SME business loans are unsecured credit facilities that provide financing needs for business owners and entrepreneurs.

Fortunately, there are several business loans in Singapore, ranging from government-assisted financing schemes, to loans offered by licensed money lenders, banks, and various financial institutions.

This guide will look at what is business term loan, how to apply for a business loan in Singapore, the types of business loans, and the options available.

Business Loan Options In Singapore

SME business loans are unsecured credit facilities that provide financing for business owners and entrepreneurs. Here are some of them.

Government-Assisted Business Loan Schemes

The Singapore government introduced government-assisted business loans in 2020 during the height of the Covid-19 pandemic to support small and medium-sized enterprises (SMEs).

Enterprise Singapore (ESG) administers these loans through the participating financial institutions (PFIs).

Such loans are a great option for SMEs in Singapore because they come with a government risk share of up to 70%. Currently, ESG offers two main credit facilities:

Enterprise Financing Scheme – SME Working Capital Loan (EFS-WCL)

• Maximum loan quantum $500,000 until 31 Mar 2023
• Only available for SMEs
• Government risk-share of 50-70%
• Repayment period of five years

Enterprise Financing Scheme – Trade Loan (EFS-TL)

• Maximum loan quantum of $10 million until 31 Mar 2023

• Government risk-share of 70%

• Repayment period of one year

Evaluation Criteria

Banks and financial institutions usually evaluate your business or company holistically based on its current bank statement records and past financial performance. They also look into your guarantors’ credit records.

Unsecured Business Term Loan

As its name suggests, unsecured business term loans aren’t secured by physical assets such as equipment or property but by the business directors’ guarantees.

They are popular with Singapore SMEs because of their flexibility. An unsecured business term loans can be used to fund the daily operational needs of your business such as payroll and inventory purchases

It can also be used to fund business expansion activities such as renting or leasing a new retail outlet.

Evaluation Criteria

Banks and financial institutions evaluate your company holistically based on its current bank statement records and past financial performance. The guarantor’s credit records will also be considered.

Structure

A normal unsecured business term loan finances up to $500,000 with a repayment period of one to five years.

Its chargeable interest rate varies from 7-12% annually. Levied administration fees of 1-5% of the approved loan amount also apply.

The tenure, repayment schedule, charges, and loan amount vary across different institutions. It’s advisable to select an unsecured business term loan that you can afford and that will solve your business needs.

Merchant Cash Advance

An MCA is a niche financing product only accessible to F&B or retail businesses that use credit card terminals.

Evaluation Criteria

The primary evaluation criteria for an MCA facility is the business’s credit card transactions over the past six months.

Other factors that also determine if the business can get a higher loan amount are profitability, guarantors, and financials.

Structure

The MCA advance amount or the loan quantum is initially calculated by averaging the monthly credit card transactions over the past six months and multiplying by one and a half to four times. For instance, if the average monthly transaction is $10,000, the advance amount given could be between $15,000 to $40,000.

The loan is given to the business at the beginning of the facility, with repayments made over six to nine months. The lending institution opens a new joint bank account with the business.

It directs all the credit card transactions into the account, where the monthly repayments will be automatically deducted.

If the monthly credit card transactions surpass the monthly repayment amount, the lending institution hands over the excess amount to the business.

However, if the transactions are less than the repayment amount, the repayment period is extended by a month and may last six to nine months.

Invoice Financing (Account Receivable Purchase, Factoring, Receivable Financing)

Invoicing financing refers to credit facilities that use invoices as collateral.

Evaluation Criteria

The financial strength of an SME’s customers is the main evaluation criterion of an invoice financing facility. Multi-national corporations or government clients are typically preferred over SME customers.

The business must provide a proven track record of service performance using its previous transaction history. Its financial performance and profitability will affect the evaluation process.

Structure

After providing a service or product, SMEs normally issue invoices to their clients. While awaiting payment, an SME can use the invoices as collateral to receive early payment for the work completed.

Once it is approved for an invoice financing credit line, the SME can draw up to 80% of the value of the invoice for every invoice until it has reached the credit limit.

The financing institution will receive payment for every invoice directly from the SME’s client after a month and refund the remaining payment value (20%) to the SME after deducting the fees and interest.

Some may confuse this with purchase financing, where a business borrows capital using a supplier-issued invoice to pay its suppliers.

Business Overdraft

An unsecured overdraft (OD) facility is usually considered an alternative to business term loans. It is ideal for SMEs that need short-term working capital.

Evaluation Criteria

The evaluation criteria is similar to that of an unsecured business term loan. The business is evaluated holistically using its current bank statement records and past financial performance, as well as the personal credit records of the guarantors.

Structure

The structure of an OD facility is very different from an unsecured term loan. The OD facility offers an SME with a line of credit instead of a lump sum amount.

The interest is only charged on the amount used and allows multiple withdrawals of any amount, up to the credit limit.

SMEs must make a minimum monthly repayment of 20% of the outstanding amount on the OD credit line, similar to credit card facilities. Interest is only charged for the period of usage and the amount withdrawn.

Other business you can consider include:

• Business First Loan: Offered by OCBC Bank, this unsecured loan is suitable for young start-ups registered and operated between six months and two years
• Venture Debt Financing: This is available to start-ups backed by venture capital investors

Business Loans Vs Personal Loans

Business loans can be used to buy machinery, inject capital, for expansion, etc. On the other hand, personal loans can fund weddings, vacations, medical emergencies, and just about anything.

Business loans usually allow repayment over a long time, while personal loans are more short-term.

Eligibility Criteria

Every financial institution has a basic set of eligibility criteria to assess business loan applications for SMEs in Singapore.

The eligibility criteria are not the same as the credit evaluation criteria.

An SME could be eligible to apply for a business loan. However, it could still be rejected if it fails the evaluation process.

In Singapore, the basic eligibility criteria for licensed money lenders such as Horison Credit include:

How To Apply

The following is a rundown of how a normal business loan Singapore process works in Singapore and the things to prepare at every stage.

1. Apply at the branch or online
2. First call back from the financial institution
3. Submission of documents
4. Second call back from the financial institution
5. Process for approval
6. Presentation of business loan proposal
7. Site visit
8. Signing of documents
9. Disbursement of funds

Documents Required To Apply For A Business Loan In Singapore

1. ACRA business profile information
2. Last two years’ Notice Of Assessment (NOA) of all directors
3. Latest Credit Bureau Singapore (CBS) report of all directors
4. The company’s financial statements for the last two years
5. Latest six months of bank statements
6. Accounts receivables aging list (optional)

Why Your Business Loan Application May Be Rejected

As previously mentioned, SMEs applying for business loans in Singapore might be rejected after the evaluation process.

While we cannot certainly know the precise business loan evaluation criteria used by banks that they keep secret to prevent fraud, we can deduce the most common rejection reasons.

With this information, SMEs can increase their chances of getting a business loan.

Here are some possible reasons:

1. The business is newly incorporated/not yet a year old
2. Loss-making in the past financial year
3. Low or insufficient revenue in the past financial year
4. Too many existing business loans or overleveraged
5. The business is in a restricted industry
6. The company is using the director’s bank account and not the corporate account
7. Multiple bounced cheques in the bank account statements
8. Directors have no/low/negative declared personal income
9. Directors have bad personal credit records
10. Directors have a high balance-to-income (BTI) ratio

If your business is struggling and requires a business bank loan to stay afloat, Horison Credit is your go-to licensed money lender.

We pride ourselves on being one of Singapore’s best business loan providers. Our rates and SME loan terms are attractive for all business types in Singapore. Reach out to us today for more information or apply for a loan now.