Businesses require borrowing for a wide variety of reasons. By taking up a business loan, Singaporean businesses are at an advantage under a lot of circumstances. Loans can be incredibly useful: your business can use a loan for expansion, to cover an unexpected cash flow shortage, and/or to build a credit history to make future borrowing easier, when it is required.
It is important that your business picks the right type of loan. Depending on your borrowing requirements you may need a short-term loan, in which case a higher interest rate is not necessarily a problem. Other financing requirements, such as investments, are long-term, and you should carefully consider the interest charges on long-term loans and weigh this against factors such as the return on investment. In this article, we will look at the different types of loans businesses in Singapore have access to.
When choosing which type of loan suits your business best, one important point to consider is whether your business will put up collateral. If a lender knows they can recover an unpaid loan via an asset, the lender will offer a lower interest rate. These secured loans are one way of borrowing and tend to have a lower interest rate. However, you only qualify for secured loans if your business has collateral to offer, for example, a property.
Unsecured loans are also an excellent option, especially for short-term borrowing. There is a wide choice of unsecured loans available, but depending on the credit history of your business and your history with the provider, you may be charged with a higher interest rate. Knowing your options concerning collateral and secured loans will help you rule out which loans you can apply for.
Not every type of loan will be available to all businesses. Some factors will influence your eligibility, and banks use complex credit scoring systems to evaluate the creditworthiness – and the profitability of a customer. Some factors may not be within your control: the longer your business has been established, the more options you will have. However, a brand-new business will still have opportunities to borrow, just at a higher cost.
Don’t wait until the last minute – or your choices may be limited
One of the aspects of business loans Singapore businesses find most important is timing. Firstly, establishing a credit record for your business helps lenders evaluate your ability to repay. If your business has never borrowed money, a lender will have no track record to base an evaluation on. On the other hand, if your business has repaid some loans according to the conditions of the credit agreement, a lender will likely charge you lower lending rates, and you will find obtaining a loan easier.
If you establish a good credit profile, you will have the entire range of borrowing options available to you. However, keep in mind that some borrowing options have extensive application processes and long approval periods. You may be restricted in choice if you experience a shortage of cash flow. Establishing a credit profile and avoiding borrowing at the last minute also prevents the need for extreme measures such as loan sharks.
Common types of loans
It’s good to have a complete view of the different business loans Singapore companies have available to them before you make a choice. Each type of loan has different characteristics – here is a list of the most common types of loans.
Business term loans
The most formal, and most traditional type of business lending. A business term loan is granted over long periods of up to 5 years, though some loans can have an even longer term. Banks provide these loans to established businesses with a good credit history. Your business will be free to use these funds for whatever purpose it wishes – whether to maintain cash flow or to facilitate expansion. A business term loan can be a great choice if you want to purchase fixed assets that will generate returns over time, as long as this return is higher than the cost of the loan.
One perfect example of obtaining a business term loan is through Funding Societies. They offer quantum ranging from SGD $50,000 to SGD $1,000,000 with approval period of only up to 24 hours!
Another type of loan that is often used to make large fixed asset purchases is asset financing. These loans are usually secured by the asset which is purchased. For example, purchasing a vehicle or property using this type of financing implies that the asset you purchase is held as security until you have fully repaid the loan. The lender has recourse if you don’t repay the loan, and you will typically see a lower interest rate on asset financing – but the associated application process can be long and tedious.
Cash flow is a common problem for a lot of businesses. The rate at which your customers or clients pay for goods and services can be unpredictable. For this reason, some providers offer cash in exchange for a claim on outstanding invoices. You will be required to give up a percentage of the invoice amount in exchange for cash, but if your cash flow is low, invoice financing can be an attractive option. In some cases, the provider will even collect the outstanding amount on your behalf. This is essentially a type of secured loan, as your business forfeits any right to the funds due on these invoices.
Funding Societies also offers invoice financing option for your business. This includes up to 80% of invoice value and there is no collateral needed!
Businesses which trade goods or manufacture products can face particular difficulties when embarking on new projects. Suppliers will demand some assurances that contracts will be fully paid up, but payments for finished goods may only realise long after production inputs are purchased. Banks can provide trade financing, often in the shape of guarantees to suppliers which will help your business get past the problem of how to pay for inputs. This type of financing will require close co-operation with the provider so that you can expect an intensive application process and you need to be willing to share a lot of details about your company.
Crowdfunding involves many small loans from a large group of people that adds up to a single large loan sum offered to a single business which is managed by an intermediary. Each participant in crowdfunding is exposing a small amount of money to risk, while the borrower has access to a large loan. It is also an excellent way to promote your business and is often used where businesses need funding to launch a new product or service. Crowdfunded lending is usually for a short-term only, and not secured against an asset.
Funding Societies is one such institution that provides various loan options for your business through crowdfunding. They believe in providing financial solutions to cater to all SMEs needs.
Large financial institutions can be hesitant to lend to small businesses as, in their eyes, the risk outweighs the small amount of money to be made. There are, however, many independent providers such as FS Bolt who facilitate micro loans to small businesses. These can be incredibly easy to apply for, with some companies providing smartphone apps to make the process quick and easy. Micro loans can be very useful – either to cover cash flow gaps or to enable investment in new stock or equipment. The fact that microloan vendors provide unsecured loans and do not require collateral, and feature simple applications, is a major plus.
Informal lending in the shape of loan sharks can be a tempting option when your business is experiencing cash flow difficulties. Loan sharks will not require an extensive application process and will consider almost any business for a loan, but the negative outcomes are huge. Your business will be charged extortionate interest rates, and you may face physical intimidation or other forms of coercion in case you are slow to repay.
How to make a choice
As a business owner, you need to look at many aspects before you decide which lending arrangement is suitable. Though low-interest rates are important because it reduces the cost of the loan, you should also think about the loan application process, which can be intensive and time-consuming. If you are looking to borrow a small amount for a short period, it may be worth paying a higher interest rate so that you can bypass the intensive application process.
Also, think twice about secured loans, and consider whether you can operate without the asset a loan is secured against. Should you have trouble repaying the loan due to a cash flow problem, the ability of a lender to repossess an asset can make it very difficult for your business to continue earning on a day to day basis.
When it comes to making the final decision, it is always a good idea to list the pros and cons of each borrowing option to help obtain a better picture. This list should be kept in mind when you compare the respective interest rates of each loan. Only by viewing the entire picture can you choose the loan which is most suited to your business, and its current circumstances.
Funding Societies – Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)