4 Key Factors to Help You Secure Your SME Loan in Singapore

During the COVID-19 pandemic, the Singapore government introduced Government-Assisted loans to support businesses struggling in Singapore. Administered and handled by Enterprise Singapore (ESG) alongside the participating financial institutions, they have come up with two loan schemes suited for SMEs.

Enterprise Financing Scheme

An umbrella scheme for the financing schemes offered by Enterprise Singapore, the EnterPrise Financing Scheme (EFS) covers seven areas to address business’ financing needs. These include green projects, SME working capital loan, SME fixed assets loan, venture debt loan, trade loan, project loan as well as the Mergers & Acquisitions Loan. You may want to consider this if you are interested in micro loans, equipment and factory loans, or venture loans for your SME.

To be eligible for the EPS, you need to fulfill the following criteria:

Unsecured Business Term Loans

Unsecured business term loans are issued and supported by the borrower’s creditworthiness. A borrower’s creditworthiness is often determined by your business’ financial health, repayment history, and credit score.

Popular for its flexibility, SMEs often take up such loans to fund both their daily operations and business expansion plans such as opening a new retail outlet.

Further, such loans are also collateral-free. As such, unsecured business term loans can be disbursed quickly and at short notice. Having said that, because it is collateral-free, unsecured business term loans often carry high interest rates.

Business Term Loan

Business term loans involve borrowing a sum of money from a lender, normally banks, and paying it back on a fixed schedule over a stipulated period of time, also known as a term.

While the majority of lenders have a fixed interest rate, there are a few which offer variable interest rates.

Invoice Financing

A channel for small businesses to borrow money against the amounts due from customers, invoice financing aids businesses in boosting their cash flow. By boosting the business’ cash flow, it helps small businesses to pay their employees, suppliers as well as make investments.

Invoice financing can be done either through factoring or discounting. Invoice factoring involve the business (borrower) selling its unpaid invoices to the lender, who may pay the business up to 90 percent of the invoice amount upfront. The lender will then remit the remaining 10% to the business who will then pay interest for their service.

On the other hand, for invoice discounts, the business collects money from customers. Should However before customers pay their invoices, lenders will pay the business up to 95% of the invoice amount. Once the business receives payment from the customer, they will repay the lender the total amount on top of a fee and/or interest.

Venture Debt

Venture debt is designed for startup small businesses with fast growth potential that already have venture capital funding. Unlike typical business loans, venture debt does not require borrowers to offer their assets to serve as collateral. In most cases, the principal amount of debt, or money borrowed, is 30% of the total funds raised in the last round of equity financing. Equity financing is essentially raising capital via the sale of shares.

Venture debt is usually paid off through interest payments, either based on the prevailing rates that the banks charge or the SORA rate, a benchmark interest rate.

To make up for the high default risk and to ensure that the lenders receive a fair level of return, warrants are issued by borrowers. Such warrants provide borrowers with the right to buy the company stock at a specific price within a specific period of time.

Business Line of Credit

Similar to a credit card, a business line of credit is a type of loan issued to SMEs. It provides SMEs with a line of credit that can be used at any time. However, unlike a credit card, you may offer collateral to secure your business line of credits. As such, interest rates charged will be lower.

During the draw period, SMEs may tap onto the line of credit through writing checks or cash withdrawals. Further, interest will only be incurred on the amount that you borrow.

Once the credit limit has been reached, the repayment period begins. During the repayment period, SMEs will not be able to borrow beyond their credit line and must pay the outstanding amount through fixed monthly payments.

Who to Apply To

Apart from the traditional banks, there are other financial institutions as well as money lenders who offer SME loans.

Licensed Banks

Banks are typically the first financial institution that you would think of when you intend to apply for an SME loan. In Singapore, banks that you may take an SME loan from include but are not limited to the following:

While getting a business loan from a bank may sound tempting, their approval rates are relatively low. This could be attributed to the strict filtering and approval process. Normally, most banks look out for the following attributes:

As such, do keep in mind the above factors when filling in the application form and ensure that your business performs well in these areas.

If your business is keen on applying for an SME loan from a bank, our top pick would be the DBS Business Term Loan. You might want to consider this if your SME has a strong track record and is looking for a traditional bank loan.

DBS advertises attractive business loans with competitive interest rates (from 10.88%), maximum loan sizes (up to S$500,000) of up to 5 years. They also offer a variety of other products with higher-than-average maximum amounts to borrow. Taking a traditional banking loan or line of credit is ideal for companies who have a stable source of income or annual sales.

Non-bank Financial Institutions

Licensed by the Monetary Authority of Singapore (MAS), there are also financial institutions that offer SME business as well as startup business loans in Singapore. While such firms may not offer all the services that banks offer such as foreign exchange services, businesses big or small normally have a higher chance of securing a loan with them.

Hong Leong Finance as well as Sing Investments & Finance Limited (SIF) are two of the many non-bank financial institutions in Singapore. Click here for the full list of Participating Financial Institutions (PFIs) under the EFS.

If you are looking to borrow from a non-bank financial institution, you can consider Validus. You may consider this if your SME requires a larger amount of capital over a short period of time.

Validus is a cost effective option for many businesses due to its competitive rates that start at 0.75% per month. Additionally, the platform offers competitive cash disbursement, with 90% of approved businesses receiving funding within 48 hours. Businesses may borrow up to S$1,000,000 for invoice financing, up to S$150,000 for working capital financing, and up to S$120,000 for purchase order financing, which makes Validus a good option for small to medium short-term loans.

Overall, Validus Capital can be a good choice for more established SMEs who want to use a straightforward platform to borrow money.

Peer-to-Peer Lending

Connecting SMEs to individual investors looking to finance business loans, peer-to-peer lending platforms facilitate the process.

On such platforms, potential borrowers, in this case, SMEs, will be listed. Investors will then analyse their individual profiles as well as credit scores before deciding to issue a loan to them. Similar to loans given by non-bank financial institutions, the eligibility criteria are also less strict compared to that of banks. Lenders, or the investors, profit from the interest of the loan amount. As such, peer-to-peer lending benefits both the lender and the SME.

For those who intend to take up a loan using a peer-to-peer lending platform, we recommend Funding Societies. You may consider this if your small business seeks working capital loans and invoice financing.

Funding Societies’ FS Bolt is the only loan that offers near-instant access to cash (within 24 hours) up to S$100,000. With low monthly interest and processing fee, this microloan is relatively inexpensive compared to other long-term loans in the market. While you can only borrow money for up to 12 months, this is a common feature for many SME loans.

Funding Societies also has a competitive product called the Accounts Receivable Financing (previously called invoice financing). This allows customers to withdraw 80% of their invoice(s) up to S$1,000,000. To be eligible, businesses only need to be registered in Singapore and in operation for at least 6 months. This makes Funding Societies a good choice for new businesses and startups. Companies are also not required to submit operational history or financial history, and there is no collateral needed or charges for early repayment. With over S$2 billion funded, the firm has a proven track record of helping SMEs.

Eligibility Criteria

Each financial institution and lender will have its own eligibility criteria. However, the majority of them will follow a basic set of eligibility criteria to filter out SMEs that are eligible for SME loans.

Having understood the four key factors to consider when applying for an SME loan, check out our roundup of the Best SME Loans for Small Businesses in Singapore to find the best SME loan for you!