6 Common Financing Options SMEs Should Know About

March 13, 2020

Comprising a total of 99.6% of all registered businesses in the country, small and medium-sized enterprises or SMEs serve as the backbone of the Philippine economy. With this number, it’s not surprising that there are a lot of financial products that cater specifically to businesses in this category.

Before they even need it, SME owners should familiarize themselves with the financing options that their business is qualified to apply for. This way, in case they require funds to overcome liquidity needs, they have a good idea of what’s available to them and which options best fit their current situation. If you’re a stakeholder in an SME, here are some of the most common types of business loans and financing options that you should know about:

Invoice Financing

A form of short-term borrowing, invoice financing refers to selling a company’s accounts receivable or outstanding invoice to a third party. In exchange for a percentage of the invoice, the third party will advance part of the funds that the invoice is worth to the company. Invoice financing is a practical option if a company is set back by slow invoice payments. Through it, the company can boost its cash flow without needing to wait for due dates or chasing after clients.

Purchase Order Financing

Another short-term option, purchase order financing is designed to help businesses, particularly those that have more sales than what their current cash flow can fund, fulfill product orders. Here, the lending party will pay the company’s suppliers so that the company can complete customer orders. This option offers flexible funding, but it can also come with high fees and may not be applicable to service-oriented businesses.

Bank Term Loan

Bank term loans refer to bank-issued loans with a fixed payment term that usually exceeds one year. Business owners prefer this type of loan because it normally features very low interest rates and predictable monthly payments—if the loan is paid on time and within its terms. At the same time, applying for a bank loan can be a stringent process, as most banks look for strong credit and require lengthy paperwork. SMEs often take a bank term loan to expand the business or acquire new property.

Bank Business Credit Line

Also known as a line of credit, this business loan allows the SME to borrow up to a certain amount of money from the bank. The money can be withdrawn for any reason, which makes a business credit line an ideal option during a financial emergency. Used wisely, a line of credit can help your business build a relationship with the lender and increase its credit rating. Take note, though, that this type of financing option may have higher interest rates and added fees.

Bank Short Term Loan

Bank short term loans refer to one-time bank loans that need to be repaid within 18 months. It’s usually easier to apply for short term loans, but the downside is that these typically feature higher interest rates. Short term loans can be an option if your SME doesn’t qualify for bank term loans or a line of credit.

Private Company Loans

Issued by private lenders, private company loans are an option for business owners who find bank loan applications to be too strict and rigorous. Businesses can apply for private company loans online, and the loan requirements are usually easier to comply with. However, this type of loan requires heavy collateral. Businesses should also be wary of online lending scams that are posing as private lending companies.

There are plenty of financing options and business loans that SMEs in the Philippines can turn to should they need to stabilize their cash flow or if they want to expand their business. Before signing up for one, though, make sure that your company is prepared to shoulder the responsibility that comes with the additional funding and that you are transacting with legitimate lenders.