What is a Business Loan?

Summary:

Business loans are a vital source of funding for small and medium enterprises (SMEs) in Singapore, particularly those facing cash flow challenges. Various loan types, such as invoice financing, unsecured business term loans, merchant cash advances, and business lines of credit, offer solutions to SMEs. Lenders typically assess SMEs based on the “6 C’s” — character, capacity, capital, collateral, conditions, and credit score. Lenders range from traditional banks to peer-to-peer lenders, angel investors, and government aid schemes. SMEs should evaluate their business plans, financial health, and creditworthiness before applying for loans.

Introduction:

Nearly six in 10 Singaporean firms anticipate a recovery to pre-COVID-19 levels within one to two years, as businesses explore new revenue sources, accelerate digitalisation, and innovate their products and services. Despite the uncertainty, many SMEs continue their expansion plans. However, challenges like rising business costs, supply chain disruptions, and financing difficulties remain prevalent, making business loans a crucial tool for survival and growth.

What are the Major Types of Business Loans in Singapore?

There are several types of business loans in Singapore, each designed to meet different needs. Below are the six major loan types:

1. Invoice Financing:

Invoice financing allows SMEs to borrow money against unpaid invoices, turning outstanding receivables into immediate cash. This is particularly useful for businesses dealing with delayed payments from clients. For example, Funding Societies offers flexible invoice financing solutions with options for a one-time pledge or a revolving credit line.

2. Business Term Loan:

A business term loan provides a lump sum of capital to SMEs with a fixed repayment schedule. These are usually secured loans offered by banks and have a set interest rate, helping businesses plan repayments.

3. Unsecured Business Term Loan:

This type of loan is offered without requiring collateral. It is based on the creditworthiness of the borrower and the financial stability of the business. Lenders assess factors like business history and repayment ability, but the borrower’s credit score plays a crucial role.

4. Merchant Cash Advance:

Merchant cash advances provide SMEs with an advance against their future credit or debit card sales. The repayment is tied to daily sales, which means payments fluctuate with business performance.

5. Venture Debt Financing:

This financing is typically provided to startups or businesses with high growth potential, often in exchange for equity or convertible debt. Venture debt is ideal for businesses that may not qualify for traditional loans but have strong prospects for growth.

6. Business Line of Credit:

A business line of credit gives SMEs access to a pool of funds that they can draw from as needed, with interest only charged on the used amount. This is ideal for businesses with fluctuating cash flow needs.

The 6 C’s of Lending

Lenders evaluate SMEs based on the “6 C’s” of lending to determine loan eligibility:

1. Character:

Lenders assess the personal history of business owners, including credit history, educational background, and criminal record.

2. Capacity:

Capacity refers to the business’s ability to repay the loan. Lenders review cash flow, past loan repayments, and other income sources.

3. Capital:

This evaluates how much personal and business capital has been invested in the company. Lenders want to see strong personal investment from the owners.

4. Collateral:

Collateral refers to assets that can be sold if the SME cannot repay the loan. However, for unsecured loans, this criterion is less relevant.

5. Conditions:

Lenders consider external factors like industry trends, the business’s position in the market, and economic conditions when making lending decisions.

6. Credit Score:

A business’s credit score is a significant determinant in loan approval. In Singapore, the Credit Bureau Singapore uses a score range of 1000 to 2000 to assess creditworthiness.

Major Types of Lenders in Singapore

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Various lenders provide business loans in Singapore. These include:

1. Traditional Banks:

Banks like DBS and OCBC offer a range of business loans. These banks provide term loans, credit lines, and working capital loans but often have stringent approval processes.

2. Equity Financing Firms:

Private equity firms provide capital in exchange for ownership in the company. This form of financing is common in startups and high-growth businesses.

3. Peer-to-Peer Lenders:

P2P lending platforms like Funding Societies connect SMEs with individual or institutional investors. These platforms offer quick, collateral-free loans, often with flexible repayment options.

4. Angel Investors:

Angel investors are high-net-worth individuals who provide early-stage funding in exchange for equity or convertible debt.

5. Government Support:

The Singapore Government offers various financing schemes, including the Enterprise Financing Scheme (EFS), which shares loan default risks with participating financial institutions.

Key Considerations for SMEs When Applying for Business Loans

Before applying for a loan, SMEs should consider several factors:

1. Business Plan:

A solid business plan that outlines the company’s goals, strategies, and financial projections can help justify the need for a loan.

2. Financial Health:

The financial stability of a business is crucial for loan approval. SMEs should ensure that they have steady revenue streams and a healthy balance sheet.

3. Creditworthiness:

A business’s credit score can significantly impact loan approval. Checking and improving the company’s credit score beforehand can increase the chances of securing a loan.

What to Consider When Submitting Business Loan Requests

When applying for a business loan, SMEs should ensure all documentation is accurate and up-to-date. Required documents may include the company’s ACRA profile, financial statements, and the Credit Bureau Singapore report for all directors. Proper preparation can expedite the approval process.

Alternative Financing Options for SMEs

Aside from traditional loans, SMEs may also explore government grants or crowdfunding options. Government grants, such as those provided through the Enterprise Singapore, can offer a lifeline during tough times.

Conclusion

SMEs considering business loans should carefully evaluate the various options available, from traditional bank loans to P2P lending. By understanding the loan types and assessing their business’s financial health, SMEs can make informed decisions that promote growth and stability in today’s dynamic economic environment.

Disclaimer:
This article serves as a general guide to SME loans in Singapore and should not be taken as professional financial advice. Business loan criteria and approval processes vary between lenders. This article was published on January 18, 2021, and is accurate as of the publication date.

 

Dorcas Pang
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