Types of Business Finance and Funding in the Philippines

Every business, even established ones, may find themselves needing a cash injection to tide them over. After all, running a profitable business is expensive work, and cash flow can be a major issue. So, looking for funding and financing options is nothing to be ashamed of.

In fact, it’s normal. Businesses across the Philippines rely on different kinds of finance every single day. But what are the options?

We believe every business owner should understand their financing options and how they differ. It can be tempting to take the first lump sum offered, but that’s rarely the best choice. 

Choosing the “right” business finance can be tricky—that’s where we come in.

We’ll guide you through the different types of business finance available in the Philippines, including short-term, medium-term, and long-term options. Plus, we’ll cover the pros and cons of each to help you make an informed decision.

The main categories of business finance

Finance in business isn’t all the same. There are different types and categories to suit different needs.

Of course, that involves differences in repayment terms and details. But the types of finance can also be separated into three broad categories based on the duration of the funding:

• Short-term 
• Medium-term
• Long-term

Let’s take a look at each of these financing types:

Short-term finance

Short-term financing is the “quick fix” of the business funding world. It’s there to cover immediate and operational expenses. Usually, the repayment period is less than a year. 

So why would a business need short-term finance? Businesses rely on this type of financing to:

• Manage cash flow fluctuations
• Pay for inventory (paying suppliers)
• Pay salaries
• Pay overheads and utility bills

Ideally, a business will have the cash flow to cover all these payments. But younger companies—startups especially—might not be there yet.

Short-term finance allows companies to maintain smooth operations even during seasonal downturns or unexpected financial gaps.

Medium-term finance

Medium-term finance has a longer repayment period than short-term, usually around 1 to 5 years. It’s more than a cash flow plug, but it’s not as extensive as a long-term investment. 

Businesses might need medium-term finance to:

• Expand their business
• Purchase expensive equipment
• Fund larger growth projects
• Upgrade technology
• Renovate facilities

It’s all about flexibility. Businesses want to invest in growth while keeping financial stability. Medium-term financing offers repayment plans that balance affordability and sustainability—because lenders don’t want to see their borrowers go bankrupt.

Long-term finance

Long-term financing is the most extensive financing type. Philippine businesses use long-term finance for significant capital expenditures like infrastructure projects and large-scale business expansions. Expect repayment periods of more than 5 years.

With that in mind, long-term business finance is generally for:

• Acquiring land
• Constructing buildings
• Investing in high-value tangible and intangible assets

The irony is that these larger, longer-term investments usually require more capital to begin with. 

Repayment schedules are structured to accommodate extended financial planning, ensuring that companies can generate returns on their investments over time.

Short-term finance options

Looking for short-term business finance in the Philippines? They’re usually the easiest to come by. Lenders are quicker to give them out, as they’ll get repaid within a year—quick loan, quick profit.

But that also means you have to be careful. Make sure you can repay, and avoid loans that are too good to be true.

Here are some common types of short-term finance available in the Philippines:

1. Business credit cards

Business credit cards are just like personal ones, but for your business. They’re used to cover routine expenses like office supplies or travel costs. Small and medium-sized enterprises (SMEs) love them as they provide flexibility and help avoid cash flow problems. 

The advantages include:

• Immediate funds access—no waiting around for approval
• Easy to track expenses
• Sometimes offer rewards
• Building credit history (which could help secure larger loans in the future)

Bank overdrafts

You might have an overdraft agreement on your personal bank account. Well, bank overdrafts on business accounts are similar. Businesses can withdraw more than their available balance and pay it back later. It’s common for tackling temporary cash flow challenges, like meeting payroll or handling unexpected expenses.

The advantages include:

• Instant cash, no need to apply
• Interest only charged on overdrawn amount
• Avoid penalties from missed payments

Invoice financing

Invoice financing is a way for businesses to basically “sell” outstanding customer invoices to third party lenders for a small fee. This is beneficial for businesses dealing with long payment cycles, such as suppliers and service providers.

Advantages include:

• Immediate cash flow without waiting for late customer payments
• Reduced risk of bad debts
• Helps maintain smooth operations

Trade credit

Buy goods or raw materials now, pay later. Interested? Trade credit is a private agreement whereby a supplier lets a business pay for goods at a later date (usually within 30 or 90 days).

The advantages include:

• Acquire more inventory without immediate cash
• Strengthen supplier relationships
• Generate revenue first, make payment later

Medium-term finance options

Medium-term business finance may not be quite as easy to acquire as short-term funding, but if you’ve got a watertight business plan and the right finances, you’re in with a good shot.

Philippine businesses may look to get a medium-term loan for a number of reasons. They may want to:

• Expand their operations
• Upgrade their equipment
• Invest in new tech
• Manage cash flow

Just like short-term finance, medium-term comes in many shapes and sizes. The following kinds of finance are suitable for different businesses with different medium-term needs:

Asset finance

If it’s assets you’re after—like machinery, vehicles, or equipment—asset finance could be a handy option. Asset finance lets businesses buy these crucial assets without paying the whole cost upfront. Instead, you can pay for them in fixed monthly or quarterly installments.

The main advantages here include:

• Get hold of essential equipment without hammering cash reserves
• Use the latest tech—great for boosting productivity
• You may even get tax benefits (payments can sometimes be tax deductible as business expenses)

Hire purchase

Hire purchase is normally categorized as a type of asset finance. Under hire purchase agreements, businesses can acquire assets by making installment payments over a fixed period. 

After the loan term ends, the goods are yours. Again, it is often used for machinery and equipment.

Advantages include:

• Use the asset while you pay it off
• Eliminate financial burden from eye-watering upfront payments
• Get structures repayment terms to meet your needs

Medium-term business loans

You can also choose the traditional route—a medium-term business loan.

Banks and financial institutions often lend substantial amounts to businesses with solid plans and strong balance sheets. These loans can fund expansion, renovations, tech upgrades, or working capital.

Just be sure to keep an eye on the interest rates.

That said, there are advantages:

• Provides a big lump sum amount
• Offers structured repayment schedules
• Can be secured or unsecured, depending on the lender’s requirements and the business’ creditworthiness

Long-term finance options

Got your eye on the long-term? These long-term finance options should help you make the headway you’re looking for.

If you need substantial capital investment for expansion, infrastructure development, or strategic growth initiatives, there are plenty of long-term business funding opportunities in the Philippines.

They usually have repayment terms exceeding 5 years. This gives you breathing space to pay it back while focusing on sustainable growth. But of course, terms vary. 

Here’s a closer look:

Venture capital

Venture capital (VC) is a form of equity financing. That means that you don’t have to pay the money back. Not exactly, anyway,instead, you’ll give the lender shares in your company. 

Venture capitalist firms may give startups significant sums to get started and develop their early-stage businesses (especially in tech, fintech, and innovation with high growth potential).

Advantages include:

• Substantial funding without requiring immediate repayment
• Could get mentorship and industry connections as well as cash
• Helps startups scale operations quickly

Commercial mortgages

Commercial mortgages are long-term loans used to purchase or develop commercial real estate, such as office buildings, factories, warehouses, and retail spaces. The best part? These loans are secured by the property itself. This makes commercial mortgages a great option for businesses investing in physical assets.

Here are some advantages:

• Own property instead of renting
• Get large sums with relatively low interest rates
• Build equity in real estate

Business expansion loans

Again, there’s a more traditional route here: business expansion loans from financial institutions. Banks may look to invest in creditworthy businesses with long-term growth potential. So if you’re planning a big expansion, this could be an option. Although don’t forget that banks may charge higher interest rates.

Advantages include:

• Significant sums without immediate repayment
• Allows businesses to scale quickly
• Usually customizable (APR and loan term lengths) to fit your needs

Advantages and disadvantages of each type of finance

Every type of business finance has its pros and cons—there’s no one-size-fits-all solution.

The key is to find the option that works best for you. Take the time to research and analyse your needs, then choose the finance model that ticks the most boxes for your business.

This should help you out:

Pros and cons of short-term finance

A quick reminder: short-term finance includes business credit cards, overdrafts, invoice financing, and trade credit. They’re not all the same, but they share general trends.

Let’s break it down.

Pros:

• Quick access to funds, ideal for immediate operational needs
• Flexible repayment terms, often within a year
• Helps manage cash flow gaps and short-term expenses

Cons:

• Higher interest rates compared to long-term financing
• Frequent repayments can strain cash flow
• Limited borrowing amounts may not support major business expansions

Pros and cons of medium-term finance

Remember asset finance, hire purchase, and medium-term business loans? Here’s how they stack up against other types of finance:

Pros:

• Suitable for acquiring essential equipment and business expansion
• Allows structured repayment over 1 to 5 years, balancing affordability and sustainability
• May offer lower interest rates compared to short-term finance

Cons:

• Requires collateral or strong creditworthiness for approval
• Fixed repayments may limit financial flexibility
• Medium-term debt can increase liabilities, affecting future borrowing capacity

Pros and cons of long-term finance

Long-term includes venture capital, commercial mortgages, and business expansion loans. Details can vary, but here’s how long-term financing compares to shorter-term finance types:

Pros:

• Provides large capital amounts for major investments and infrastructure
• Repayment is spread over many years, reducing short-term financial strain
• Can help businesses scale significantly and enter new markets

Cons:

• Lengthy approval process with strict eligibility requirements
• Interest costs accumulate over time, increasing total debt obligations
• Venture capital requires giving up equity and potential control over business decisions

How to choose the right finance for your business

Understanding the different types of business finance available in the Philippines is one thing, but choosing the right one is another. You'll need to carefully assess your business's performance and needs before making a decision.

Here’s a breakdown of what types of finance are best for different types of businesses:

Startups (0-2 years)

Whatever industry you’re breaking into, startups generally want to establish operations (rather than expand) and develop their products, as well as gain market traction.

However, you’re probably facing:

• Limited capital
• High uncertainty
• Little or no credit history

With those hurdles in mind, you should consider:

• Venture capital: If you’ve got a product with high growth potential, there'll no doubt be venture capitalists willing to dish out large sums in exchange for shares.
• Business credit cards: Great for managing small expenses and building credit history.
• Trade credit: Trade credit helps startups acquire much-needed stock without upfront payments.

Early growth stage (2-5 years)

So, you’re established. Now, you want to focus your efforts on expanding your customer base and investing in better equipment. It’s time to look for new funding opportunities.

You’re probably handling:

• Growing revenue
• Moderate expenses
• Potential cash flow challenges

Look into:

• Medium-term business loans: A great lump-sum way to fund expansion efforts like opening a new store or purchasing essential machinery.
• Hire purchase: You’re making steady profits, so you know you can pay off a loan, just not in one go—buy assets with monthly installments instead.
• Invoice financing: Use your already-earned cash to alleviate cash flow difficulties.

Expansion and scaling stage (5+ years)

At this stage, your goal may be to open new locations, acquire competitors, or even invest in infrastructure. You probably have:

• Established market presence
• Strong revenue
• Need for large capital

In that case, consider:

• Commercial mortgages: Great for brick-and-mortar purchases.
• Business expansion loans: You’ve proved you can turn a profit. Banks may provide structured long-term funding for scaling operations.
• Venture capital: Venture capital firms might want a piece of the pie, giving you money to expand into new markets.

Conclusion: Understanding your finance options

You’re on the precipice of a big business decision. Different types of finance can open the doors to incredible new opportunities, wherever you are on your growth journey. 

But it comes with challenges. You may have limited capital or pressing cash flow issues to confront. With that in mind, choosing the right kinds of finance is crucial. You should avoid taking out large loans you can’t repay or settling for terms that will squeeze you too tight.

Take the time to assess exactly how much you need, develop a solid business plan (with proposals), and apply for a business finance type that works for you.

It’s also a great idea to use cutting-edge accounting software to manage your finances. Don’t forget: you can try QuickBooks for 30 days 100% free at any time!