Why business loans are more expensive and what SMEs can do about it
If you find that business loans are getting more expensive month by month, you are not alone.
In an effort to control inflation, the Bangko Sentral ng Pilipinas (BSP) has raised its key interest rates several times this year to encourage consumers to spend less and save more. The latest hike raised the overnight lending interest rate to 4.75%. This means that banks and lenders pay more to borrow money from the BSP, which they will have to pass on to the borrowers. This is the most important external factor that makes business financing more expensive.
That’s bad news for business owners who simply have to borrow now, especially with vacations and next year’s business planning ahead. After all, whether inflation continues or not, businesses will always need increased inventory, a possible increase in labor during the holidays, and emergency financing to mitigate expenses. contingencies and cash flow discrepancies during “ber” months.
The good news is that you can opt for legitimate independent lenders to offer you better financing rates. Since many independent lenders do not derive their capital from the BSP, they should not be affected by interest rate increases unless they have to offset rising business costs.
For example, First Circle has previously said it is keeping pre-inflation interest rates as low as 1.39% for the remainder of 2022. The announcement applies to new and existing customers. Although other independent lenders have not made similar announcements, companies can take this information and use it to negotiate more favorable loan prices with other lenders.
That doesn’t mean there aren’t internal factors making business loans more expensive. Many elements can affect the final cost of the loan: the choice of the lender, the type of loan, the conditions of the loan or the guarantee that you are ready to provide, etc. More important, however, is simply that your business finances may present you as a risky borrower. The interest rate on a business loan is the price the lender charges you for the loan; the higher the risk of non-repayment, the higher the percentage.
Improving your business finances is unfortunately a long-term game that won’t do you any good if you need financing now. So, for now, you can shorten the term of the preferred loan, reduce the loan amount, or be open to other financing options to get a better interest rate. Look at legitimate independent lenders who are more willing to take on much higher risk. Alternatively, you can also change your preferred loan from an unsecured loan to a secured loan; just remember that it increases the risk to your business.
Over the long term, work on making your business more attractive to lenders. There are many ways to do this, but the most important is to take care of your credit history. Although there is no centralized credit reporting system in the Philippines to date, the first thing lenders do with new applications is to perform a credit check on owners and partners of the company.
Pending loan obligations and financial discrepancies will factor into your ability to repay, so repay all existing personal and business loans and ask your business partners to do the same. Also, keep your daily bank balances as high as possible — this builds your financial capacity.
Another way to lower future interest rates is to show consistency of cash flows. Legitimate lenders ask for bank statements, tax returns, cash flow projections, and audited financial statements for this very reason. Unexplainable inconsistencies such as days of negative balance, irregular income and huge losses and gains will set off red flags – your loan application could be denied. It’s also why businesses in industries with erratic cash flow, such as restaurants and property developers, have a harder time getting loans. Even though they may show a high annual income, an unpredictable drop will easily derail repayments.
Finally, the easiest thing to do is keep business records, files, and document filings up to date. In addition to not having to pay penalties, companies with clear and up-to-date paperwork get loans approved much faster – this indicates that the company has nothing to hide. This applies in particular to companies with parent companies, subsidiaries and name changes. Audited financial statements, articles of association, and general information sheets should clearly reflect your business history and relationships.
Lenders vary in their underwriting and risk rating systems; for many, it is more effective to refuse the loan application outright than to take the time to reach out and sort out the inconsistencies in the records.
Business loan prices are highly dependent on factors beyond the control of any business owner. However, if your business simply cannot afford to defer borrowing for a few more months, there are short-term and long-term ways to make interest rates more affordable.
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.