Take that first step: Consider getting a business loan from other types of lenders apart from banks. Photo credit: Unsplash
Gone are the days when the bank was your only avenue for getting a business loan. Now, there are plenty of options for SME owners.
We take a look at five of them below, and weigh the pros and cons for business owners.
Apart from the major players DBS, OCBC and UOB, there are other banks to choose from, such as HSBC, Standard Chartered, Maybank and RHB.
This means more options for the average SME owner, right? However, the approval process is a little more time-consuming than you may think.
In today’s cautious business climate, banks are getting increasingly more careful about granting loans.
There are also quite a few things that you will need to get in order before you apply for a loan at a bank (or any other financial institution, for the matter).
You will need to prepare your company profile information from the Accounting and Corporate Regulatory Authority; latest credit scores of all company directors from Credit Bureau Singapore; the last two years of your company’s financial statements; the last six months of bank statements; and the last two years of your company directors’ Notice of Assessments (NOAs).
Banks perform stringent checks before they approve your loan application. So if your (or that of your company directors) credit score is less than ideal or your Balance-to-Income ratio is way off, chances are your application will be rejected.
Pros: A bank’s interest rates are likely to be more affordable. You also get to enjoy the broad infrastructure of the bank. In addition, the bank is likely to have a better understanding of your business and can advise you accordingly.
Cons: A bank’s established reputation can be something of a double-edged sword. This means it is likely to take quite a long time vetting your application in order to check you are not a high-risk applicant.
After all, banks famously have a strict credit scoring system and a low risk appetite. Their regulations also often allow little room for flexibility. So they may not be the best bet if you need a loan urgently.
If and when a bank rejects your application, you are not likely to be given a reason too. That’s just the way it is (if you prefer, you can blame it all on information asymmetry).
The bottom line: Be prepared to wait it out if you want a bank loan. You may stand a higher chance if your company has a strong financial record, and you and your company directors have good credit scores. But shop around for the best interest rates and don’t be hasty.
Hong Leong Finance, Sing Investments & Finance Limited (SIF), Singapura Finance and IFS Capital Limited have one thing in common: They are non-bank financial institutions (NBFIs) serving the SME market.
While these finance companies are not banks, they offer business financial services such as personal loans, car loans, property loans, and of course, business loans.
Singapura Finance offers property, equipment/machinery and vehicle loans, as well as inventory financing, block discounting and inventory financing.
SIF provides land and construction loans, machinery loans and shipping loans, along with unsecured loans.
Apart from the standard types of loans, Hong Leong Finance also offers green loans, medical and dental equipment loans, and even a HDB SME loan.
IFS Capital specializes in invoice factoring, property financing and SME Working Capital Loans.
These NBFIs all have decades of experience behind them. Hong Leong Finance has a 60-year history. SIF was incorporated in 1964 and has been listed on the Singapore Stock Exchange since 1983, while Singapura Finance’s history dates back to 1950.
Part of the PhillipCapital network of companies, IFS Capital has been serving SMEs since 1987. It has been listed on the Mainboard of the Singapore Exchange (SGX) since 1993.
Pros: These financial institutions tend to focus more on helping you see if you can collateralize your loan using property or invoices, as well as reduce losses rather than default.
They present SME owners with another alternative apart from banks, especially if they were previously rejected by the latter.
Cons: Being non-banks, they do not have the full suite of banking services such as payment and foreign exchange services.
The bottom line: Worth checking out if you are looking at applying for some alternative types of loans.
Peer-to-peer lenders (P2P) lenders do not match a borrower directly to a specific lender. Instead, they enable a pool of investors to gain access to borrowers through technology, often via a P2P lending platform that connects both parties.
After assessing a borrower based on his or her eligibility and financials, the P2P lender then allows investors to review available borrower applications.
Investors then decide which borrowers they would like to fund by looking at their credit risks. They are not able to view the borrowers’ personal information.
Funds are then transferred to the borrower, with repayments determined by how much of the loan the investors funded. The P2P lender will also deduct a fee from the borrower upon the successful disbursement of the loan.
Pros: The borrower’s credit score determines the interest rate of the loan. However, the interest rate is often lower than that of banks, which is a good thing.
Cons: Check if the P2P lender and its platform are credible, as well as if the P2P lender has a good reputation. Do also check if the interest rate is fixed or variable.
The bottom line: This can be a viable alternative for SMEs if the P2P lender is a reliable one that is transparent with its fees and interest rates.
These are lenders that grant business loans to other companies. These lenders mainly serve the SME community.
Pros: SME owners who are unable to get a loan from a bank can try applying for a loan with a private lender. Being smaller outfits than banks, private lenders may be quicker and more flexible when processing your application.
Private lenders also tend to have a higher risk appetite than banks; so what a bank rejects may be deemed doable by a private lender.
Private lenders are also able to offer interest-only payments, and may be able to extend payment requirements.
Cons: That said, the cost of borrowing for private lenders is generally higher than that of banks. This is why the interest rates charged by a private lender is often higher than what is charged by a bank. Banks, being much larger organizations, can afford to have a lower cost of funding.
The bottom line: An established private lender may be able to grant you the loan you need. But you still need to get your paperwork in order.
Venture debt companies offer new businesses financing solutions. Through such firms, startups can get the growth or working capital they need to expand or buy equipment at the initial stage of their business.
Pros: Such companies are likely to have customizable or flexible options, and tend to be able to process applications quickly. The application process is usually quite fast and often done online.
Cons: Make sure all fees are stated upfront. Some of these companies typically charge you a percentage of your revenue to repay the funding given, while others charge a transparent fee.
The bottom line: This can be a good option for startups that urgently need funds to grow, but have no time to waste on a lengthy loan approval process.
As you can see, all these types of lenders have their own pros and cons. But if you still don’t know where to start, here’s another option that leverages on technology.
A digital business loan marketplace like Lendingpot connects SMEs to its partner network of 45 banks, non-bank financial institutions, peer-to-peer lenders, private lenders and family offices – for free.
In a lending ecosystem flooded with a myriad of confusing options, Lendingpot will naturally help fit your business into the right liquidity pool – with just one online application.
Remember – it just takes one application online to reach 45 lenders – at zero cost.
Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.