Business Loans

Third-Party Guarantors for Unsecured Business Loans in Singapore

Eric Koh
May 19, 2020

Last week, Lendingpot had the honour of being invited as a panelist on SME Centre@SMCCI’s webinar for its chamber members (watch the replay video on Facebook).

During the subsequent Q&A session, a question was raised by the moderator: “Are financial institutions in Singapore receptive of “third-party” guarantors as a form of security for an unsecured business loan?”

This article aims to explore and address the question in detail.


Guarantors for Unsecured Business Term Loans

The most common business loan available for SMEs in Singapore is the Unsecured Business Term Loan.

The Unsecured Business Term Loan is a simple financing product, where a borrower receives the loan amount (loan quantum) upfront in a lump sum, and makes equal monthly repayments for a period of time (loan tenor), at a fixed interest rate.

The DBS Business Loan, OCBC Business Term Loan, UOB BizMoney, as well as the government-backed SME Working Capital Loan (EFS-WCL) & Temporary Bridging Loan Programme (TBLP) are some examples of Unsecured Business Term Loans with similar structures.

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As we have stated in previous articles, most SME loans are secured by personal guarantees of directors or shareholders (owners) of the business in Singapore.

Unsecured Business Term Loans are not secured by collateral (such as property) but will still require personal guarantees.

This requirement applies to all the loans mentioned above, including the government-backed credit facilities.


Why do Financial Institutions Require Personal Guarantees?

Firstly, Singapore’s legal system allows individuals to set up companies with limited liabilities.

Companies in Singapore can exist as a “legal entity, separate from its shareholders and its directors and can acquire assets, go into debt, enter into contracts, sue or be sued in its own name”.

Secondly, Singapore has a business-friendly regulatory environment, where the government tries not to over-regulate in order to encourage business activities.

SMEs under a certain size are exempted from producing audited financial statements. Singapore also does not have a mandatory, centralised SME Credit Bureau.

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These situations present unique challenges to financial institutions, as they are unable to accurately evaluate an SME’s credit rating as there is no credit bureau and nor audited financial statements, yet have to manage the risk that an SME can simply shut down the business after receiving the loan.

Thus, most financial institutions require personal guarantees from an SME’s shareholders/directors whenever an unsecured business loan is offered.

Personal guarantees will not only encourage the company directors to borrow funds strictly for business purposes, but it will also ensure that company directors work to repay the loan as they are also personally liable for any loss/non-repayment.


What are Third-Party Guarantors?

Third-party guarantors are individuals who are willing to give their personal guarantees to obtain the business loan but are:

  1. Not shareholders or directors of the borrowing company,
  2. Or explicitly linked to the company (i.e. successor, next owner of the business).


Will Banks Accept Third-Party Guarantors?

Different financial institutions adopt different stances towards third-party guarantors.

Institution Stance on Third-party Guarantors
Local Bank A Accepts third-party guarantors, as long as:

  • the existing local shareholders (at least 30%) are also willing to be guarantors
Local Bank B Does not accept third-party guarantors
Local Bank C Does not accept third-party guarantors, unless that individual:

  • has a business interest in the company
  • or is connected explicitly (i.e. successor, next owner)

We have redacted the names of the financial institutions as the information provided is sensitive and not meant to be revealed to the public.


What Should You Do If You Would Like to Use Third-Party Guarantors?

Make sure that these guarantors have good personal financial track records.

They should have sufficient income (approximately >$40,000), as declared in the Notice of Assessment (NOA), and also a good personal Credit Bureau Record (CBS Report).

Otherwise, having third-party guarantors will not improve the credit rating score of your company.

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We have several other tips that would significantly help your business loan application if you would like to utilise third-party guarantors. Contact us now to find out more!


Disclaimer: This article is based on information that Lendingpot has received informally from partners. All the information is believed to be accurate; however, no claims, promises or guarantees about the accuracy, completeness or adequacy of the information are made. All information, commentary, recommendations or statements of opinion provided in this article are for general information purposes only. We do not claim to be authoritative. If there are any errors in our reporting, please contact ask@lendingpot.sg for rectification.


Request for a Business Loan Now!

Lendingpot.sg operates a Business Loan Marketplace that allows an SME to connect to multiple lenders with just one application, allowing the SME to know who its prospective lenders are and the rates that they offer, in a very short time.


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

Eric Koh is passionate about helping SMEs grow and has spent years interacting with business owners at OCBC and IFS Capital. He is interested in 70s rock ‘n roll, the odd novel and copious amounts of historical trivia.

Third-Party Guarantors
Unsecured Business Loans
SMEs
SME Loan
business loan
Business Term Loans
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