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Factors to Consider When Applying for an SME Business Loan
Whether you are a new entrepreneur hoping to acquire bank loans to start a business or a Small and Medium-sized Enterprise (SME) owner needing fresh funds to improve cash flow, getting a healthy dose of monetary support can certainly ease the burden of any business owners. Especially for SMEs that are hard hit by the downturn of the economy due to the recent Covid-19 pandemic, additional financing can be precious lifelines that can help to turn their businesses around during this difficult time.
However, before rushing to apply for an SME business loan, there are several factors that business owners need to consider before selecting a loan package that is most suitable for their needs. Here are some important considerations that will help make the right choice.
Types of SME Business Loan
There are many types of SME business loans to match different business needs. Some are specific to operational functions, while others are more broad-based, suitable for easing cash flow or expansion of the business. Some of the common SME business loan types are explained below.
Unsecured Business Term Loan
This is one of the most common forms of working capital loan that offers a lump sum principal loan amount usually between $50,000 to $500,000 and the repayment term is typically between 1 to 5 years. Interest rate can range between 5-11% per annum effective interest rate (EIR). Any locally incorporated companies with at least 30% local shareholding can apply for such a loan.
The term "unsecured" simply means that small business owners do not have to offer personal or business assets as collateral. The lender is fully aware that the borrower might default and not be able to repay the loan.
SME Working Capital Loan
This is a special type of business loan that is offered to local SMEs with no more than 200 employees and at least 30% local shareholding. It is a government-assisted financing scheme launched in 2016 under Enterprise Singapore to help local SMEs in all industries gain access to financing for cash flow.
Due to the recent Covid-19 outbreak that is hurting SMEs in all sectors, the Singapore government has announced the extension of the maximum loan quantum from the initial S$600,000 to S$1 million. Government has also increased their risk-sharing to 90% for applications until 31st March 2021 to help SMEs have better access to credit.
The loan repayment period is up to 5 years, and interest rate has been reduced to 2-5% per annum, capped at 5%. SMEs can choose to defer principal repayments up to one year, subject to assessment. This will also help to ease cash flow during this difficult period.
Temporary Bridging Loan Programme
The Temporary Bridging Loan Programme is another government-backed business financing scheme that was set up to help the hardest-hit tourism sector initially. It was later enhanced on 1st April 2020 to help businesses in ALL sectors to tide over the Covid-19 crisis. The loan amount is capped at S$5 million and it is available to Singapore-registered companies with at least 30% local shareholding. Government risk-sharing has also been increased to 90% for applications until 31st March 2021.
While the credit criteria and interest rates differ across banks, such bridging loans are meant to provide working capital financing for companies that have fallen on hard times. As a result, the interest rates are also kept low at around 2.5 to 5% and with the option to apply for up to one year principal deferment.
The participating financial institutions are as below:
Eligibility for SME Business Loan Application
To apply for any type of business loans in Singapore, there are criteria that companies need to meet before they are eligible to access the loans. For example, most of the SME business loans require their applicants to have at least 30% local shareholding. SMEs must also be at least 6 months into their incorporation before they are eligible to apply because there is no way for loan providers to gauge the credibility of the business if they are new.
Minimum Incorporation Criteria
One of the most important criteria that banks consider is the duration that your business has been operating for - not just from the time your company is registered, but whether there has been legit business operation.
From a lender’s perspective, the longer a company has been in operation, the more stable the business is. Data from professional services firm Aon noted that in 2017, whilst 62,113 new businesses were created, 48,259 exited the market. The struggle for new startups is real, and many new businesses do not survive past their first two years.
Hence, it is no wonder that most lenders are more stringent with their lending criteria towards new businesses, as they might not even survive long enough to repay back their loans. (Nevertheless, it is still feasible for new businesses to secure a loan, but maybe in a much lesser loan quantum.)
Most banks and Financial Institutions deem a company as reasonably stable when it has been in operations for at least 2 years. These companies that have operated for more than 2 years also have access to a greater variety of SME business loans, which are usually larger loan amounts at much lower interest rates.
Credit bureau Record
Having a good credit score with the Credit Bureau Singapore (CBS) can also improve the chances of obtaining an SME business loan. Such ratings allow the loan providers to assess the financial credibility of borrowers and the possibility of defaulting loan repayments. A low credit score can raise doubts and lower the chances of receiving a business loan.
Understand your credit bureau rating, a rule of thumb is not to fall below GG which is most bank credit criteria of approving SMEs loan. But on a case to case basis, we do encounter financial institutions that approve loans with grading less than that.
Financial Institutions also look at the total utilization of credit limits. E.g if your total credit limits across all participating financial institutions in the credit bureau is $100,000 the utilization should not be more than $70,000 (outstanding credit balance) -70%.
If SMEs owners cash advance on their credit cards often, this will also affect the bank assessment of the application.
Minimum Turnover requirement:
Additionally, note that a fledgling business spells trouble for loan providers, which is why companies with positive track records and healthy annual revenue are more likely to get a loan approval than an undeveloped one. As a general guide, most lenders have internal credit criteria of minimum turnover requirement of more than $350,000 and banks like UOB and SCB have higher criteria such as $750,000 and above turnover for loan submission.
How to Apply for an SME Business Loan?
The required documents may vary across different banks and FIs, however the general documents that every lender will need to process your application are:
- Past 6 months bank account statements
- Profit and Loss statements
- Balance sheet
- Income tax returns of Directors for past 2 years
- NRIC of Directors
- Any existing financing facilities
Alternatives to SME Business Loans
If business owners are not qualified to apply for traditional SME business loans, perhaps seeking personal loans might be an alternative. Typically, a personal loan grants up to 4 times of a salary and it is suitable for salaried workers who are looking to start a side business that does not require huge capital.
Recently, we have also seen a trend of Business To Business (B2B) Lenders, where corporations use their own funds to finance other SME businesses. Their interest rates typically range from 3-7% per month for short term funding, usually for 3 to 6 months. Do note that only LLP and Pte Ltd companies will be eligible for B2B lending as any lending to sole proprietorship or partnership are subject to Money Lending Act.
Peer To Peer Lenders
Alternatively, fundings can also be obtained through Peer To Peer (P2P) Lending or crowdfunding that involves borrowing money from the general public through an online platform. Such methods of financing have been gaining popularity amongst businesses because they provide new methods for getting funds and introduce interesting channels for individuals to invest. It is a win-win situation for both parties - the lenders get to make some money in the form of interest, while the SME borrowers might be able to get loans more easily than going through traditional channels. However, do note that interest rates for P2P fundings are usually much higher than a traditional bank loan at 1-5% per month.
Consider P2P funding and bank loans as complementary financial products as they each serve different purposes. The fast approval and funding process from P2P lending is the highlight of their business model, whereby funds are usually disbursed within days. SMEs can utilise P2P funds to capitalise on short-term business opportunities, albeit at the mercy of investors pricing their loans at higher interest rates.
On the other hand, banks are highly regulated financial institutions, and have strict credit policies when it comes to lending. SMEs can also benefit from other banking facilities such as advisory services, cash management and trade finance solutions.