Why corporate loans are more expensive and what SMEs can do about it
If you’re finding business loans getting more expensive every month, you’re not alone.
In a bid to control inflation, the Bangko Sentral ng Pilipinas (BSP) has hiked interest rates several times this year to encourage consumers to spend less and save more. The latest interest rate hike raised the call money rate to 4.75 percent. This means that banks and lenders pay more to borrow money from the BSP, which they have to pass on to borrowers. This is the largest external factor making corporate financing more expensive.
This is bad news for business owners who simply need to borrow now, especially with the holidays and upcoming business planning for next year. Whether or not inflation persists, companies will still need increased inventories, a possible increase in furlough work, and emergency funding to mitigate contingencies and liquidity shortfalls during the “ber” months.
The good news is that you can turn to legitimate independent lenders who can offer you cheaper financing rates. Because many independent lenders don’t get their capital from the BSP, they shouldn’t be affected by rate hikes unless they have to offset rising costs of doing business.
For example, First Circle has already said it will maintain pre-inflation interest rates at just 1.39 percent for the remainder of 2022. The announcement applies to both new and existing customers. While other independent lenders have not made similar announcements, companies can use this information to negotiate cheaper loan rates with other lenders.
This doesn’t mean that there aren’t internal factors making business loans more expensive. Many things can affect the final cost of borrowing: the lender you choose, the type of loan, the terms of the loan or the collateral you are willing to post, etc. The biggest one, however, is simply that your business finances may present you as high – risk borrower. The interest rate on a business loan is the price the lender charges you to borrow; The higher the repayment risk, the higher the percentage.
Unfortunately, improving the finances of your business is a long-term game that doesn’t do you well if you need funding now. In the meantime, you can shorten the preferred loan term, reduce the loan amount or be open to alternative financing options to secure a better interest rate. Check out legitimate independent lenders who are more willing to take a much higher risk. Alternatively, you can switch your desired loan from an unsecured to a mortgage loan; Just remember that this poses a higher risk to your business.
Work long-term to make your business more attractive to lenders. There are many ways to do this, but the main one is to take care of your credit history. While there is no centralized credit scoring system in the Philippines at this time, lenders conduct a credit check of the company’s owners and associates first for new applications.
Outstanding credit obligations and financial discrepancies count against your ability to repay, so pay off any existing personal and business loans and ask your business partners to do the same. Also, keep your daily bank balances as high as possible – it strengthens your financial performance.
Another way to lower future interest rates is to show cash flow consistency. Legitimate lenders require bank statements, tax returns, cash flow projections, and audited financial statements for this very reason. Inexplicable inconsistencies such as negative balance days, erratic income and huge losses and gains will sound the alarm – your loan application could be rejected. That’s also why companies in industries with inconsistent cash flows, like restaurants and real estate developers, have a harder time getting credit. Even if they have a high annual income, an unpredictable drop will easily derail repayments.
After all, keeping company registrations, records and document filing up to date is the easiest thing to do. Aside from not having to pay penalties, companies with clear and updated documentation are approved for credit much more quickly – signaling that the company has nothing to hide. This is especially true for companies with parent companies, subsidiaries and name changes. Audited financial statements, articles of association and general information sheets must clearly reflect your business history and relationships.
Lenders differ in their underwriting and underwriting systems; For many, it is more efficient to decline the loan application outright than to take the time to contact them and untangle any discrepancies in the records.
Business loan prices are highly dependent on factors beyond a business owner’s control. However, if your business simply can’t afford to defer borrowing for a few more months, there are short- and long-term ways to make interest rates more affordable.
Jess Jacutan is Content Marketing Lead at First Circle, an SEC-registered financial technology company that has been helping SMBs with financing and free growth tools since 2016.