learning how to navigate it can really make or break your business. I hope this article has helped clarify some things for you and made lending a little less daunting. If there are still questions in your mind, remember that it doesn’t hurt to ask them. Our team at First Circle will be happy to answer your questions and help you decide which loan product is right for you or if you even need one. As I mentioned at the beginning of the article, we only want to lend to businesses that can grow with their loans.
Belli Caballeros is Head of Digital Marketing at First Circle. She has been helping digital-focused brands grow their business since 2014 and is passionate about improving the financial prospects of everyday Filipinos.