In the middle of the coronavirus disease 2019 (Covid-19) pandemic, it has become a trend for businesses, even those in the essentials category, to manage their finances more efficiently to survive.
Business financing is one of the most pragmatic ways to sustain your business during the “new normal.” For some, it could take just once to jump-start their operations, while others might need to maintain a continuous business financing cycle, as delayed payments may just be a trend for customers who are also tied due to the coronavirus -caused recession.
Regardless, the solution it provides is keeping your business’ cash flow healthy. Below are three easy options for business financing.
One way to raise capital for your business is to liquidate assets that you don’t need anymore. In financial terms, liquidation simply means selling off property in order to convert them to cash. It’s an easy way to raise money that you can then use for your business-related expenses, whether it’s to buy the equipment you need to cover the payroll of your employees, to pay for office rent, to pay for the purchase of a commercial property, and many others. Anything you have that is of value and can be sold off to the open market as an asset. This can include things like an expensive artwork, a car or office equipment.
These are the pros of that measure:
– The biggest advantage of selling assets is getting the money you need for your business immediately — and you won’t owe anyone anything.
– If you have assets that are dormant or not being used — or if they are actually costing you money to keep and maintain, then selling them off is a great way not only to earn money that you can use toward your business, but also to get rid of potential money drains.
This is the con: Sale of some assets in the Philippines (e.g., real estate and precious metals) may incur the seller capital gains taxes.
Ideal for: Obtaining capital through liquidation of assets can benefit virtually all business owners. However, it’s probably not a good financing option if your capital requirements surpass your possible earnings from the liquidation.
Business term loans
Taking out a business term loan is one of the most popular options to take in the Philippines. This traditional loan is offered by all major banks in the country, although it is also offered by non-bank entities such as private lending companies and government agencies. Term loans can be used for a variety of purposes, whether you intend to use it as working capital, to invest in new equipment, or to finance your business expansion endeavors.
Fixed interest-rate term loans vs variable interest-rate term loans
In brief, a business term loan is a kind of loan where the borrower is given a lump sum amount that has a definite repayment schedule over a specific period of time. The borrower agrees to pay the lender back through regular repayments either at a fixed interest rate or at a variable interest rate. A loan with a fixed interest rate will have payments that have the same interest rate for the duration of the borrowing period, while a loan with a variable interest rate will have payments whose interest rates will fluctuate depending on the prevailing market rates.
Secured term loans vs unsecured term loans
Taking out a business term loan typically requires a rigorous screening process, and this is true whether one is looking at obtaining a secured business term loan or an unsecured business term loan. A secured term loan will require the borrower to pledge a collateral, which serves as a security for the repayment of the loan. In the event that the borrower defaults on the loan, this security will be forfeited, allowing the creditor to get back the money owed. An unsecured business term loan, on the other hand, does not require collateral, and as such, a borrower’s creditworthiness and financial standing will be more scrutinized. Unsecured business loans also usually entail larger repayment amortizations and bigger interest rates compared to secure business loans.
Short-term loans vs long-term loans
Finally, business term loans are available in a range of maturities, from less than a year to as long as 15 years or more. Short-term business loans are usually taken out for smaller amounts that borrowers can pay quickly but also have higher interest rates. Conversely, long-term business loans are available as a financing option to those who need larger amounts. However, it’s precisely because of the huge sums of money involved that lenders conduct a more stringent approval process for long-term business loans. However, such loans typically carry lower interest rates and as their name suggests, the borrowing period can be a lot longer, allowing you to spread your payments over several years.
Here are the pros:
– You can use a term loan for all business-related purposes.
– Flexible payment methods and loan terms are typically available to borrowers.
– You can take advantage of predictable repayment amounts and payment schedules.
– You’ll have access to larger amounts of cash.
Here are the cons:
– You’ll likely go through a rigorous approval process.
– Collateral is usually required if lower interest rates are desired.
Ideal for: Term loans are ideal for established businesses of good financial standing.
Growing popular examples of short-term, unsecured business financing would be invoice and purchase order financing. These help solve working capital gaps and are one of the most convenient and easy ways to get quick financing.
First Circle offers both invoice financing and purchase order financing and instead of requiring an asset or property title. Applying can be easily done on the website while submission of requirements can be self-serve or accomplished with the help of a relationship manager. You can be assured that social distancing is practiced as we don’t require our customers to meet with us to get a loan approval.
Lines of credit
Another type of loan that banks and private lending institutions can extend to business owners is a line of credit. A line of credit is different from installment loans like a term loan because instead of being given a lump sum of money with a fixed repayment schedule and period, a borrower is provided with a predetermined borrowing limit — a fund that they can draw money from whenever they need cash. If you take out a line of credit, you will be able to access the fund at any time and at your own discretion, but you can’t withdraw an amount beyond your maximum credit limit. In this sense, a line of credit is just like borrowing money using a credit card.
Revolving vs fixed (non-revolving) line of credit
Business owners who choose lines of credit as a source of financing usually have the option to take out a revolving line of credit or a fixed line of credit. Similar to a credit card, a revolving line of credit resets when the borrower pays the balance in full. Conversely, a fixed or non-revolving line of credit possesses all the features of a revolving line of credit, but the available credit will not reset after the payment is settled. The account is closed and it cannot be used again.
Here are the pros:
– Available funds from a line of credit can be withdrawn at any time and can be used at your own discretion.
– You can borrow only the money you need.
– You’ll only incur interest on the amount you borrowed.
Here are the cons:
– Taking out a line of credit often requires good credit history for a borrower to qualify.
– There is some interest rate risk, as lines of credit typically have variable interest rates.
– Approvals for lines of credit are about as long as those for term loans.
Ideal for: Lines of credit are best for established businesses that periodically require access to a reliable source of fund, or those that usually experience short-term cash shortfalls.
To learn more about other types of business financing in the Philippines, visit First Circle’s blog at https://www.firstcircle.ph/resources/blog.
Lee-Anne Tobias is the senior communications associate for First Circle Growth Finance Corp. She has 10 years of experience in digital media, business communications, corporate social responsibility, and qualitative research in the energy and market research industries. To get in touch with her, email her at firstname.lastname@example.org. To know more about First Circle and its financing services, visit www.firstcircle.ph.