Securing loans in Singapore is critical for SMEs, especially as rising costs and tough competition squeeze profit margins. Fortunately, business owners have access to a wide range of options, each offering different interest rates and terms to support growth, operations and cashflow.
We always recommend comparing options. This can reveal better rates, more flexible repayment options, and, in general, more advantageous financial solutions.
That being said, today, we’ll be taking a closer look at two popular options—private lenders and moneylenders—to determine, for SMES, which has better loan interest rates.
Private lenders, sometimes referred to as non-bank financial institutions (NBFIs), are a category of financial institutions that offer loans and financing solutions without being licensed as full banks. This group, as a result, doesn’t offer the full suite of services that banks do, such as deposit taking. Examples of such lenders include merchant banks, private credit firms, P2P lending platforms and more. These lenders unlike moneylenders are not required to be regulated as such have very low barriers to entry. They can exist in more reputable forms like your Funding Societies or Validus, or small pop ups that may not even have a website.
Generally, the more known private lenders charge relatively moderate interest rates for SME loans, when seen in the context of the loan marketplace. They most commonly offer interest rates from about 8 to 18% per annum. Let’s take a look at two examples of interest rates from private lenders. Funding Societies offers a Business Term Loan of up to $1 million with a starting interest rate of 0.8% per month while Validus, offers an SME Working Capital Loan of up to $300,000 with interest rates as low as 1.3% per month.
The interest rates stated here are slightly higher (7-13% p.a.) than those offered by banks as they are less strict with their credit assessment. However, they are still lower than those charged by moneylenders, as we shall see in the following sections.
However, as the B2B private lending market is unregulated, interest rates are uncapped and have been observed to go up to 6-7% per month. This could mean an annual interest of more than 80% p.a.. This mostly revolves around compensating for the greater risk they assume by offering more flexible eligibility requirements. Some lenders like Bizcap do not even look at the director's credit score during their credit assessment.
Registered money lenders are legally acknowledged financial bodies who are regulated by the Ministry of Law. The Ministry oversees licensing, regulation and the enforcement of the Moneylenders Act 2008, ensuring that moneylenders adhere to strict operational guidelines. This includes the requirements to register their business premises and to meet with any borrower in person at said address before any loan contract can be signed and the funds disbursed.
Money lenders offer loans to both individuals and businesses, and they’re known for being flexible in their terms and conditions. They can also disburse funds quickly, which is why many borrowers consider them during emergencies.
The interest rate money lenders can charge is, again, heavily regulated by the Ministry of Law. It has been capped at 4% per month, which works out to 48% per annum. This is higher than the interest rates offered by private lenders and banks. It is important to note that the interest rate offered is effective and if put to simple rate can be as low as 1-2% flat per month.
The real reason why moneylenders tend to be among the highest interest rates in the market is their admin fee. They are allowed to charge administrative fees of up to 10% as part of the borrowing costs. However when you think of the admin fee and brokerage fee that most SMEs pay to get access to private lenders, it can also addd up to 10%.
You should also keep in mind that the interest rate they offer you would be dependent on your creditworthiness, ability to repay the loan and the risk you pose as a borrower.
Who has better SME loan interest rates, private lenders or moneylenders? The known private lenders offer better interest rates however the lesser known ones are known to charge higher than moneylenders. However, the lesser known ones can charge as higher or even higher than moneylenders as interest rates are uncapped in the B2B private lending space.
So a general rule of thumb is yes, private lenders are generally cheaper but only for the more known ones. As for the rest of the market, it might be cheaper to borrow from a moneylender as their rates are on a reducing balance basis and not a flat rate.
If you’re considering alternatives to banks, both private lenders and money lenders are good options each with their own strengths depending on your business needs and financial profile. The best way to find the right fit is to compare their offerings side by side, and that’s where we come in.
Lendingpot gives you access to both non-bank lenders and moneylenders. You’ll be able to compare their offers to find one that aligns with your financial goals. Sign up with your Singpass myinfo today and connect with more than 45 trusted lenders.
Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
