Business loans may help SMEs facing cash flow problems to continue smooth operations.
Some types of business loans include invoice financing, unsecured business term loan,
merchant cash advance, business overdraft, venture debt financing and business line of credit.
Before considering to issue loans to SMEs, lenders generally look at some criteria’s. As a
general guide, the criterias reveal the 6 C’s of the SME – character, capacity, capital, collateral,
conditions and credit score. These lenders can also include traditional banks, equity financing
firms, peer-to-peer lenders, angel investors and governmental aid. SMEs may find it helpful to
take note of their business plan, financial health, and creditworthiness before deciding whether
or not to secure a business loan.
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Nearly six in 10 Singapore firms will take one to two years to recover to pre-COVID-19 levels,
even as they seek new revenue sources, speed up digitalisation and innovate in products and
services. That being said, far-sighted SMEs with adequate resources tend to continue pressing
on with expansion plans amidst the coronavirus given that it is not a short-term problem that will
go away, and is likely to impact the way businesses operate in the long run.
Should community cases remain low as the country intensifies testing and contact tracing,
Singapore can enter phase three of its reopening by end 2020. This reopening amidst an
ongoing global pandemic presents both opportunities and challenges to SMEs. While
businesses can possibly operate closer to pre-COVID levels, SMEs may face rising business
costs, supply challenges due to border restrictions, uncertain economic and political conditions
as well as financing problems.
With the aforementioned considerations in mind, business loans may potentially provide a
source of relief to SMEs facing cash flow issues.
What are major types of business loans in Singapore?
Before exploring the types of business loans available, it can be useful to understand the two
general forms of loan structure – Term loan and line of credit. Term loans refer to loans which
disburse a lump sum of funds to a company, with a fixed repayment schedule over a set period
of time. Line of credit, on the other hand, is a pool of funds that the company can draw down
funds of, with interest charged only on the amount of money utilised.
With the understanding of the two basic loan structures as a backdrop, there are six major
business loan types in Singapore – Invoice financing, business term loan, unsecured business
term loan, merchant cash advance, venture debt financing and business line of credit. Each
loan type works differently from the other.
● Invoice financing:
Invoice financing is the borrowing of money against the amounts due from customers. In
a way, invoice financing helps SME turn invoices into cash as opposed to waiting for
customers to pay their balances in full. This type of business loan may help solve issues
associated with delinquent customers who take a long time to pay. Funding Societies
offer both one-time pledge of invoice as well as invoice financing credit line for eligible
businesses to better manage their cashflow.
● Business term loan:
Business term loans are secured loans commonly offered by traditional banks. It is a
lump sum capital that borrowers have to pay back with a specified repayment schedule
and it also has a fixed or adjustable principal and interest rate.
● Unsecured business term loan:
An unsecured loan is a loan that is issued and supported by the borrower’s
creditworthiness and the business’ ability to repay the loan. It may be useful to note that
the borrower creditworthiness is not the sole consideration for unsecured loans as
business’ past history and repayment ability matters as well. It is approved without the
use of property or any other assets as collateral. The terms of the loan are typically
dependent on the credit score of the borrower.
● Merchant cash advance:
Merchant cash advances are loans received by companies or merchants from banks or
alternative lenders. On top of looking at a business’ credit score, alternative lenders
often survey the company’s creditworthiness by looking at multiple data points, including
how much money the merchant receives through online accounts such as PayPal to
more accurately assess the business’ capability to make repayments. Businesses with
lower credit scores have a tendency to use cash advances to finance activities.
With a merchant cash advance, a lender grants an advance of capital and in turn,
purchases a portion of the firm’s daily credit and debit card sales. The company then
pays back the advance with a percent of daily card sales. When business is slow, the
firm pays back less and the converse is often true when business booms.
● Venture debt financing:
Venture capital is a form of private equity and a type of financing that investors provide
to startups and small businesses that are believed to have long-term growth potential. It
typically stems from high net worth investors and investment banks. It is interesting to
note that the funds may not necessarily take the form of money, and can be the
provision of other resources such as technical or managerial expertise instead.
● Business line of credit:
This loan type gives SMEs access to a specific amount of money that can be drawn from
at any time as needed. There are two types of business line of credit- fixed and
revolving. The first type offers a fixed amount of money, whereas the second type will
reset the credit line after the SME pays the balance in full, similar to how credit cards
work. Different financial institutions however, have slightly different definitions of fixed
and revolving credit lines offered.
What are the 6 C’s of lending that lenders look at?
Business loans can aid SMEs in improving cash flow, reinvesting in operations, and fuelling
expansion plans. To secure these loans, different lenders look at their own set criterias prior to
As the list can get complicated, a good initial checklist for SMEs to refer to is the 6 C’s of
lending. Fulfilling the 6 C’s below can help instil confidence in the lender. The common 6 C’s are
character, capacity, capital, collateral, conditions, and credit score. Credit evaluation criteria
varies from firm to firm, hence it’s best to clarify with the lender for specific requirements.
The SME owner’s personal history may be evaluated by lenders. Background
characteristics of the company directors, major shareholders or guarantors such as
personal credit history, educational background, criminal record, and other businesses
owned may form part of the evaluation.
The Balance To Income (BTI) ratio may possibly be looked at as well. This ratio
evaluates an individual’s ability to repay any additional debt by comparing their current
debt versus their current income. A healthy BTI ratio may, by extension, present a better
overall picture of the company’s financial health.
The company’s ability to repay the loan can be judged based on their capacity. Lenders
may need to know how funds will be repaid before approving loans so that they can
better judge whether or not to approve a loan amount to an SME. Capacity can be
evaluated bylooking at the business cash flow, past loan payment history, and even
contingent sources for repayment. These contingent sources for repayment refer to other
streams of income that can be used to repay the loan in future. Examples can include
the directors’ personal assets and savings.
Lenders may be interested to know the total capital injected into the company, and even
the amount of personal investment capital contributed by the owner. This can be a useful
consideration to lenders to gauge whether an SME is undercapitalised, so that lenders
can do their own evaluation of the firm’s ability to repay loans.
Collateral refers to items that can be sold should the SME fail to repay the loan.
Examples of collateral include machinery, accounts receivable, inventory, and other
business assets. Collateral tend to be considered as a secondary source of repayments
as lenders usually prefer cash.
The economic conditions specific to the industry of the business applying for the loan
and the overall state of the country’s economy can influence a lender’s lending decision.
These can include the position of the SME in relevance to its competitors, economy
outlook, and any relevant social, economic, or political factors.
Other conditions include the purpose behind why a loan is taken. Examples of these
purposes could be to repay debts incurred from operations, finance research and
development (R&D) efforts, expand business operations to overseas markets, and more.
● Credit Score
In Singapore, the score by Credit Bureau Singapore ranges from 1000 to 2000 with
different alphabetical grades to gauge a borrower’s creditworthiness based on their
credit history. The score is based on credit history, which can be impacted by a number
of factors such as the number of open accounts, total debt level, repayment history,
length of credit history, type of credit, and more. Having a good credit score can act as a
form or assurance to lenders that the loan taken will be duly repaid.
What are the major types of lenders?
Technological advances have enabled new forms of lenders to emerge. Fintech companies, in
particular, are changing the brick and mortar landscape of lending by using data and
technology. Digital lending and processing models have been introduced and SME loan
application processes are now much faster.
There are many types of lenders in Singapore; notable lenders include traditional banks, equity
financing firms, peer-to-peer lenders, angel investors and financing schemes from Government
● Traditional banks
Traditional banks, as its name suggests, are banks that many of us may be familiar with.
They can be commercial or corporate banks that provide day-to-day business banking
services, as well as other speciality services like credit services, cash management,
commercial real estate services, and employer services.
● Equity financing firms
An alternative investment class, private equity is made up of capital that is not listed on a
public exchange. It is composed of funds by investors that directly invest in private
companies or engage in buyouts of public companies. These institutional and retail
investors provide the capital for private equity, which can then be used to fund activities
that promote new technology, expand working capital, and more.
● Peer-to-peer lenders
Peer-to-peer (P2P) lending allows SMEs to get funds directly from individual investors,
removing the financial institution as the middleman. Examples of P2P lending providers
include Funding Societies , which enables SMEs to get the business financing required
with or without collateral, through a simple application process and fast approval. It offers
unsecured business financing of up to S$2 million, loan disbursal in as soon as 24
hours, and customisable financing options. Funding Societies’ product offerings include
term loans, invoice financing and micro loans as well.
● Angel investors
An angel investor is often known as a private investor or seed investor. This investor
tends to be a High Net Worth Individual (HNWI) capable of providing financial backing
for startups and SMEs, typically in exchange for ownership equity in the firm. Angel
investors may fund SMEs with a one-off investment amount to get the business off the
ground, or provide an ongoing injection of funds to keep the company going through its
difficult early stages.
● Government support
In response to the economic decline stemming from COVID-19, the Singapore
Government has various SME support that take the form of credit support and the
co-sharing of business loan risks.
The Enterprise Financing Scheme (EFS), for example, covers six areas to address
enterprises’ financing needs, with Enterprise Singapore sharing the loan default risk in
the event of enterprise insolvency with the participating financial institutions. The six
loans are the SME Working Capital Loan , SME Fixed Assets Loan , Venture Debt Loan ,
Trade Loan , Project Loan , and Mergers & Acquisitions (M&A) Loan .
A higher risk share will be considered for young firms within five years from inception, and markets with
Standard & Poor’s (S&P) ratings of below BBB- or are not rated. Firms in the Food &
Beverage (F&B), retail and tourism industry need to comply with safe distancing
measures to be eligible for the EFS.
What are some basic considerations when securing business loans?
Prior to approaching a lender, SMEs can look at some basic considerations to determine which
business loan type and lender type to opt for. This review allowsSMEs to assess whether they
are ready to take on loans in the first place. These considerations include and are not limited to
the SME’s business plan, financials, and creditworthiness.
● Business plan
Simply put, business plans describe the measures and actions which the business
intend to undertake to achieve its goals Business plans typically have a time frame, and
can be a roadmap detailing the marketing, financial and operational means of reaching
various business objectives. Business plans can span from one page to a full fledged
proposal. Knowing the business plan may aid SMEs to determine if the company is
ready to take up a certain loan amount at a specific time, in relation to the other activities
The financial health of businesses is crucial when it comes to business loans. How
extensive and steady revenue streams flow, how much SMEs spend, and how much
SMEs owe are all reflected in the financials and can reflect the survivability of the
From the financials standpoint, SMEs can also ask themselves if the type of spending is
sustainable, and whether it contributes to the overall stability and potential growth of the
business. The firm’s spending habits will reveal its ability to make recurring payments
for operational or expansion costs as well.
With the internal evaluation, SMEs can review its financial health and determine whether
it should take on business loans, and if so, how much to take on. By determining the
required amount with internal evaluation, SMEs will be in better position to discuss
and justify the loan amount required should the offered amount be less than the expected sum.
Creditworthiness is a measure of how likely a lender thinks that a firm will default on its
debt obligations. In other words, it shows how ‘worthy’ the firm is to receive credit. It is
determined by many factors such as repayment history, credit score, amount of liability,
SMEs may find it helpful to examine their creditworthiness before deciding
which business loan they are eligible for. To check their creditworthiness, SMEs can
access their credit score at Credit Bureau Singapore .
What should SMEs take note of when submitting business loan requests?
The submission of business loan requests can be administratively cumbersome. SMEs who are
keen to apply for business loans should take care to submit documents orderly and accurately.
During the business loan application, financial institutions may require SMEs to submit a set of
The documents required differ based on individual circumstances, and may include
the company’s ACRA business profile information, financial statement, Notice Of Assessment
(NOA) of all directors, Credit Bureau Singapore (CBS) report of all directors, bank statement,
and other documents as required by lenders. When consolidating documents for submissions,
SMEs should ensure that the submitted documents are updated and as recent as possible.
SMEs should also plan ahead and try to avoid submitting loan applications without sufficient
time buffer to the period where the fund will be required.. If unsure, SMEs may also consider
seeking help from loan consultants instead of forging ahead without a clear idea of how to
submit applications and what to expect.
What if SMEs do not want to take a business loan? Are there grants instead?
Besides getting business loans to smoothen cash flow issues, SMEs may also seek alternative
financing methods such as government grants to tide them through these difficult times. In light
of COVID-19, the Singapore government has provided some pandemic-specific grants for
SMEs. More information about available grants can be found in the SME grants guide.
At the end of the day, SMEs considering to take up business loans may find it useful to consider
different types of business loans from various type of lenders to better fulfil their financing needs
and fits their repayment ability. Much due diligence needs to be undertaken by the SME to make
a well informed choice.
With determination, SMEs who stay agile, lean and effective can definitely survive and thrive in
the new normal .
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The article above is a general guide to types of SME loans in Singapore and should not be
considered as a reference for professional financial advice. Credit evaluation system varies
according to the lender firms and does not reflect Funding Societies’ credit scoring system.
The above article is published on 18th Jan 2021 and accurate as of date of publication.
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