The much beloved temporary bridging loan that was first introduced in 2020 has finally reached its termination after twice extended and will officially end on the 30 Sep 2022. This will mark the era of cheap funding for SMEs as banks revert to the 8-12% interest rate range that they use to provide under the Working Capital Loan (WCL). Quantum changes will also be observed as the loan cap is reduced from S$1mil to S$500k under WCL. Under such circumstances, we believe that a property-backed loan for your business might be a good option for a lower interest rate and higher quantum.
Also, by properties we are mainly referring to a wide range of properties ranging from commercial, industrial, shophouses and private residential. Do note that this excludes HDB properties. Here we explore some options you can do with your properties both from a bank and non-bank perspective.
Banks offer one of the cheapest modes of financing when it comes to being property backed with interest rates hovering around 2-3% p.a. with a tenor of up to 25-30 years. On top of that, they are also able to offer attractive loan-to-valuation (LTV) on commercial properties with some going up to 90% on the property valuation. Such a loan is what we call an Equity Cash-out.
While this is the most obvious option, it may not necessarily be the most feasible one. This is because there is a wide range of factors to be considered which includes:
We recommend you read our full guide on property on property backed loan as you weigh your eligibility.
We did a quick summary on the difference between a private lender and a bank and here’s some numbers we think still work against a traditional working capital loan.
The ability for a higher LTV allows for you to take larger loan than what you would expect from a working capital loan. A 10% increase in LTV as compared to a bank could make room for a full $100,000 if the property is S$1mil in valuation.
While the rates are almost doubled that of standard bank equity cash out, the interest offered are much lower than a WCL. Interest rates are hovering at 6% p.a. with 1% processing fee against WCL rates of 9-12% p.a. and 1% processing fee. That 3% savings on a $300,000 loan is a good $6-9,000 of cost savings a year.
One of the best perks of a non-bank loan is the lack of a TDSR requirement and at the same time allowing you to only make interest servicing payments. This means that while your interest is higher, it does not have a huge impact on your cashflow as you do not need to make payment to your principle. This puts your cash outflow to be slightly lower than a bank loan but with a higher eligibility. At the same time for companies, non-bank lenders can take into account your forward looking projections of your business and are generally more willing to take more risk with you.
Look below for a quick comparison for cash flow comparison.
Loan amount: S$1,000,000
Interest: 3% p.a.
Tenor: 20 years
Monthly Repayment: $5,545
Loan amount: S$1,000,000
Interest: 6% p.a.
Monthly Repayment: $5,000 for the first 5 years
Quick caution: Watch out for hidden cost!
If your eligible cash out amount is substantially lesser than the outstanding loan amount, it might not make sense to get a loan from a non-bank lender. This is because your outstanding amount will be subject to a higher interest as a whole. Here’s an example to help you understand the point.
Take an example of a property valued at $1mil with an outstanding loan of (A) $100,000 and (B) $500,000 respectively.
As you can see, under example (B), while the amount eligible to cashout is only $250,000. The higher interest is charged on the full amount of $750,000. Therefore, it is important to add the increased in interest rate on your outstanding amount when you factor the total cost.
To conclude, it is important to understand the ranking of financing. The first rank should be a property cash out with the bank as it is the cheapest. The second if you don’t qualify for the first should be a property cash out with a non-bank lender factoring in the increased interest on your outstanding as well. Finally take on the WCL which is still a reasonably priced loan for SMEs.
If you are exploring new working capital for your business, do reach out to Lendingpot who have access to more than 45 lenders in the market including bank and non-bank lenders who provide WCL and property backed financing.
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.