Here’s 3 Types of Business Loans You Can Use for Your Business Expansion

Most people set out to start their businesses with excitement, but many of them, even those who plan well and save to start up, often run out of money along the way. Whether it is working capital that you are short of, or you need the money to expand the business and take it to the next level, borrowing is usually part of the game. As individuals, people are often admonished to keep their borrowing low, but this is because most times individuals borrow to consume. Borrowing for the business, otherwise known as business financing, is a common practice for businesses large and small.

Businesses tend to borrow strategically with an aim to grow the business. Most times, the money is used to scale up their operations, to cover costs of operation, or to ensure that they can take advantage of the opportunities presented to them for more business. It is therefore important that business people have a good understanding of the various lending options available to them, in order to use them more effectively.

Four common reasons for business financing

Most business people take loans for the following five reasons:

• Expansion – Once the business is set up and begins to grow, it usually needs a capital injection to take it to the next level. This is essential to stop the business from either plateauing or shrinking. Growth may include the purchase or leasing of new or bigger property, renovations of the current building, recruitment and new hires, advertising, increased marketing efforts and more.
• Inventory – Expanding and replenishing inventory is a delicate balance. You don’t want to have inventory that just sits, but you also want to make sure that you can fill large orders as they come. In the event of a big order, an inventory loan will take care of purchasing inventory without interfering with cash flow.
• Cash Flow – Small businesses in particular struggle with ensuring that they have enough cash flow. Problems ensue when there is a shortage of cash flow because paying staff, utilities, the mortgage or rent becomes an uphill task. A loan can help manage operation costs as you continue building the business.
• Equipment – Every business requires some form of equipment. It could be office computers and printers, or machinery to manufacture products. If any of these suddenly breaks down, replacing or repairing it can be expensive. A loan can help you out.

Here are three of the most popular business loans taken in Singapore. It is up to you to figure out which loan is most suitable to the needs of your business.

1. Unsecured loans – These loans are suitable for business that need to expand or are in need of cash flow injection. The reason the loan is considered unsecured is because there is no need for collateral. Instead, the bank needs a guarantor to sign off on the loan. Luckily, the government of Singapore is working hand in hand with banks to ensure that entrepreneurs get cheaper government-assisted loans. Some of those loans include:

• Business first loan – If you have been in business for 6 months you are eligible for an unsecured loan of up to $100,000 to be paid back over a period of 4 years.
• SME working capital loan – Businesses that are 2 years and up and are looking for an unsecured loan qualify for this one. They can take as much as $300,000 and pay it back over a period of 5 years.
• Revolving short-term loan – This loan gives the business access to revolving funds that can be borrowed and repaid as needed. Interest is only paid on the money borrowed.

2. Commercial property loan – This loan is best for businesses that want to purchase property of their own. If a business wants to purchase commercial property, they need to take this loan in the same way that someone needing to purchase a house will take a home loan. A down payment of 20% or more is required, which means that a business can get as much as 80% of the money needed to purchase the property, or of the valuation amount, whichever of the two is lower. Repayment is over a 30-year period.

3. Equipment financing – This is a loan for businesses looking to purchase machinery or equipment. Equipment and machinery loans are available and one can get as much as 90% of the equipment’s purchase price or valuation price, whichever of the two is lower. The loan is paid back over an 8-year period and can be used to purchase of used or new equipment.

Participating banks

The government enterprise financing scheme has partnered with a variety of lenders in Singapore. This means that one is spoilt for choice on where they can get the financing they need for their business. The list includes the following lenders:

• DBS Bank Limited
• Maybank
• The Hongkong and Shanghai Banking Corporation Limited
• RHB Bank
• Hong Leong Finance Limited
• Standard Chartered Bank
• ORIX Leasing Singapore Ltd
• Indian Bank
• IFS Capital Limited
• GE Commercial Financing (Singapore) Ltd
• United Overseas Bank Limited
• Oversea-Chinese Banking Corporation Limited

Loan interest rates for business loans vary from one lender to the next depending on the loan product. The EIR range falls between 6.5% and 11%. The eligibility requirements also vary depending on the type of loan one is looking for. Startup loans can be given to businesses that have been operational for the last 6 months, but more typical requirements are as follows:

• An operational history of between one and two years
• A bank account that has maintained an average daily balance of $10,000 on average
• An annual revenue of not less than $300,000

It is important that one check the eligibility criteria of the loan they are interested in before putting in an application. In addition, shopping around for loans may lead you to better deals than if you settled for the first bank you come across. Due diligence should therefore be done.

Loan processing

A loan application takes between two and three weeks to process. If the case is more complex, it may take even more time than that. This means that you should put in your application well ahead of time. It is also advisable to furnish the bank with all the supporting documents as you submit the application to avoid delays.

In the event that the loan is required urgently, speaking to an SME loan consultant will help with the loan application process. He or she can help you expedite the process because of their experience with loan applications and processes.

Local banks

It is common knowledge that most SMEs in Singapore prefer to bank with the three local banks, namely DBS, UOB, and OCBC. These three dominate the SME market and are considered safe places to bank. As such, most SMEs tend to take loans from the three. The loan terms tend to be pretty much the same across these three banks with a few differences here and there. An example is the unsecured business term loan.

DBS offers a loan amount of 500k for 5 years. The interest rate on the loan is 10.88% p.a. They do not have a penalty for early repayment and they charge a 2% loan processing fee.

OCBC offers a loan amount of 500k as well for a term of 5 years. The interest rate is the same at 10.88% p.a. and the processing fee is 2%. They charge and early repayment penalty of 3%.

UOB on the other hand offers a maximum loan amount of $350,000 for a term of 4 years. The interest rate remains the same at 10.88% p.a. and the processing fee is 2%. They charge a much higher early repayment penalty of 6.88%.

It is therefore up to the business owner to make shop around and find what works best for him or her.