What is a Business Term Loan?

Many SMEs face significant day-to-day challenges due to short-term cash flow problems. These challenges can hinder daily operations and impede long-term growth. According to a 2021 Mastercard study, financing and working capital remain key challenges for SMEs, particularly during their recovery from the Covid-19 outbreak in 2020. Without sufficient funding, businesses are unable to invest in opportunities that promote growth. So, how can SMEs overcome these obstacles?

One of the most effective solutions for SMEs looking to boost their business is securing a business term loan. A term loan provides an agreed amount of cash upfront to the borrower, with specific borrowing requirements and repayment terms. SMEs repay the funds in monthly instalments, and with platforms like Funding Societies, entrepreneurs can access between S$50,000 and S$2 million in working capital with a hassle-free process. But what exactly are term loans, and how do they work for SMEs?

The Three Classifications of Term Financing

Business term loans come in different types, each tailored to specific business needs. Understanding these classifications is essential for SMEs seeking the right financing solution.

1. Short-Term Loans

Short-term loans are ideal for managing day-to-day expenses. These loans are relatively easy to secure, but they come with higher interest rates. Repayment periods typically range from 1 to 2 years, which is suitable for businesses looking for quick financial boosts to address immediate operational needs.

2. Intermediate-Term Loans

For businesses seeking moderate-term solutions, intermediate-term loans are considered the “sweet spot.” These loans, typically repaid over 2 to 5 years, are perfect for companies looking to expand their operations or hire new employees. Businesses can secure up to S$500,000 in funding, making this option suitable for those pursuing steady growth.

3. Long-Term Loans

Long-term loans are generally reserved for larger enterprises requiring significant capital. These loans can span up to 25 years, with funding reaching millions of dollars. Long-term loans are often used for substantial investments, such as real estate or large-scale projects. Approval for long-term loans depends heavily on the business’s financial history and credit standing.

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Benefits of Business Term Loans

Term loans offer several advantages that can support the growth and sustainability of SMEs:

1. Free Up Your Cash Flow

With a business term loan, companies can finance major investments while freeing up cash flow for other essential expenses. For instance, an SME can use the loan to hire and train new employees, allowing them to allocate their existing funds for day-to-day operations.

2. Fast Approvals

For businesses in urgent need of funding, term loans can be a quick solution. With Funding Societies, SMEs can receive funds within 24 to 48 hours of signing the contract, depending on the type of financing they require.

3. Preserve Equity

One of the most attractive aspects of a term loan is that it does not dilute shareholder equity. Unlike equity financing, term loans allow business owners to maintain full control over their operations, offering them greater autonomy.

Required Documents for Term Loan Applications

If you’re interested in applying for a term loan with Funding Societies, the following documents are typically required:

  • Two years of financial statements
  • Latest six months of bank statements
  • Director(s) and shareholder(s) NRIC or passport
  • Two years of Notice of Assessment (NOA)
  • Credit Bureau Singapore (CBS) report

What to Consider Before Committing to a Term Loan

Before committing to a business term loan, SMEs must be aware of any upfront fees and additional charges imposed by lenders. It’s also important to consider the business’s current credit score, as this will affect loan approval chances. If your credit score is low, it might be beneficial to work on improving it before applying for a loan.

Conclusion

Business term loans offer SMEs a reliable source of funding to support growth and sustainability. However, it’s crucial to carefully evaluate your business needs, financial situation, and the terms of the loan before committing. By weighing the benefits and potential risks, SMEs can determine if a term loan is the right financial solution to achieve their goals. For more information on Funding Societies’ business term loans, visit our website and explore the options available for your business.

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Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.  

 

Dorcas Pang
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