Financing a Philippine business is not necessarily complicated. But the ability to receive funding, use it and eventually repay the lender depends on decisions that should be made long before the funds arrive.
By Marc-Olivier Levy – OPKO Finance
When an international group establishes or expands a business in the Philippines, financing is often approached as a relatively straightforward decision.
The local subsidiary needs capital to fund operations, purchase equipment, develop a project or support its growth. The parent company has available liquidity and agrees to provide a loan. The money is transferred, the Philippine company receives the funds, and operations continue.
From a commercial perspective, the problem appears to be solved.
But a question that is sometimes overlooked is:
How will the Philippine company repay this loan when the time comes?
This is where financing can become more complicated than initially expected.
Borrowing Money and Repaying Money Are Two Different Questions
Philippine companies can generally obtain financing from domestic banks, overseas lenders, foreign shareholders and related companies, subject to the applicable legal and regulatory requirements.
However, the regulatory treatment of the loan depends on several factors, particularly the residency of the lender and the source of foreign exchange used for repayment.
A loan from a bank operating in the Philippines may be classified as domestic borrowing even if denominated in US dollars.
Conversely, a loan from a Singapore parent company is generally classified as foreign borrowing, even if denominated in Philippine pesos.
The distinction may appear technical, but it has important practical consequences. For foreign loans, the Bangko Sentral ng Pilipinas (BSP) establishes notification and ongoing reporting requirements.
For a purely private foreign loan without a public guarantee, BSP registration is generally required when the borrower intends to purchase foreign currency from the Philippine banking system to service the debt. This means that receiving the loan and being able to access foreign currency for its repayment are two distinct matters.
The Shareholder Loan Situation
Consider a Philippine company established by a foreign investor.
During its first years of activity, the company requires additional working capital. Rather than increasing share capital, the foreign shareholder provides financial advances.
The transfers are recorded in the accounting records as amounts payable to shareholders or related companies.
Several years later, the business becomes profitable and the shareholder wishes to recover the funds.
The company has sufficient pesos in its bank account. However, if the advances were never properly documented and the relevant BSP formalities were not completed, purchasing foreign currency through a local bank to repay the shareholder may become problematic.
The commercial intention was straightforward.
The difficulty arises from how the financing was structured and documented.
Depending on the circumstances, solutions may exist, including late registration, refinancing, repayment from eligible foreign-currency resources or conversion into equity.
But each alternative has its own regulatory, corporate and tax implications.
The Cost of Financing Is More Than the Interest Rate
Another frequently overlooked aspect is the actual cost of shareholder or cross-border financing. An interest-bearing loan from a foreign related company can create several obligations beyond the contractual interest payment. Depending on the transaction, these may include withholding tax on interest, documentary stamp tax, transfer-pricing considerations and foreign exchange exposure.
The fact that a loan is provided within the same corporate group does not eliminate these considerations. An apparently attractive interest rate may therefore produce a different economic result once taxes, currency movements and administrative requirements are taken into account. Equally, providing financing as equity rather than debt may simplify some aspects while introducing others, including changes to ownership, capitalization and future distributions. The appropriate choice depends on the company’s financial position, business model and intended investment horizon.
Financing Should Be Designed Backwards
When reviewing a financing structure, I believe one useful approach is to start with the expected repayment rather than the availability of funding.
Before transferring money, investors should consider:
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- How will the Philippine business generate the cash required to repay the loan?
- Will repayment be made in pesos or foreign currency?
- Will the company need to purchase foreign exchange from local banks?
- What documentation and reporting obligations will apply?
- What are the tax consequences for both borrower and lender?
- Would a combination of debt and equity be more appropriate?
These are not simply compliance questions.
They are fundamental financial structuring questions.
A loan that is easy to provide but difficult to repay is not necessarily an efficient financing solution.
From Funding Availability to Financing Strategy
Businesses often focus on where the money will come from. Banks, shareholders, international lenders and other financing sources are evaluated based on cost, availability and commercial flexibility. These are important considerations. But an effective financing strategy should also take account of the entire life of the investment, from the initial funding decision through to repayment, refinancing or eventual exit.
The objective is not simply to find the money needed to start or expand a business. It is to establish a financing structure that supports its operations, remains commercially sustainable and can be managed throughout its life. Sometimes, the most important financing decision is made before the first dollar is transferred.
About the Author
Marc-Olivier Levy is Managing Director and Founder of OPKO Finance, an Outsourcing, Accounting and Advisory Services company advising businesses and investors in Hong Kong, Singapore, mainland China and the Philippines. OPKO Finance supports businesses and investors on financial structuring, financial analysis and investment feasibility, working alongside appropriate legal and tax professionals where required.
This article provides general business information and does not constitute legal, tax or regulatory advice. The applicable requirements should be reviewed based on each transaction’s circumstances.