So, you’ve stumbled upon what you think is the next big thing, a business idea that’s destined for greatness.

 

You have the skills, you have the vision, you have the drive to turn it into reality – you're over the moon with this idea!

 

But suddenly you’re crashing back down to earth when you check your bank account. Reality check, luv: you don’t have the cash to hit the gas on that business idea.

 

We don’t mean to be a buzzkill, luv, but everyone knows you need money to make money. Fear not, though, because we’re here to present a solution to get that business up and running: working capital loans!

 

 

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What is a Working Capital Loan?

Businesses need money to handle everyday operations like replenishing inventory, covering salaries, and paying bills. This money is what you call working capital.

 

Working capital loans, then, are loans that allow you to borrow money for those day-to-day needs. They help ensure that businesses run smoothly even during seasons when there’s shortage of cash flow.

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Understanding Working Capital Needs

Working capital doesn’t just fuel your business on a daily basis; it can also free you up from financial disruptions so you can seize growth opportunities, invest in innovation, and easily navigate challenges. Before you take one out, though, you must first assess your business’ requirements. Here’s what you can do to make sure you’re getting working capital loans for the right reasons:

 

1. Calculate current assets and liabilities - Evaluate current assets (i.e. cash, inventory, and accounts receivable) versus liabilities (such as bills, loans, and accounts payable). This will help determine the working capital gap.

 

2. Forecast cash flow - Project incoming and outgoing cash over a specific period (monthly or quarterly) to understand cash needs and avoid shortages.

 

3. Analyze operating cycle - Assess the time it takes for cash to be invested in operations and then recovered through sales. This can help you optimize cash management.

 

4. Consider seasonal trends - Timing is everything, luv. Understand how your business's income and expenses fluctuate throughout the year so you can rest assured you’ll have enough working capital during slow periods.

 

5. Review growth plans - Evaluate planned expansions or changes in business operations to anticipate how they might affect the working capital needs in the future.

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Types of Working Capital Loans in the Philippines

The suitable type of working capital loan varies from business to business. To help you choose, here are brief descriptions including pros and cons of each type available in the Philippines:

 

1. Short-Term Loans - You get a fixed amount of capital over a relatively shorter repayment period which can range from a few months to a year. The application process is typically quick and straight-forward, but their interest rates tend to be on the higher side. Plus, lenders may ask for collateral.

 

2. Invoice Financing - You borrow money against unpaid invoices. This gives you quick access to much-needed cash, but repayment may become a hassle if customers delay payments or default.

 

3. Lines of Credit - A lender will provide access to a predetermined amount, and you will only pay interest on the amount you use. This type offers plenty of flexibility, but a good credit score is extra important here for approval.

 

4. Merchant Cash Advances - You receive a lump sum amount of cash upfront in exchange for a portion of future credit or debit card sales. This is easy and straightforward to get for businesses with consistent card sales but expect high fees and (once again) interest rates.

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Eligibility Criteria for Working Capital Loans

Different lenders look for different loan criteria, but there are a few that are common across the board. Read through the typical eligibility criteria below so you can get ready for your application!

 

• Business Age - Your business may have to be at least 1 year old in order for you to get working capital loans.

 

• Identity Verification - Prepare documents that prove your identity as business owner.

 

• Annual Revenue - Some lenders may ask for a certain level of annual revenue to qualify for a loan.

 

• Credit Score - An exemplary credit score isn't always a month, but it can definitely help you score that approval.

 

• Profitability - You may need to demonstrate a minimum of 2 years of proftable business track record.

 

• Proof of Registration and Legitimacy - Make sure your business has the proper government registrations. You can't get a loan if you're not legit, luv!

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Documentation and Application Process

The application process for any loan can be challenging. To avoid hiccups along the way, we’ve broken down the process, just for you! But heads up, they’re not the same for all lenders. These are just the common steps that everyone has to take when applying for working capital loans.

 

Step 1: Research and preparation

Assess which loan type you need for your business.

 

Step 2: Select a lender

Look for a lender that offers the specific type of working capital loan you need. Don't go for the first one you find. Shop around and compare terms, interest rates, and eligibility criteria.

 

Step 3: Fill up the application form

Complete the application form provided by your chosen lender. Submit documents like proof of identity, business permits, financial statements, credit history, collateral details, and more.

 

Step 4: Wait for evaluation and approval

This may involve credit checks, analysis of financial statements, and assessment of creditworthiness.

 

Step 5: Negotiate

Review the terms offered and negotiate to get the best loan possible!

 

Step 6: Documentation and disbursement

If both parties agree on the terms, sign the loan agreement and wait for disbursement!

 

There’s no guarantee that you’ll get approved even if you go through those steps. What you can do is follow these tips for a higher chance at approval:

 

• Maintain good credit history - Like we said earlier, a good credit score doesn't ensure instant approval, but it sure helps increase your likelihood of loan approval and get better loan terms!

 

• Prepare a solid business plan - Lending companies use this to assess your ability to pay back the loan. Your business plan should be comprehensive and must include your company's objectives, strategies, and financial projections.

 

• Organize financial statements - Make sure your financial statements are in order as they will showcase the financial health and stability of your business.

 

• Consider collateral loans - Loans like Tonik Big Loan provide lenders with more security since collateral reduces the lending risk.

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Choosing the Right Lender

Just like picking the type of loan, you also have to choose your lender wisely. So you can do just that at a glance, here’s a quick comparison table with important factors like interest rates, loan terms, processing time, and reputation!

 

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Interest Rates, Fees, and Repayment Terms

In case you forgot, the interest rate is a percentage of the principal amount that is charged by the lender. This can be fixed – which means it will be the same throughout the loan term – or variable – meaning it can change based on changes in market conditions.

 

Aside from interest rates, should also be wary of certain fees that your lender may charge:

 

• Processing Fees - Can range from 1% to 3% of the loan amount.

 

• Late Payment Fees - Charged for missed or late payments. They’re usually around 3% to 5% of the overdue amount.

 

• Origination Fees - Cost of processing the loan application, usually a percentage of the loan amount deducted from the loan amount before disbursal.

 

• Prepayment Fees - Charged if the borrower pays off the loan before the agreed-upon term, typically around 1% to 5% of the prepayment amount.

 

If you’re just about to get a loan, you may not be thinking about repayment just yet. However, not knowing your chosen loan’s repayment structure could be a big mistake. You have to be prepared to be a good borrower. Here’s a quick overview:

 

• Short-Term Loans - Fixed payments over a short duration, usually a few months to a year. For Tonik Loans, you can do it easily in-app via the Pay Button.

 

• Invoice Financing - Repayment corresponds to the due dates of outstanding invoices, with the repayment amount being settled when the customer pays the invoice.

 

• Lines of Credit - Borrowers will pay interest only on the amount used, with varying repayment options.

 

• Merchant Cash Advances - Repayment based on a percentage of daily credit card sales or fixed daily/weekly payments. This will be deducted from the borrower's sales until the advance and fees are cleared.

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Risks and Best Practices

 

Remember, luv, getting a loan is a big responsibility. Before you apply, take note of the risks involved:

 

• High-Interest Rates - Working capital loans may come with relatively high-interest rates, potentially increasing the overall cost of borrowing.

 

• Short Repayment Terms - Some working capital loans might have shorter repayment terms, resulting in higher periodic payments.

 

• Impact on Credit Score - Defaulting or late repayments on working capital loans could negatively affect the your credit score.

 

• Cash Flow Constraints - Loans might add pressure to cash flows, especially if revenues are lower than expected.

 

Plus, some pro-tips! Make sure to assess your needs properly and borrow only what you need. Budget for repayments and monitor cash flow, too, so you don’t miss payments. Finally, use the funds effectively to get the best out of your loan!

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Government and Private Sector Support Programs

Before we let you go, we’re sharing a few government and private sector support programs you can consider. While they’re not all working capital loans, they can surely help you out on your business journey!

 

• KAPATID Mentor Me - This program offers guidance and resources for SMEs operating for at least one year.

 

• Pondo sa Pagbabago at Pag-Asenso (P3) - This program offers loans ranging from PHP 5,000 to PHP 200,000 to MSME owners, helping them launch or expand their businesses.

 

• Go Lokal! - This initiative assists MSMEs in marketing their products to both local and international markets.

 

Think you’re ready to dive into the world of working capital loans? We know it seems intimidating at first, but don’t stress out too much. As long as you have a good credit history and keep up being a lovely borrower (in other words: always paying your loans on time) you’ll be alright.

 

Keep this blog handy as well in case you need to refresh your memory anytime. You got this, luv! Go get ‘em!