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What You Need To Know Before Applying For A Business Term Loan

Viewed by 3,485 Smart Towkays

OCBC Bank with Smart Towkay
May 11, 2023
Things To Know Before Applying For A Business Loan

Disclaimer: The insights shared in this article are the result of a collaboration between OCBC and Smart-Towkay.com. It's essential to note that all views expressed in the article are the independent opinion of Smart-Towkay.com, which is based on our thorough research and industry expertise.

Smart-Towkay.com cannot be held responsible for any financial losses that may occur as a result of any transactions, and we strongly encourage readers to conduct their own research before making any financial decisions.


The government is stepping up to support Singapore's SMEs as they handle the financial consequences of the COVID-19 outbreak because they are the foundation of the country's economy.

The extension of the working capital loan (WCL) to March 31, 2024, was among the most important announcements made in Budget 2023 for SMEs. This government-backed lending initiative offers up to S$500,000 in finance to assist SMEs in managing their everyday operations and cash flow.

While this financial respite is appreciated, many SMEs have already reached or used their WCL limit, leaving them to ask what other options they have if they need to raise additional working capital.

By considering alternative working capital financing options such as Bank’s Business Term Loan, SMEs can access the funding they need to keep their operations running, invest in growth and expansion, and weather any economic challenges that may arise.

What Is A Business Term Loan And Its Features

A Business Term Loan is a financing option that provides a lump sum of money to a business for covering company expenses, such as day-to-day operations and business expansion.

However, it's important to note that the financing option should be based on the company's requirements at the very juncture of application.

For example, if a customer is planning for a couple of business trips, a business credit card might be the best option for them, as it allows them to make necessary purchases on credit. On the other hand, if a customer is looking to increase their business space by renting another unit and fitting out the place, then the best option for financing would be Business Term Loan and SME WCL.

This financing option allows the customer to receive a lump sum of money that is repaid over a fixed period of time with interest.

Some of the main features and benefits of a business term loan include:

  1. Larger loan amounts: Business term loans typically offer larger loan amounts than government assisted working capital loans, making them more suitable for large-scale projects or investments.

  2. Fixed repayment terms: Business term loans have fixed repayment terms, which allows businesses to plan for and budget for their loan repayment.

  3. Fixed interest rates: Business term loans typically have fixed interest rates, which helps businesses to predict and budget for their loan repayment costs.

  4. Unsecured: Most of business term loans require no collateral.

  5. Tax-deductible: Interest paid on a business term loan is tax-deductible.
     

Are There Any Other Sources of Financing Available for SMEs Aside from Business Term Loans?

When it comes to financing options for SMEs, a business term loan is just one of many options available.

Other popular options include business credit cards, overdrafts, invoice financing and revolving lines of credit. Each option has its own advantages and disadvantages, and SMES need to understand how they compare to choose the best financing option for their business.

Read also: Unlock the Potential of Your Unpaid Invoices with OCBC Short-Term Invoice Financing

Feature

Business Term Loan

Business Credit Card

Overdraft

Revolving Line of Credit

Invoice Financing 

Purpose

Long-term working capital

Short-term expenses or revolving credit

Short-term expenses or emergency funds

Revolving credit

Advance cash against unpaid business invoices

Repayment Terms

Fixed schedule


Up to 5 years

Revolving credit


30 – 55 days 

Revolving credit


30 days

Revolving credit

30,60,90 days

Pay-as-you-use 

30 – 90 days

Loan Amount

Fixed loan amount

Credit limit determined by credit score

Credit limit determined by credit score

Credit limit determined by credit score

Depends on the value of unpaid business invoices

Collateral

No collateral required 

No collateral required

No collateral required 

No collateral required 

No collateral required 

Repayment Terms

Fixed schedule

Revolving credit

Revolving credit

Revolving credit

Revolving credit


Choosing The Right Business Term Loan

Choosing the right business term loan can be a daunting task for SMEs. With so many options available, it can be difficult to know which loan is best for your business.

However, by considering a few key factors, you can ensure that you select a business term loan that is tailored to your business's specific needs and goals. Some of the key factors to consider include the loan's terms and conditions, the lender's credit criteria, and the interest rate.

By carefully evaluating these factors, SMEs can make an informed decision and choose a business term loan that will help their business grow and succeed.

Fuel Your Business Ambitions Now! Apply for Your Business Loan Today with Smart-Towkay


Interest rate: The interest rate is the cost of borrowing the money and can be fixed or variable. It's important to understand how the interest rate is determined and what the current rate is, as well as how it may change over the life of the loan.

Repayment terms: Repayment terms refer to the length of time that the loan must be paid back. The terms may vary depending on the lender, but typically range from one to five years.

Personal Guarantee (PG): Some lenders may require personal guarantees from the business owners, which means that they will be personally liable for the loan if the business is unable to repay.

Read also: Who Acts As A Guarantor In A Business Loan? A Detailed Legal Advice Before You Become a Loan Guarantor!

Fees and charges: Some lenders may charge additional fees, such as application fees, origination fees, or prepayment penalties. It's important to understand what these fees are and how they will affect the overall cost of the loan.

Credit Assessment: SMEs should take the time to review and understand each lender’s credit assessment requirements. While some lenders require companies older than two years with a minimum turnover criteria, others are willing to consider start-ups that are as young as six months old. Avoiding a “spray and pray” approach is essential for businesses looking for appropriate financing options.

Read also: Guide to Start-Up Business Loans in Singapore (2023 Edition)


Choosing The Right Business Term Loan Lenders

SMEs now have a wider range of options available to them, including peer-to-peer lending platforms, Neobanks and B2B lenders. These alternative lending options can often provide more flexible terms and faster funding than traditional banks, making them an attractive option for SMEs.

Neobanks like Fazz and Aspire, as well as Peer to Peer Platforms such as Funding Societies or Validus Capital, present SMEs with a viable option for finding working capital loans. Nevertheless, these solutions tend to charge interest rates that are significantly higher compared to traditional banks. This form of financing is great when you need expedited short-term bridging loans; however, it's not recommended if you're looking for long-term working capital loan requirements.

B2B lending can be a valuable source of financing for businesses, particularly for SMEs that may not have access to traditional forms of financing.

Feature

Established Bank

Neo Banks/ P2P Lender

B2B Lender

Credit Score Requirements

Generally higher

Can be more lenient

Can be more lenient

Effective Interest Rate per year

7.75 – 10.88% 

> 20 % 

> 50 %

Loan Amounts

Up to S$1,000,000

Up to S$1,000,000 

Up to S$500,000, typically lower

Repayment Terms

Up to 5 years

1-12 months

1-12 months

Available Services

Wide range of financial products and services

Limited to loan and business account services

Limited to loan services

*Interest rates and above terms and conditions are subject to change and may vary based on creditworthiness, loan amount, and other factors. The above illustration provided is for informational purposes only and should not be considered a guarantee or commitment to lend. Actual interest rates and loan terms may differ from those illustrated.

How Does It Compare With Other Competitive Banks Offering?

Feature

OCBC

DBS

UOB

MAYBANK

Effective Interest Rate per year

7.75 - 8.75%

10.88%

8.88%

10.88%

Processing Fee

1.5%

2%

2%

1.5%

Prepayment Fee

3% of prepaid loan amount and admin fee of S$1,000

2% of prepaid loan amount

2% of prepaid loan amount

2% of prepaid loan amount 

Min Incorporate Requirement

> 2 years

> 1 year

> 2 years

> 2 years

Online Application

Yes

Yes

Yes

No


***Interest rates and above terms and conditions are subject to change and may vary based on creditworthiness, loan amount, and other factors. The above illustration provided is for informational purposes only and should not be considered a guarantee or commitment to lend. Actual interest rates and loan terms may differ from those illustrated.

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Conclusion

In conclusion, finding the right business term loan and lenders can be a challenging process for small business owners. However, by understanding the different options available and finding a business term loan that fits their specific needs, they can ensure that their business has the financial stability it needs to succeed in the long term. It is important to carefully review the terms and conditions of any loan and to work with a reputable lender to find the best solution for your business. Additionally, it is crucial to maintain good credit and a solid financial track record to increase the chances of securing a loan with favourable terms.
Fuel Your Business Ambitions Now! Apply for Your Business Loan Today with Smart-Towkay


Frequently Asked Questions

What are some possible risks of a business loan for an SME?

When obtaining a business loan for an SME, it is important to be aware of the potential risks. For example, default risk—the possibility that the borrower will have difficulty repaying the loan due to financial hardship or unforeseen circumstances—as well as interest rate risk which can cause payments on the loan to become more costly if rates climb.

Are there any restrictions on how the funds from a business term loan can be used?

Typically, funds used from business term loans are restricted for working capital requirements for the business only and should not be used for personal expense or to pay off personal debts. Some lenders may require borrowers to provide regular financial reports or other documentation to demonstrate that the funds are being used in accordance with the loan agreement.

Why do I need to provide a PG if it is termed as an unsecured loan that does not require collateral?

Personal guarantees are not collaterals. A personal guarantee is a promise by the business owner to repay the loan if the business fails. Hence, a PG is required as it guarantees the bank that they will be able to recover at least some of their losses even if the business goes bankrupt.

Are there any credit bureau score requirements for a business term loan?

Different lenders have different appetites towards guarantor personal credit bureau scoring, by and large a credit bureau rating of AA to even GG will suffice for approval. Beside credit bureau rating, lenders do look at the utilisation of personal credit limit i.e. if you utilise more than 80% of your total credit limit, it might lead to rejection of the application.

Read also: Understanding Your Credit Report from Credit Bureau Singapore - Business Owner Edition

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UPDATED AS OF 27 Feb 2024
Lowest Business Banking Facilities
SMART-TOWKAY.COM
Lowest SME Working Capital Loan (WCL) Rate
6.5%
Per year
Lowest Business Term Loan Rate
7.5%
Per year
Lowest Home Loan Rate
3.3%
Per year
Lowest P2P Biz Loan Rate
1.3%
Per month
Lowest Commercial Property Rate
3.98%
Per year

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