With so many business loans made available out there for Singaporeans, it can be a challenging task to find and choose the best loan type for your business.
The different types of business loans in Singapore include:
- Unsecured Business Term Loan
- Asset Financing
- Invoice Financing /Receivables Financing
- Trade Financing
- SME Micro Loans
- Equipment Financing
- Property Loan
When it comes to choosing a business loan, there are certain factors that you should consider before deciding to obtain the loan. Knowing when to borrow and the type of loans to choose is a vital part of business building.
This article will cover the main factors to help you choose the best type of loan for your business in Singapore, be it large or small.
Here’s What We’re Covering:
- Spotting out your financing needs
- Short-term funding options
- Long-term funding options
- Consider the cost of a loan
Spotting out your financing needs
Whether you run a large or small business, a business requires financing for a variety of reasons. You can make a better decision about funding your business when you know why you need the funds.
Are you in need of financial help to cover short-term cash flow problems? Is your goal of obtaining funds to acquire equipment or inventory? Do you wish to expand your business over the next five years?
Read on to find out all these answers and to find out the purpose of the funding before you can choose the type of loan.
Short-term funding options
If your new business is proliferating or if you have slow-paying accounts receivable, you may simply need cash to maintain daily operations, for instance, rent or utilities.
In this case, you will have to find short-term funding options that can assist you in getting through difficult times.
Remember, the interest rate charged for these loans will be significantly higher. But you can always compare the interest rates and fees to settle for the best.
If your business has already issued a notable amount of invoices for completed work, you can opt for invoice financing. This type of business loan allows you to receive a credit based on invoices that are owed from customers.
Since you have already delivered your goods or services, and your business has a reasonable expectation of being repaid, invoice financing can be less risky. Also, its interest rates are usually lower compared to other short-term loans.
Does your business need cash immediately to grow? Micro loans, a short-term business loan can be the right type of loan for you. It offers funding in smaller amounts (S$5,000 – S$100,000) and shorter durations than conventional business loans. Some P2P/Crowdfunding loans are even obtainable within one business day. Moreover, it features higher interest rates than long-term loans.
If you anticipate having recurrent needs for short-term financing over the course of a year, flexible financing that cuts out the hassle and delay of the application process and strict repayment schedule can be your ideal choice.
A revolving credit agreement will allow you to draw up to an agreed-upon amount anytime. It charges interest based on borrowed amounts, asks for an initiation fee but does not charge early repayment fees. You don’t have to undergo additional application processes each time you draw more funding. It won’t require collateral either.
Long-term funding options
Short-term funding is not for all companies. Your company might require long-term financing to facilitate growth. You will find plenty of options when it comes to long-term financing.
Business term loans
There are different forms of business loans. You can receive a lump-sum payment and repay this principle along with interest over a set period of time.
In other cases, you will be asked to provide collateral, or directors are usually requested to provide a personal guarantee of repayment.
You can expect to get more funding from this type of loan, over a longer duration, with lower interest rates than short-term loans. Business term loans can be used for varied purposes, including business expansion. The downside is that it offers stricter payment profiles than other loans. The interest is charged based on the principal amount, and cash disbursement is slower.
Asset purchase agreements
If you wish to purchase equipment, inventory, or real estate, to continue or expand your operations, asset purchasing financing can be a great choice. You can obtain funding tailored to your business’s required purchase.
Usually, this type of loan offers lower interest rates than general business loans as the asset can be used as collateral to secure the loan. The interest rates will vary depending on the specific asset.
If your SME is not eligible for business loans, equity funding can be an option. It allows your business to sell shares of itself to investors. It does not require regular interest payments and provides the greatest financing amounts. However, equity funding dilutes the ownership of the business.
Consider the cost of a loan
It is always wise to consider the loan’s costs and benefits before making any business decision. Obtaining funding can be crucial for your business’ future, but it is equally important to consider the costs of each financing option.
Remember that lenders usually charge interest rates and various fees, including application, success/issuer, and early repayment fees. Try to understand the description of the fees for each loan. It is also vital to know if each fee applies to your business. Interest rates charged will be determined by the lender, the borrower, and the type of loan.
Obtaining a loan to expand your business operations is a fairly common practice. But if you want your company to operate effectively, it is crucial to ensure that you are familiar with the business loan options available in Singapore. Only then you can take the right type of business loans based on the requirements of your business.
Note that the best business loan is the one that not only offers a low-interest rate but suits your needs as well. Apart from financial institutions, some banks can provide you with business loans in Singapore.