How MSMEs in the Philippines Can Secure Financing and Manage Business Debt

For micro, small, and medium-sized enterprises (MSMEs), scaling may only be possible by taking on a loan.

The search for a suitable lender may be difficult for MSMEs, however, considering the complex and tedious process traditional institutions set, or the accessible yet exorbitant rates provided by informal lenders.

Entrepreneurs may also have a hard time navigating the financing they receive, and not have the right financial knowledge and practices to manage their debt.

Karen Cua, Senior Vice President (SVP) for BDO Network Bank, the community and rural bank arm of BDO Unibank (BDO), spoke with The Business Manual about her insights on MSME debt behaviors, and shared advice for entrepreneurs on how to manage their debt.

Cua, who built and launched the MSME lending business model for BDO Unibank, estimates that over 70% of MSMEs use their loans for working capital. Case scenarios could include mini-groceries wanting to stock inventory or hardware stores needing more supplies.

Less than 30% of MSMEs use financial services for business expansion, such as equipment upgrades or new branch openings.

“When they come back for their second, third, or fourth loan, it's usually growing in size, reflecting that the business itself is also growing,” she said. “That's how we grow with them.”

Cua has seen how businesses scale when they receive access to financing. 

“When we were in Siargao," she shared, "there was a business there that first sold fruits, and then eventually got fridges so they could store more goods and expand to vegetables.”

Studies show that MSMEs in developing countries, including the Philippines, struggle to secure business loans. Some even hesitate to apply.

As of 2019, the MSME financing gap (the lack of funding available for MSMEs despite the demand for financing) was estimated at $5.7 trillion, according to the 2024 “Boosting SME Finance for Growth: The Case for More Effective Support Policies” report published by the World Bank.

The Philippines’ MSME finance gap stood at $221.8 million in 2017, according to the International Finance Corporation (IFC). The number is equivalent to 76% of the country’s 2017 GDP, which is the highest out of 128 countries the IFC surveyed.

Cua said that the application process and requirements set by financial institutions may be high barriers for most MSMEs to meet, making them accessible only to bigger companies.

“You also typically have collateral [requirements]. You have to have land, and you have to collateralize with a bank. A lot of the MSMEs don’t have this.”

Other factors that MSMEs have to consider when loaning from a bank - high interest rates, long processing times, and limited financing options in rural communities - also discourage them from seeking traditional business financing.

Cua believes that an MSME should base their plans on getting a business loan on how ready and willing it is to scale.

“Not everyone may want to grow,” she told The Business Manual. “I think that’s really important to note because you assume, ‘Wouldn’t all business owners want to grow?’ Well, not necessarily. In fact, I attended some of these forums, and what they said was ‘No’. Most don’t.”

For owners who want to scale, Cua advises viewing borrowed capital as a “tool” to expand the business. 

“If someone has a plan — not just passion and boldness, but a plan — and a tested business, that's when borrowing makes sense,” she said.

For those starting out, meanwhile, her advice is to use savings as equity.

Borrowing should not be used when an entrepreneur is “desperate.”

“The debt is not supposed to fix something that is not working,” she said. “It’s supposed to strengthen the business because it’s already doing something, and it wants to grow or capture certain opportunities that are there.”