Guide to Business Loans for SMEs in Singapore

Summary:
Business loans may help SMEs facing cash flow problems to continue smooth operations. Some types of business loans include invoice financing, unsecured business term loans, merchant cash advances, business overdrafts, venture debt financing and business lines of credit. Before considering issuing loans to SMEs, lenders generally look at some criteria. As a general guide, the criteria 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.

Singapore’s dynamic business environment presents numerous growth opportunities. However, navigating the complexities of running a small or medium-sized enterprise (SME) can be challenging. One crucial aspect that often requires careful consideration is financing.

Business loans can be a valuable tool for SMEs seeking to expand, invest in new equipment or manage cash flow effectively. By leveraging external funding, businesses can seize opportunities, overcome obstacles and achieve their long-term goals.

This article will delve into the different types of loans for businesses available in Singapore, providing insights into their benefits, eligibility criteria, and the application process. We’ll also cover some examples of the best business loans that your SMEs can use in Singapore. Whether you’re looking to start a new venture, scale your existing business, or weather economic fluctuations, understanding the options can help you make informed decisions and secure the necessary financial support.

Let’s explore how business loans can empower your SME to succeed in Singapore’s competitive market

What are the 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 loans and lines 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. The different types of loans for business  and their concepts are further explained in the next sections:

● 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’s ability to repay the loan. It may be useful to note that the borrower’s creditworthiness is not the sole consideration for unsecured loans as the business’s 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. Depending on your needs, this could be one of the best types of business loans that you can apply for in Singapore.

● 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’s 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’s capability to make repayments. Businesses with lower credit scores tend 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 they believe 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 lines 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 criteria before distributing funds.

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 before you apply for an SME loan in Singapore. The common 6 C’s are character, capacity, capital, collateral, conditions, and credit score. Credit evaluation criteria vary from firm to firm, hence it’s best to clarify with the lender for specific requirements.

● Character

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 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 — thus making a good case for your SME’s application for a business loan.

● Capacity

The company’s ability to repay the loan can be judged based on its 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 by looking 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.

● Capital

The amount of working capital available is one of the most important C’s when trying to secure an SME business loan. 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 for 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

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 tends to be considered as a secondary source of repayments as lenders usually prefer cash.

● Conditions

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, economic 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 1,000 to 2,000 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 of 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 bodies.

● Traditional banks

Traditional banks, as its name suggests, are banks that many of us may be familiar with and they’re where most get their business loans from in Singapore. 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. P2P lending providers enable SMEs to get the business financing required with or without collateral, through a simple application process and fast approval. Depending on the platform, these P2P lenders may offer unsecured business financing of varying amounts, faster loan disbursals and customisable financing options. 

● 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 global economic decline, the Singapore Government has various SME support that takes the form of credit support and the co-sharing of business loan risks.

The Enterprise Financing Scheme (EFS), for example, covers seven 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 seven loans are the SME Working Capital Loan, SME Fixed Assets Loan, Venture Debt Loan, Trade Loan, Project Loan, Mergers & Acquisitions (M&A) Loan and Green Loan.

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 allows SMEs 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 intends 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 in determining if the company is ready to take up a certain loan amount at a specific time, in relation to the other activities planned.

● Financials

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 company.

From the financial 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 their financial health and determine whether they 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 a better position to discuss and justify the loan amount required should the offered amount be less than the expected sum.

● Creditworthiness

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 and more.

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.

How to apply for a business loan: 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 documents.

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 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. Taking all of the above in mind will allow businesses to apply for and get their SME business loans approved smoothly.

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. More information about available grants can be found in the SME grants guide.

SME Loans in Singapore: A Recap

At the end of the day, SMEs considering taking up business loans may find it useful to consider different types of business loans from various types of lenders to better fulfil their financing needs and fit 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.

 

Disclaimer

All third party trademarks product and company names are trademarks or registered trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them. 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.