Business Credit Agreement (Philippines)

A Business Credit Agreement in the Philippines records the terms of a loan between lender and borrower, fixing the amount advanced, the interest and the schedule for repayment.

Business credit facilities in the Philippines take several forms: (1) revolving credit lines (short-term, renewable annually) for working capital; (2) term loans (fixed principal repaid over a defined schedule) for capital expenditure and business expansion; (3) import/export credit lines for trade finance, regulated by BSP regulations on foreign exchange and Letters of Credit; and (4) omnibus credit lines combining multiple facility types. Financing companies registered with the Securities and Exchange Commission (SEC) under Republic Act No. 8556 (Financing Company Act of 1998) also extend business credit under this framework.

For SEC-registered corporations borrowing from related parties or directors, Section 32 of the Revised Corporation Code (Republic Act No. 11232, 2019) requires board approval of loans to directors, trustees, or officers, and prohibits loan terms more favorable than what the corporation would extend to third parties. The BSP's Manual of Regulations for Banks (MORB) imposes single borrower limits — a bank's total credit accommodations to a single borrower may not exceed 25% of the bank's net worth under Section X303 of the MORB.

The Truth in Lending Act (Republic Act No. 3765) applies to business credit agreements with individual borrowers (sole proprietors) but not to corporations. Corporate borrowers negotiate the finance charge disclosures separately. Documentary stamp tax under Section 179 of the NIRC applies to loan instruments regardless of whether the borrower is an individual or a corporation, at the same rate of PHP 1.50 per PHP 200 of face value (as amended by TRAIN Law RA 10963).

For SME borrowers, the Magna Carta for Small Enterprises (Republic Act No. 6977, as amended by RA 8289 and RA 9501) requires all government financial institutions (GFIs) and private banks to set aside at least 8% of their total loan portfolio for micro and small enterprises and 2% for medium enterprises. Business credit agreements with GFIs such as the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LandBank), and Small Business Corporation (SBCorp) are subject to RA 6977 program requirements.

A Business Credit Agreement in the Philippines is needed whenever a business entity formally establishes a credit facility with a lender and requires a written contract covering draw conditions, interest, repayment, covenants, and security.

A Business Credit Agreement is needed when a corporation, partnership, or sole proprietor applies for a bank credit line or term loan for working capital, equipment purchase, business expansion, or trade financing. Banks and financing companies require a signed credit agreement as the primary loan document before releasing funds.

A Business Credit Agreement is needed when a corporation borrows from a related party — a parent company, affiliate, or major stockholder. Under Section 32 of the Revised Corporation Code (RA 11232), board approval is required, and a written credit agreement documents the arms-length terms necessary to support tax deductibility of interest expense under the National Internal Revenue Code (NIRC) and to avoid the tax-on-interest rules under Bureau of Internal Revenue (BIR) Revenue Regulations No. 13-2000.

A Business Credit Agreement is needed when a borrower pledges receivables, inventory, or other business assets as security for the credit facility. The agreement must specify the collateral, the manner of perfecting the security interest (registration with the Land Registration Authority for real estate, the LTO for vehicles, or the Personal Property Security Registry under RA 11057 for personal property), and the remedies on default.

A Business Credit Agreement is needed for BSP regulatory compliance when a foreign bank or foreign corporation extends credit to a Philippine borrower. The BSP requires prior approval for certain cross-border loans under BSP Circular No. 1043 (2019) and foreign borrowings must be registered with the BSP for the borrower to access foreign exchange for repayment.

A Business Credit Agreement is needed as primary supporting documentation for BIR audit purposes to establish that amounts received from related-party lenders are debt obligations (not taxable equity infusions), that interest paid is deductible under NIRC Section 34(B), and that the applicable final withholding tax on interest (20% for domestic corporations under NIRC Section 27(D)(1)) was properly withheld and remitted.

A valid Business Credit Agreement in the Philippines must contain the following essential elements to be enforceable and to satisfy bank regulatory, BIR, and SEC requirements.

Borrower Identification and Authorization: Full legal name of the borrower (as registered with the SEC, DTI, or CDA), SEC Registration Number or DTI Certificate Number, registered address, Tax Identification Number (TIN), and evidence of corporate or partnership authority — Board Resolution or Partners' Resolution authorizing the borrowing and designating the authorized signatory. Without a valid Board Resolution under Section 23 of the Revised Corporation Code (RA 11232), a corporate officer signing the credit agreement without authority may not bind the corporation.

Credit Facility Type and Amount: Whether the facility is a revolving credit line, term loan, omnibus line, or other structure; the approved credit limit or principal amount in Philippine pesos (PHP ₱); and for revolving facilities, the conditions and timing for drawdowns and reductions of the credit limit.

Interest Rate and Fees: The annual interest rate expressed as a percentage per annum (fixed or floating with reference to the BSP Overnight Reverse Repurchase rate or Philippine Interbank Reference Rate as applicable), the computation basis (30/360 or actual/365), front-end fees, commitment fees on undrawn portions, and amendment or waiver fees.

Repayment Terms: The principal repayment schedule (bullet maturity, equal installments, or cash flow-based), interest payment dates, the maturity date of the facility, and the conditions under which the lender may call or accelerate the loan.

Covenants: Financial covenants (minimum current ratio, maximum debt-to-equity ratio, minimum debt service coverage ratio) computed from the borrower's audited financial statements; affirmative covenants (maintain books of account, pay taxes, maintain insurance, provide periodic financial reports); and negative covenants (restrictions on additional indebtedness, asset disposals, dividends, and change of business without lender consent).

Security and Collateral: A description of all collateral — real estate mortgage under Article 2124 of the Civil Code, chattel mortgage under Act No. 1508, pledge under Articles 2093–2123 of the Civil Code, assignment of receivables, or personal/corporate guarantee — and the time by which each security must be perfected and registered.

Events of Default and Remedies: Specific events of default including payment default, covenant breach, cross-default (default on other obligations), insolvency or dissolution of the borrower, material adverse change, and misrepresentation; the cure periods applicable; and the lender's acceleration and enforcement rights upon default.

Additional compliance elements for a Business Credit Agreement (Philippines) used in Philippines include: Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Forms-legal.com provides this template as a starting point for Philippines-compliant documentation.