Almost every business is in need of a loan at some stage of its life. In fact, making use of borrowed money can be a key driver in business profitability and growth – if money is borrowed in the right way. Businesses in Singapore have a wide range of choices when it comes to borrowing money, with various options ranging from the formal to the informal. However, when it comes to less formal ways of borrowing, certain types of borrowing should be avoided.
Loan sharks are common in Singapore, but that does not mean turning to a loan shark is a sensible option for any business, regardless of the circumstances. Unlicensed moneylending, including loan sharking, is illegal for many excellent reasons. Both businesses and consumers need to be protected against financial practices that are abusive and unfair. However, loan sharks continue to abuse businesses across Singapore. In this article, we explain why loan sharks should be avoided at all costs.
- Loan sharks are simply too expensive
Looking at loan sharks from a purely rational, business point of view quickly leads to a simple conclusion: loan sharks are incredibly expensive. The interest rates and fees charged by loan sharks are extortionate, and no responsible financial manager should agree to borrow money at the effective interest rates loan sharks charge.
Loan sharks rely on the fact that borrowers do not fully understand the interest rates and other charges they are exposed to. For example, an interest rate mentioned by a Singapore loan shark would be presented in a way which is not easily comparable to commercial bank rates. A per day interest rate could appear cheap, but would clearly present as extortionate when annualised. Fixed dollar fees are also difficult to compare.
Regardless of the way in which loan sharks represent their charges, the interest rates your business will be charged is far over and above as compared to the interest rates charged by banks, micro loan providers or sources of crowdfunding.
- The criminality of loan sharks – and the response of Singaporean authorities
Costs aside, it is the illegal to engage with a Singaporean loan shark when your business is in financial need. Loan sharks rely on extortion and abusive tactics not just to ensure the repayment of loans, but also to escalate the total interest and fees you are charged for a loan, thereby increasing the profit of the loan shark.
Abusive tactics include social media shaming and acts of harassment including writing offensive graffiti on walls and splashing paint, causing damage to the business premises. Loan sharks also make use of personal intimidation, and arguments with loan sharks can easily lead to violent encounters. It is for these reasons that authorities in Singapore have cracked down on loan shark practices.
For example, in January 2017, a three-day island-wide police operation ended in the arrest of 65 men and 30 women due to their alleged involvement in operating loan shark lending schemes. Of these, eight were runners who procured ATM cards for use by the Singapore loan shark syndicates. A further operation in April 2017 led to the arrest of a total of 102 individuals who were also suspected of loansharking activities.
Underlining the level of criminality loan sharks engages in, Singapore’s authorities have been imposing tough sentences on loan sharks. As just one example, in January 2016 a 26-year-old man was sentenced to three and a half years in prison for harassment. The man pleaded guilty to eleven charges of unlicensed moneylending harassment and endured 12 strokes of the cane in addition to his time in prison. Clearly, associating your business with a loan shark is entering very dangerous territory.
- What you are risking when you engage with a loan shark
Businesses rely on their reputation to remain an ongoing, profitable enterprises, and it is precisely this that loan sharks prey on. If your business engages with a Singapore loan shark, it risks its reputation in the eyes of its customers or clients. Loan sharks are aware of this and leverage this reputational risk when it comes to extorting high-interest rates and charges.
Simply put, a loan shark knows you don’t want to risk the reputation of your business, and will make use of this knowledge to extort high amounts of interest and charges. As such, if you engage with a loan shark, you risk the public shaming of your business. You can expect a loan shark to retaliate against your business on social media, for example. Or, you could experience property damage which you will have difficulty to explain to your clients.
Reputational damage aside, the financial risks you take when engaging with a loan shark are also significant. Loans sharks rely on a large part of snowballing interest charges into very large amounts. Your business may start out borrowing an amount it can easily repay, but a loan shark will quickly turn this into an amount which is almost impossible to repay – and which, from the perspective of a Singapore loan shark, can lead to almost indefinite repayments. This is not a healthy situation for any business to be in.
- Formal lending alternatives
Your business should stay clear of loan sharks at all costs. Thankfully, businesses in Singapore have access to a wide range of formal lending options which are designed to serve different business needs and requirements. Formal lending is not restricted to long-established businesses with perfect credit scores, and there are many lending options which offer affordable loans to businesses which do not present as perfect credit risks.
Yet, if your business is established and benefits from a top credit report, it can take advantage of low-interest rates in the shape of formal, long-term business loan in Singapore. These types of loans are provided by respected institutions none of which will do anything illegal to harm your business. Another benefit of formal bank loans is relatively low-interest rates – rates that are nowhere as high as the rates charged by loan sharks. However many businesses cannot meet the strict lending conditions imposed by large financial institutions.
For businesses that cannot meet strict lending criteria, other forms of lending can be suitable. For example, your business can take advantage of crowdfunding platforms like Funding Societies which can quickly boost your cash flow if your business is facing a financial shortage. Invoice financing can also help with cash flow issues, as long as you have invoices which you can offer to a provider.
Small businesses can also look to micro lenders who often offer straightforward application processes which can be completed using a simple smartphone app such as the FS Bolt app, providing a business loan of up to SGD 100k in Singapore to a broader range of businesses. These loans are far better option as compared to turning to a Singapore loan shark and are often offered with very soft credit scoring criteria. If your business has a below average credit profile, micro lenders will still lend to you, albeit at a higher interest rate. That said, rates charged by micro lenders are nowhere near as high as those charged by loan sharks.
- Financial planning is key to avoiding loan sharks
It is abundantly clear that avoiding loan sharks is incredibly important, no matter how sudden or extreme the financial requirements of your business is. The question remains, however, is why do so many businesses in Singapore find dealing with loan sharks to be their only viable option? The answer lies in a lack of financial planning.
Effective planning for the financial needs of a business is a difficult process which is fraught with uncertainty. A number of circumstances can make this task even more tricky: if your customers are under financial pressure, they can turn into late payers. Cash flow can also become a big problem for a range of unpredictable reasons, and it is these reasons which often drive businesses to deal with loan sharks.
To avoid loan sharks, businesses should focus on financial planning. Some of the typical financial difficulties businesses face are predictable and can be planned well in advance. Whereas those difficulties that are unpredictable needs to be covered using contingency funds. Or in other words, always make sure your business has some spare cash flow to cover the unexpected so that it does not need to deal with loan sharks.
You can avoid loan sharks by establishing a borrowing history early on – use small loans like with the FS Bolt app to build a positive credit record which lenders can use to evaluate your creditworthiness. Also, keeping a line of credit available is important especially if the cash flow of your business is often restricted. Regardless of your strategy, thorough planning is the key to avoiding a situation where your business finds loan sharks a sensible option.
Funding Societies has a Capital Market Services License issued by the Monetary Authority of Singapore. Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)