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.
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.
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.
Third-party guarantors are individuals who are willing to give their personal guarantees to obtain the business loan but are:
Different financial institutions adopt different stances towards third-party guarantors.
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.