Types of Business Loans for SMEs
Today, there are plenty of business loans made available for local businesses, from traditional lenders such as banks, to alternative financing solutions which you can choose from. Besides helping you to grow and scale your business, minimising cash flow and liquidity issues, a smart business loan, when maximised, can allow you to innovate new products and services.
After all, if there are any takeaways from the current pandemic, ‘adaptability’ and the readiness to ‘pivot’ are needed more than ever to stay relevant and avoid getting phased out of the race.
Here is a summary of the types of working capital loans for small and medium businesses (SMEs) in Singapore. Understand your main objective in obtaining one and then read on to find out what is best suited for your business needs.
1. Business Term Loan
This is what most people have in mind when they talk about business loans. Almost every bank in Singapore offers this option of financing, and the terms are broadly similar. Business Term Loans, also commonly known as Working Capital Loans, have quantums that range from $100,000 to $500,000, and loan tenures of 12 to 60 months.
Business term loans are unsecured, so SMEs will not have to pledge any assets or collateral. However, these loans have a higher qualifying criteria. At a minimum, most banks require the business to have been in operation for two to three years. In addition, the bank will review the borrower’s credit score, and possibly the credit score of the director or owner as well.
Startups and sole proprietorships often face a high rejection rate for these types of loans. The approval process can be tedious with numerous company and financial documentation requirements, and take can weeks. As such, it can be difficult to rely on business term loans for quick financing.
SMEs should note that business term loans might have a prepayment penalty. If a business tries to repay a loan with a 24-month tenure in six months, for example, they may have to pay charges so as to compensate the bank for lost interest. As such, it’s important to know exactly how much you need before borrowing.
1.1 SME Working Capital Loan
Another example of a business loan, this refers to the recently Enhanced EFS-WCL offered under Enterprise Singapore, made available to SME across all industries to help them access working capital for their business needs. As announced in the Solidarity Budget on 6 Apr 2020, the Government has enhanced the EFS-WCL further with 90% risk share and this enhancement is applicable to new applications initiated from 8 April 2020 until 31 March 2021.
The Enhanced EFS-WCL offers a maximum loan quantum of $1,000,000, with loan tenures ranging from 12 to 60 months. Interest rates are determined by PFIs in consideration of the risk profile of each loan application.
2. Business credit lines / overdraft facilities
These are revolving credit facilities. Once a credit line has been approved, the business can use it for credit at any time, up to a given amount (typically $300,000 for SMEs). They could be unsecured loans that don’t require collateral.
The main advantage of a credit line is that the SME only goes through the approval process once. After the credit line is opened, the SME can draw from the credit line on an “as needed” basis, without having to seek loan approval each time. This is useful for SMEs that face variable costs (e.g. changing Forex or supplier costs).
SMEs, however, face the same problem with getting credit lines that they do with business term loans. There is the same need for a track record and credit score; and the initial approval for a credit line can take some time.
One other drawback to credit lines is the administrative charge for maintaining them. There’s an annual fee to keep the facility open; this has to be paid even if the SME has not used the credit line that year. Exact charges vary based on the lender’s terms and conditions. In some banks, highly active borrowers can sometimes get the charges waived.
3. Invoice Financing / Invoice Discounting / Factoring
One of the main problems faced by SMEs is cash flow. Clients do not always pay on time, and this can create complications – SMEs may end up paying late fees to suppliers, incurring reputational or credit damage through late payment, or be unable to fund further production.
At the same time, bank loans are an impractical solution to cover the cost of the occasional invoice (most banks are not, at any rate, willing to incur the administrative costs of disbursing loans in such small amounts).
One pragmatic approach to the issue is invoice financing. SMEs can now monetise their account receivables/ unpaid invoice(s). Instead of waiting up to three months for payment (depending on the credit terms), they can obtain working capital from Day 1 of issuing the invoice. When the invoice is due, the end-buyer makes payment, and the SME borrower will receive the balance (minus interest and fees).
Not to be confused with the above-mentioned business loans, it is not considered one because the invoices are sold to a financing company in exchange for cash. Simply put, invoice financing is the conversion of invoices to cash in advance of the due date. It is a viable option for most businesses which operate on a credit term basis, allowing them to put working capital back into their businesses.
Another alternative to invoice financing is invoice discounting where the only difference is that the business, not the lender, collects payments from customers. Hence, they would not (need to) know of this arrangement. Invoice factoring (sounds similar but works very much differently) is the sale of accounts receivables, which is also a service SMEs can find easily online. Unlike invoice financing and discounting, this involves the SME selling the invoice to a third party at a steep discount; the third party will then pursue repayment of the full amount.
4. Purchase Order Financing
Another short-term financing option, Purchase Order Financing provides capital to pay supplies upfront for verified purchase orders. This allows businesses to accept large orders and adjust the loan basis, depending on the need. With no long-term commitment required, businesses can choose to take it up or stop using it as and when as required. This is definitely an attractive solution for growing businesses who would like to fulfil large orders such as manufacturers, distributors, wholesalers, resellers, importers and exporters.
5. Equipment and Machinery Loan
If you are specifically looking to finance the purchase of equipment or machinery, there is also Equipment and Machinery Loan you could explore that are currently offered through various local banks.
6. Other business loans
Besides the above, there are still plenty of other options such as Venture Debt Loan, Trade Loan, Project Loan and even Mergers & Acquisitions Loan you could check out at Enterprise Singapore.
In addition to banks and financing companies, Singapore SMEs can also obtain financing from Fintech lenders (or P2P lenders)
Many of the loan options above face its own stringent restrictions, which could be difficult for SMEs to meet. Fintech lenders (commonly known as P2P lending platforms) such as Validus, provide an alternative source of financing for SMEs.
Fintech lenders operate peer-to-peer lending platforms that provide SMEs funds they require, through crowdfunding (or crowdlending) from a group of individual lenders (also known as investors) and are regulated by the Monetary Authority of Singapore. While the interest rate on SME lending platforms are typically slightly higher than banks, they are lower than other sources of credit thus offering an affordable cash flow-friendly solution for businesses.
As compared to traditional financial institutions, fintech lenders also offer a much faster loan approval time, in just 48 hours. In addition, these platforms are often willing to lend in much smaller amounts – ideal for small and medium businesses looking to bridge their cash flow.
Let’s Get Started
Your business must be registered on ACRA, with an operating history of at least 2 years, and a minimum annual revenue of at least SGD 500k.
Here’s what you need to send in*
- Bank Statements (past 6 months)
- Financial Statement/ Management Account (past 1 year)
- Credit Bureau Statement (past 1 month) of Personal Guarantor(s)
- Notice of Assessment (past 1 year) of Personal Guarantor(s)
*Required application documents may vary on application based on the financing request
Learn more about how invoice or purchase order financing could benefit your business, or check out how affordable this method of financing could be.