So you are ready to start your own business or are looking to expand. You will likely need working capital to fund your start up expenses or pay for expansions. It is important to understand how loans work and what the lender will want to see from the owner.
What is a business loan?
A business loan is borrowed capital that companies use towards expenses that they are unable to pay for themselves. There are several types of small business loans. Each bank has its own criteria, rates, and types of loan offered. All loans will be repaid with added interest.
Types of Business Loans
The most common type of business loan is the “Unsecured Business Term Loan.” Some banks will offer up to S$500k for up to 5 years. However, the principal loan amount is usually between S$50k to S$300k with equal monthly installments of 3 to 5 years. This unsecured loan means that collateral is not required. Therefore, this loan is not ideal for start up businesses with no operational track record.
The SME Micro Loan is government assisted financing for local SMEs (Small and Medium Enterprise). This loan gives you access up to S$100k working capital that can be used to manage daily operations and cashflow. The repayment period is up to 4 years with government risk sharing with banks on loan default.
The SME Working Capital Loan is also government assisted financing that was introduced in Budget 2016. The financing period is only for a period of 3 years until May 2019. However, this loan gives you access up to S$300k working capital. This loan offers government risk sharing with banks on 50% loan default.
Trade financing (also known as supply chain and export finance) helps maintain the flow of credit in supply chains. This revolving credit line is used to finance purchases of inventories or materials from suppliers. Trust Receipts (TR) credit terms are usually between 90-120 days.
The fifth type of business loan is Factoring / Receivables financing. A business sells its invoices to financial institutions at a discount for immediate cash. This is one of the best ways to improve a business’s immediate term cash flow.
Property financing is when a business takes a mortgage loan to finance purchases of commercial or industrial properties. Your existing property becomes the collateral for financing. As a result, property financing is usually the cheapest.
The last type of business loan is “equipment financing.” A business owner would finance the purchase of fixed assets, usually machinery and equipment. This is different from “equipment leasing” because you are essentially buying the item outright. The equipment itself is usually used to secure the loan so additional collateral is not required.
Business Loan Interest Rate
As always, you should shop around before committing to a bank and their loan package. However, a typical business term loan’s simple interest rate is between 3.5% to 6% p.a.
Most banks will require:
Singapore-registered business Minimum 30% shareholdings held by Singaporeans / Singapore PRs Minimum annual revenue of S$300,000 Minimum average daily balance of S$10,000 maintained in bank account Operational history of 2 years
A new business has the most difficulty finding funding. Banks view these businesses as too high of a risk because they have no operational track record. Most banks require a minimum 2 years of operational history. You may be able to find a loan specifically designed for new businesses, such as the OCBC Start Up Business Bank Loan. This loan is designed for a brick and mortar business model with a fixed set of ways to turn a profit. On the other hand, this may not be a good fit for a tech startup. Instead, personal loans from banks, private equity financing, angel investors, and venture capital are the best chances for funding.
Having a business can be quite lucrative. When it is time to expand and grow, there are options to help provide working capital to make your plans a success!