Business Loans

SME financing: How much money should I borrow?

Tarsilla Lee
May 10, 2022

Photo credit: Unsplash


What goes into the decision-making process?

After deciding to take up a business loan comes the process of deciding how much to borrow. As business loans are a considerable obligation, it is wise to consider the different factors involved when picking the appropriate loan amount.  Here are some considerations to have when deciding the amount of financing required.

  1. Determine your cashflow gap
  2. Maximise “free” financing available
  3. Ascertaining your repayment capability

As a whole, these 3 simple processes can help you ensure your loan is properly optimised without putting your company at too much of a strain.

Determining your cashflow gap

Whatever it is your loan purpose, you will need to punch out the numbers behind it to identify your cashflow gap. For good practice sake, it is always good to have on hand at least 1 months of fixed operational expenses as a minimum cash balance. Therefore, even if you have sufficient cash to afford an expense, you do not want to risk thinning your liquidity in case of emergency. Thus, your available cash should begin with the amount above 1 month of fixed operational expenses.

Once you have determined your available cash, you can then calculate your cashflow gap. This is your available cash subtracting the gap required to bridge your near-term cash outflow and inflow.

Example: If you average fixed operational expenses are $20,000 a month and you have $30,000 in your bank account, your available cash is $10,000. And if you must purchase inventory worth $50,000 that you can only sell in 3 months’ time. Your cashflow gap for 3 months is calculated as: $10,000 (available cash) – $50,000 (near term gap between cash inflow and outflow) = -$40,000.

Maximise “free” financing available

As with the nature of debts, a loan taken up is a loan to be repaid. A good starting point to reduce the amount of debt on hand would be to exhaust all available forms of support before taking a loan to cover the remaining costs.

Though it may sound too good to be true, these sources of “free” financing take the form of grants and subsidies offered by bodies such as Startup SG, which supports companies in the early stages of development. These grants and subsidies are intended to support the culture of innovation, entrepreneurship and digitalisation in Singapore and will not require repayment unless otherwise stated.

Regardless of the industry you are in, the popular Startup SG Tech grant is one source of funding aimed at supporting the innovation process in the company in the early stages of conceptualisation and development. Alternatively, more mature companies can reinspect their current processes and take up the Productivity Solutions Grant (PSG) to improve their operating systems, equipment or business practices. If you are working in any of these spaces, checking out the Business Grants Portal or Enterprise Singapore would be a great place to start saving costs from “free” financing. With all things good, it is noted that these grants don’t go freely to anyone. Prepare to show the same proof of concept and other documents used in the loan application process when applying for these same grants in order to assess your eligibility for these schemes. Also, it is important to note that most grants operate on a claims basis so it is important to manage your expectations as claim can take 30-60 days to process. This again needs to be factored into your cashflow gap calculation in the earlier point.

Ascertaining your repayment capacity

As the saying goes, more does not necessarily mean better. The larger the loan quantum you take up, the higher your monthly repayment. Let’s take the earlier example that was given, where the cashflow gap was determined at S$40,000. If the tenor for the loan is given at 6 months at an interest rate of 2% per month (effective), the monthly repayment would come up to $7,141. This means that the business needs to generate an additional $7,141 of free cashflow each month to make good on the repayment. Therefore, it is important that you make appropriate forecast with adequate confidence in order to determine if you can afford your repayment. For prudence, your repayment should not exceed 80% of forecasted cash inflow. This is to help you provide for buffer in slower months.

A way to help you afford your loan is to extend your repayment tenor. This reduces your monthly instalments as it spreads the principal over a longer period of time. The maximum allowable tenor for most banks is 5 years while other alternative lenders usually max out at 1 year. Another method is to work with your lender on a bullet repayment. Although rare, this means that you only service interest payments during the tenor of your loan and only pay the principal on the final payment. Many consider this as a revolving loan where the principal can be further extended at maturity. While observably better, interest rates might be higher as lenders are taking a substantially higher risk. Nonetheless, you should not unnecessarily extend your loan tenor as interest continues to accrue on every dollar of loan outstanding and these add up your interest expense. To help with your calculations, consider using a business loan calculator. You can find our business loan calculator for loans with interest calculated on a per month basis here.

In any case, choose to err on the side of caution if this is your first loan, take a small amount first and understand how repayment works. Once you start to factor the repayment into your business cashflow, you will have a better sense of your affordability as you go through your day to day.

Always remember that a loan is meant to provide your greater freedom not to restrict you. Make productive use of your loan to secure new business and profits while cautiously keeping in mind affordability and you will be just fine. And if everything we discussed here still confuses you, speak to our SME loan experts here for a free consult.  


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.


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. 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.

About the author

Tarsilla has been an avid writer since 2019 and covers topics from event exclusives, photography, to finance. With a creative and explorative mind, she actively seeks opportunities to learn new things and takes challenges head-on.

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