Understanding the types of SME business loans available for your business is crucial as loans provide you the leverage you need to succeed in your business. In this guide, we cover the SME loan options in Singapore, interest rates, and how each financing method can help your business.

Ultimate Guide To The Best SME Business Loans In Singapore (2023)

SMEs play a crucial role in Singapore’s economy. Despite being the smallest country in Southeast Asia, Singapore has a comparatively high density of SMEs, with more than 200,000 of them contributing to about two-thirds of the country’s workforce. However, one of the major challenges small businesses are facing is access to finance, SME business loans are designed to provide funding to business owners to finance their growth, expansion, and development. There are some business loan options in Singapore typically offered by banks and other financial institutions with maximum loan amounts and loan tenure varies depending on the lender and the borrower’s financial position, creditworthiness, and business plan.

Types Of Business Loans In Singapore

1. Business Term Loans
Major banks in Singapore, including DBS, OCBC, and UOB, offer unsecured business term loans with repayment terms of up to 5 years that do not require collateral. Each bank has its credit assessment and risk management policies, which can result in varying loan approval rates. An unsecured business term loan is usually the most versatile business financing option as the fund can be used for various purposes such as working capital, equipment purchase, inventory buildup, and business expansion, the loan application process usually ranges from 1-2 weeks.

2. SME Working Capital Loans
Led by Enterprise Singapore, the Enterprise Financing Scheme SME Working Capital Loan is a Singapore government-assisted financing option to assist businesses registered in Singapore. Under this scheme, SMEs are offered loans of up to SGD 1 million with business loan interest rate subject to participating financial institution’s assessment of the risks involved.

3. Startup Business Loan
The startup business loan is an unsecured loan with a smaller quantum of up to $100,000. Obtaining a startup business loan is much simpler compared to a regular business loan as you only need to be in operation for 6 months to qualify for a loan.

4. Equipment and Machinery Loans
Equipment and machinery loans are specifically designed to help businesses acquire and upgrade their essential machinery and equipment for their business needs. Equipment and machinery purchased will act as collateral for the loan. The loan amount, loan term, and interest rates will be determined by the value, condition, age, type of equipment being purchased, and supplier. By covering the upfront expenses of purchasing new equipment or upgrading existing machinery, this financing option offers several benefits such as improving cash flow and enhancing productivity.

5. Invoice Financing
Invoice financing involves selling outstanding invoices to a financial institute that then pays an advance amount of up to 90% of the invoice amount to the business in return. This can be a useful strategy to avoid the strain of waiting for customer payments and can instead use the funds to pay suppliers, cover operational expenses, or invest in growth opportunities. It can be especially useful for companies with irregular cash flows or those that experience seasonal variations in revenue. Overall, incorporating invoice financing into a company’s financial strategy can help improve cash flow and boost liquidity.

6. Trust Receipt
It is a form of financial instrument provided by banks that allow businesses to safely exchange goods and services across borders. Trust receipt allows businesses to buy expensive goods like equipment and automotive for manufacturing or sale purposes with short-term financing and can take possession of the inventory for manufacturing or sale before paying it back to the bank at maturity with potentially lower interest rates than other types of loans. Furthermore, they do not require an upfront payment for the goods being financed, which allows the borrower to save their cash for other needs. Additionally, Trust Receipts offer flexibility in repayment terms as the borrower has the option to repay the loan after selling the goods on credit.

7. Line Of Credit
A line of credit differs from a conventional term loan in that funds can be withdrawn as required, and interest is charged only on the amount borrowed. It provides immediate access to funds, which can assist a business in managing cash flow changes and unforeseen expenses. Compared to other financing options such as credit cards or merchant cash advances, lines of credit often come with lower interest rates.

8. Commercial and Industrial Property Loan
Commercial and Industrial Property Loan offer the lowest interest rates compared to other types of loans as lenders consider these loans to be less risky since they involve using the property as collateral. In case the borrower defaults on their repayment, the lender can recover their investment by acquiring the property and selling it off. Such loans are tailored specifically for businesses looking to purchase, refinance, or expand their commercial or industrial premises or as a way to finance their business.

SME Business Loan Interest Rates

SME Business Loan Application Criteria

1. Operating History
The operating history of a business significantly affects bank loan approval, a long track record of operating history indicates stability and credibility, thus increasing the chances of receiving loan approval. New businesses with no operating history and track record may find it challenging to obtain a business loan, a minimum period of 2 years of operation is often required to be eligible for a loan.

2. Industry and Nature of Business
The approval of a bank loan can be significantly impacted by the industry and type of business. There is a higher probability that the bank will approve the loan if your business is in a rapidly growing industry, given the business’s potential to generate sufficient revenue to pay it off. Conversely, if the industry is facing challenges, the bank may be reluctant to approve the loan as it poses a greater risk for the lender. For example, businesses in the construction, F&B, and retail industries find it hard to get a loan during the Covid-19 period.

Yearly Revenue Banks typically use a business’s revenue to determine its ability to repay the borrowed amount and it is a key consideration for loan approval, the approved loan amount may also be higher for businesses with strong revenue. The minimum recommended yearly revenue should at least be 100k, while loans tend to be more accessible for businesses with higher yearly revenues, other factors like credit score, past financial performance, and industry trends also play a significant role in the loan approval process.

3. Financial report
A financial report provides a clear understanding of the financial position of the borrower. The borrower’s ability to repay the loan amount can be analyzed from their balance sheet, and net profit and loss statement, if the borrower has a healthy net profit and sufficient cash flow to cover the repayment of the approved loan amount, there is a greater chance their loan will be approved. Therefore, financial reports play a critical role in helping banks determine the borrower’s credibility and ability to repay loans.

4. Company’s Bank Statement
A company’s bank statement provides an overview of a business’s financial health. By evaluating average daily balances, monthly turnover, and month-end balances, banks can determine the creditworthiness and repayment capacity of a borrower. Consistent and positive cash flow indicates a borrower’s ability to repay their loan, while high and steady monthly turnover signifies that their income-generating activities are stable and profitable. Conversely, a history of returned cheques can signal an inability to repay the loan which may negatively affect their loan approval, therefore it is recommended that there should be a healthy average daily balance of a minimum of 20k with no returned cheque in the past 6 months of the bank statements.

5. Director’s Notice of Assessment and Credit History
A director is often required to be the guarantor for an unsecured SME loan in Singapore therefore banks will typically require the director’s Notice of Assessment, which provides details of their annual income to evaluate the director’s ability to repay the loan if the company is unable to. A personal credit bureau check will be conducted to determine the credit rating of the director. A director with a high personal income and an untarnished credit history is more likely to secure a bank loan approval, as it reassures the bank that the loan will be repaid, minimizing the risk of default. You may purchase your credit bureau report at www.creditbureau.com.sg.

6. Collateral
Collateral plays a significant role in the loan approval process, as it serves as a form of security for the lender. Lenders are more likely to approve a loan when there is solid collateral in place, as it reduces their exposure to financial loss and increases the likelihood of the loan being repaid in full and on time. Moreover, the presence of collateral can also result in the borrower obtaining more favorable loan terms, such as lower interest rates and longer repayment periods.

Documents Needed For Application

• Latest 2 years’ financial report or draft management accounts which should reflect the Profit and Loss Statement and Balance Sheet.
• Latest 6 months’ bank statement.
• *It is recommended to obtain a loan first if you foresee a temporary cash flow issue ahead, a loan application with a more robust bank statement will increase the chances of approval with a higher amount.
• Director’s NRIC and latest 2 years of Notice of Assessment (guarantor’s NRIC and latest 2 years of Notice of Assessment if a guarantor is required).
• A brief write-up of the company’s profile and upcoming projects assures the lender that you have incoming revenue, therefore, increasing approval chances.

Optimize SME Business Loan Application For Approval

1. Plan and apply ahead
It is recommended to obtain a loan first if you foresee a temporary cash flow issue ahead, a loan application with a more robust bank statement will increase the chances of approval with a higher amount. A business loan application typically takes 1-2 weeks from application to loan disbursement.

2. Maintain a robust credit score
The importance of your credit rating cannot be overstated, as it is a key consideration for lenders when assessing your loan application. It is crucial to keep track of your credit rating and implement measures to preserve or enhance it. Ensuring timely bill payments, minimizing credit usage, and addressing any mistakes or discrepancies in your credit history are all important steps.

3. Improve your debt-to-income
You can improve your debt-to-income ratio by paying off debt or increasing your income to increase your chances of loan approval with a higher amount.

4. Apply for the right type of loan
Research and apply for the type of loan that best fits your needs. For example, if you need funds for a specific project, a business line of credit may not be the best option.

5. Choose the right lender
Look for lenders that favor your industry or specialized in the type of loan you need. Choosing the right lender can increase your chances of loan approval and provide more favorable terms.

6. Seek professional advice
Loan brokers have extensive knowledge and experience in the loan market, we understand the ins and outs of various loan options and can help you find the right loan product for your needs. We are always happy to support you in your entrepreneurial journey, talk to us to discover how we can help.

Top 3 Misconceptions About SME Financing

1. Business loans are only for emergencies
Business owners typically apply for a loan only when they encounter cash flow problems, getting banks to approve a loan for a business in a crisis can be challenging as risks of default increase. It is essential to anticipate and prepare for your financial needs at least one to three months in advance and apply for a loan while your financials are still strong.

2. Business loans are for businesses with good credit
While having good credit scores can certainly help you qualify for a loan and get better terms, lenders also focus on the overall health and potential of your business, rather than just the credit scores. They usually consider factors like cash flow, time in business, and overall growth potential when making lending decisions. Business owners with less-than-perfect credit scores can still opt for a collateralized loan such as invoice financing or asset-backed financing.

3. Business loans are for large businesses only
Many small business owners believe that they cannot qualify for a business loan. However, there are various types of business loans available for businesses of all sizes. Small business owners must maintain good credit scores and healthy finances to boost their chances of approval.

Conclusion

It’s important to understand that there is no one-size-fits-all loan product. Each business is unique, with its own set of circumstances and financial needs. Therefore, it’s essential to carefully assess your options and choose the loan product that best fits your specific situation. Working with a loan broker can help you navigate the complex world of business financing and find the right solution for your business. Remember, taking the time to do your research and explore all available options can lead to better outcomes and ultimately, greater success for your business.