As an individual, being in debt is often thought to be a negative thing. But with businesses big and small alike, it’s a fairly common practice that’s known as “business financing”. When made use of strategically, loans give businesses the necessary leverage to scale up operations and seize opportunities that come their way.
An SME owner needs to be familiar with the various types of financing options available in order to decide on the one that best suits the situation. Here are the most common types of business loans SMEs apply for in Singapore:
Working capital loan
A type of unsecured business loan, working capital loans make it unnecessary for SMEs to pledge assets as collateral in order to get approval for the loan. While the interest rate is fixed and the loan tenure pre-determined, most financial institutions do require a guarantor to secure the loan.
Usually, this type of loan is used to supplement cash flow to maintain daily operations so business owners don’t end up in dire straits whereby workers leave the company after not receiving payment for their work. In general, businesses opting for a working capital loan are either in need of operational cash flow, looking to expand as well as those running on an asset-light model.
Commercial property loan
Much like purchasing a house, whereby it may be necessary to take out a housing loan to be able to afford to do so, SMEs interested in buying a commercial property typically have to do the same. As a rule of thumb, expect to borrow up to 70-80% of the valuation of the property with an imposed repayment period of up to 25 to 30 years.
This type of loan is generally used to purchase either commercial or industrial property where business operations can be conducted. Since property is a fixed asset, it can act as collateral for the loan. That means that your financial institution can seize it in the event where you don’t manage to pay back the loan in time.
If the nature of your business involves equipment and/or machinery, it’s possible to opt for an equipment and machinery financing loan. This loan allows business owners to borrow up to 90% of the valuation of the machinery or equipment, paying it back within a period of up to 8 years.
Those in need of equipment and/or machinery to facilitate business operations are usually the ones to seek out this loan. Similarly asset-based, the equipment and/or machinery will be regarded as collateral. Otherwise, the government-assisted Enterprise Singapore Scheme is also an option to consider.
While taking up a business loan in Singapore is fairly simple, the many options available may be overwhelming for small business owners and microentrepreneurs. Do your due diligence before making a decision to take out a loan from any financial institute. If you’re worried that your credit score may not meet the requirements of banks, consider going to a reputable and licensed money lender like Orange Credit or Capital Funds Investments instead.