Borrowing requirements and procedures vary from bank to bank. But the procedures described here will illustrate what can generally be expected when an entrepreneur approaches a bank to obtain credit, i.e. get a loan.
It is important for you, the borrower, to take note that getting a loan approval starts from planning well.
The steps that follow include preparations which you, as an entrepreneur, must do by yourself, before approaching a financial institution, or even before deciding to borrow.
1. Evaluate whether you are in a position to borrow
Try to answer the questions below to find out whether you have what it takes to be a borrower who can be considered a good "credit-risk."
- Am I honest, with clear lines of credit, trustworthy and without any police record? Do I fulfill my obligations and honor my commitments? In other words, can I pass a bank's credit investigation? Is my financial stake in the business sufficient to influence me to honor and repay my debt?
- Do I manage my cash flow well? Do I have ready sources to repay my obligations? Do I have a written record of my cash receipts and disbursements? Do I have the documents to show (for example, income tax returns and financial statements) that my business has consistently been profitable over the past few years? Have I been dealing with a bank through which I can show the flow of my cash in the form of deposit account?
- Am I in an industry that has bright prospects for growth? Is my business job-creating, local material utilizing or dollar-generating? Is the community where my business is operating contributory to industrial growth?
- Do I have collateral without debt or lien, in the form of land, building, automotive vehicle, or equipment of value? If I have none, will someone lend me collateral? Otherwise, am I eligible for guarantee-coverage from credit guarantee institutions?
2. Estimate accurately the amount that you need to borrow.
Whether the loan is for the acquisition of fixed assets (such as equipment, land, or building) or to get more working capital ( to pay salaries, raw materials, inventories, utilities, etc.), it is important not to underestimate the amount required. It is always better to borrow a bit too much than too little.
3. Choose the bank to approach.
Generally choose the bank that knows you and understands your business best. It should also preferably be one that is near to your business or home.
- The choice of bank must also be determined by the size and purpose of the loan, as well as the size and status of the business.
- For small loans between P50,000 and P5 million, approach development banks, savings banks and rural banks. Consider borrowing also from special lending programs for small enterprises such as the SME Unified Lending Opportunities for National Growth (SULONG) Program of the Development Bank of the Philippines, Land Bank of the Philippines, National Livelihood Support Fund, Philippine Export-Import Credit Agency, Quedan and Rural Credit Guarantee Corporation, and Small Business Guarantee and Financial Corporation.
- For bigger loans above P5 million, approach private development banks, commercial banks and unibanks.
4. Go through the loan application process of the bank you choose.
Submit the various documentary requirements and go through interviews and credit investigations:
- Application forms - The forms vary according to the bank but the following information are usually asked: name, address, telephone number, legal form and nature of the business; registration with government business registries (such as the Securities and Exchange Commission, the Department of Trade and Industry, or the city or municipal government); product lines; amount of capitalization; names of owner/partners/stockholders; type, amount, and purpose of loan applied for; and description of collateral offered.
- Documentary requirements - The requisite papers should preferably be prepared before applying for a bank loan. Incomplete documents can cause delays. The following documents are commonly asked for:
- Community Tax certificate, taxpayers' identification number, BIR-stamped tax declaration for the past three years, financial statement for the past three years, bank and grade references.
- Mini business plan or project feasibility study, especially for borrowers who are just starting in business. The business plan basically contains a forecast in terms of money of what the business is going to be like for each month of a given year. It gives estimates of production expenses and expected sales revenues.
- Business registration papers. For single proprietorships, registration with the Department of Trade and Industry and with the municipal office. For partnerships, articles of partnership and joint resolution to borrow. For corporations, SEC-certified articles of incorporation with by-laws, board resolution to borrow, and stockholders’ biodata. For cooperatives, registration with the Bureau of Cooperative Development.
- Papers pertaining to collateral. For real estate mortgage, copy of TCT, location plan with vicinity map, tax clearance, tax receipts, tax declaration, insurance, floor plan or pictures. For chattel mortgage, invoice with official receipt for payment of chattels, registration certificates, insurance, L/C evidencing payment in case of imported equipment. For exporters, letters of credit, confirmed purchase orders and sales contracts.
Be sure you understand all these documentary requirements clearly. Ask for a checklist and go through each requirement carefully with the loan officer assigned to you. Know the documents required – in what form (original or certified true copy) and in how many copies. Don’t hesitate to ask questions and clarifications.
The purpose of the interview is to gather information in order to establish your creditworthiness as a prospective borrower. Again, this is an opportunity for raising questions which you have in mind.
5. Get ready for an ocular inspection of your plant/workplace as well as the property being offered as collateral.
A bank appraisal report is made of the property, which includes: land identity; description of the land; neighborhood data; public utility improvements; valuation and encumbrances.
6. Be prepared for a credit investigation.
The credit investigation report generally covers the following:
- The company's background and history, covering the date of registration/incorporation, the type of business organization, records of registration, names of incorporators, and a summary of operating records.
- Financial condition. The current breakdown of financial statements reflecting the results of operation for the past three years. It also includes schedules, explanations of extraordinary items, breakdown of merchandise and receivables and full explanation of all inter-company loans and merchandise transactions.
- Dealings with government agencies. The lending bank checks on the credit availed of by the applicant from lending government agencies, the nature of the loan, collateral offered, and installment payments, including arrearages, if any.
- Bank's experience with the borrower, if the applicant is an old client.
- Court cases: The bank checks on civil or criminal cases involving the applicant. It also obtains information about the applicant from competitors.
After the credit investigation and supporting documents have been accomplished and evaluated, a recommendation for approval is prepared and the release of the loan is facilitated.
Borrowing from a bank can be a long and tedious process which may take anywhere from a few days to a few months. Being sure that you understand all the above procedures and requirements will definitely help shorten the process.
Remember too, that officers from special lending programs will monitor your business even long after the loan has been released. They check on your books and records. For loans on a letter of credit or purchase order, they monitor your production activities to see to it that deliveries and shipments are made on time. They do so in order to confirm that the loan is being utilized for the purpose you have indicated and to help ensure that your business stays viable and capable of keeping up with loan repayments.
Are you ready to apply for a loan?