A business term loan is the most common type of financing that allows business to obtain financing without the need of any collateral. They can be used for pretty much any business need from working capital to purchasing of new equipment.
It is to note that terminology might be differ for different banks. Some banks call it a Working Capital Loan (WCL), SME Micro Loan and also the Temporary Bridging Loan (TBL) which was made popular through its availability during the pandemic. There are some technical differences as highlighted before in our previous post, Ultimately they all share similar traits, it is an uncollateralized lump sum loan that is provided the start and repaid over a pre-determine period of time (3 months - 5 years) with a fixed instalment.
Below is a quick summary of some of the key traits:
1. Interest Rate as low as 5.5% p.a. (See table below for clarity)
2. Tenor as short as 3 months to as long as 5 years.
3. Loan amount up to 6x business monthly cashflow and up to S$1mil
Unlike other loan products like fixed asset financing and invoice financing where a specific financing need is identified, a business term loan can be used for any business purpose and is not subject to the approval of the lender. Because the use of funds are not monitored, it reduces the hassle of tedious documentary handling such as invoices, delivery order, purchase order, and even letter of acknowledgement from buyers. Some of the most common uses of a business term loan are as per below:
1. Purchasing of inventory
2. Hiring of new staff or payroll financing
3. New outlet refurbishments
4. Rental down payment
5. Purchasing of equipment
Especially with capital expenditure, a business loan helps ease immediate cashflow crunch and split repayments across a period. This provides time for business owners to reach positive cashflow in their new investments.
Another reason why business term loans are popular is due to its non-requirement of collaterals. This allows new and young business owners to gain access to liquidity even when they do not own any fixed assets. Nonetheless, we will cover how secured lending and invoice financing can act as cost effective options to work in tandem with a business term loan in our next part of the series.
Still, an unsecured business loan does not mean that lenders do not hold SME owners liable for their company’s indebtedness. Because of the lack of collateral, it is a mandatory requirement for most lenders that shareholders and directors provide at least 1 guarantor. Eligibility requirements for guarantors are:
- Singaporean or PR with a local property
- No existing default records on CBS
- Notice of Assessment of at least S$24,000
Of course, the number of guarantors required is proportionate to the business loan quantum. The more eligible guarantors, the higher the chances a business loan is approved. In some cases, lenders might ask for third party guarantors. This means that the guarantor is neither a director or shareholder of the company. Some lenders prefer this as the default risk of the guarantor is uncorrelated to the business. Business owners are also less likely to default and implicate a non-business partner.
Other eligibility criteria for business term loans are min 30% of Singaporean / PR shareholding and incorporated in Singapore. LLPs and Sole proprietors are also eligible but to limited lenders. A min 3 months of operating revenue is also required.
Now that eligibilities are out of the way, business owners need to understand the various cost of funding. Depending on the credit quality, a business term loan’s interest rate might differ. For most banks, interest rates fall between 5.5% to 12% p.a, while alternative lenders start at 1-3% per month. Do note that loans typically come with a processing fee of about 1-5%. See table below:
The lower end of interest rates (5.5% – 7% p.a.) offered by financial institutions are typically risk shared with Enterprise Singapore. You can refer here for the full details of such government supported unsecured loans.
Interest rates are not meaningful unless it is translated to numbers. It is to note that most business term loans are re-paid monthly on a Principal + Interest basis. Hence, what business owners want to really calculate is their monthly repayment schedule. This will enable them to evaluate if their monthly cash flow can cover such a repayment. If businesses are not able to afford it, they should adjust the loan amount and the tenor. A good gauge is to keep it within 60% of a business’s cashflow. This allows for some level of contingency.
One useful way to calculate the repayment is using a business term loan calculator. We provided a calculator below which can help business evaluate their options.
Documents required for a business term loan application is rather straight forward and will typically include the following:
1. ACRA bizfile (within 3 months)
2. Past 6 months bank statements
3. Latest Financial Statements or Accounting statements
4. Notice of Assessment for at least one guarantor
5. CBS record for at least one guarantor
Certain lenders might require additional documents such as receivables ageing or a money lender credit bureau report. But the above 5 would be sufficient to get an indicative approval from most lenders including banks.
Client is in the business of sale and training of horses in Singapore with an annual turnover of approximately S$500,000 with profit of S$245,453. The loan request was S$100,000 for 1-2 years for the purpose of buying more horses. The company has an existing loan with DBS and the single shareholder has a credit score of EE with no default records.
Through our 45 available lenders we managed to find a lender that was comfortable with the request.
Client receives $140,650 after deducting 3% in processing fee ($4350)
As calculated by our loan calculator: $12,883.07
Lendingpot is always happy to connect if business owners want to understand more about the loan market. Reach out to us at Ask@lendingpot.sg or drop us a whatsapp at +65 9337 0719
Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.