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Let’s compare DBS business loan, OCBC business loan and UOB business loan to review how they stack up against each other.

The 3 local banks are undoubtedly the dominant players in Singapore’s SME financing space. With strong branding and sturdy balance sheets, our 3 homegrown banks continue to dominate Asia’s safest banks rankings year after year.

DBS and OCBC are ranked the top 2 safest banks in Asia and UOB at 4th place for 2016.

dbs business loan, ocbc business loan, uob business loan

Image credit: http://www.straitstimes.com/business/banking/dbs-named-asias-safest-bank-ocbc-at-no-2-and-uob-at-no-4

 

Most Singapore SMEs have at least a banking account with the 3 local banks due to their wide retail banking network and brand name familiarity.

When it comes to applying for a business loan, most SMEs will naturally gravitate towards these 3 banks as well.

How attractive are the 3 local banks business loan offerings compared against each other?

We’ve done some research via mystery shopping calls to their respective SME loan departments and quick checks on their website product page. Here are the results we got:

DBS Business Loan

DBS offers an unsecured business term loan for SMEs.

  • Maximum loan amount is $500K.
  • Maximum loan repayment period is 5 years.
  • Interest rate starts from 10.88% p.a.
  • Processing fee 2% of loan amount
  • Repayment method via equal monthly instalments calculated on monthly reducing principal
  • No early repayment penalty

OCBC Business Loan

OCBC’s business loan product is similarly termed business term loan as well.

  • Maximum loan amount is $500K.
  • Maximum loan repayment period is 5 years.
  • Interest rate starts from 10.88% p.a.
  • Processing fee 2% of loan amount
  • Repayment method via equal monthly instalments calculated on monthly reducing principal
  • Early repayment penalty 3%

UOB business loan

UOB’s unsecured term business loan is named ‘BizMoney’:

  • Maximum loan amount is $350K.
  • Maximum loan repayment period is 4 years.
  • Interest rate starts from 10.88% p.a.
  • Processing fee 2% of loan amount
  • Repayment method via equal monthly instalments calculated on monthly reducing principal
  • Early repayment penalty 6.88%

local banks business loan compairson

 

Which bank business loan should you choose?

Based on the information above:

We conclude that all 3 banks business loans product features are very similar. They are also priced almost identically with all 3 banks’ business loan interest rates starting from 10.88% p.a. EIR.

UOB’s business loan features are less attractive with the maximum quantum of $350K compared to both DBS and OCBC at $500K. UOB’s early loan redemption penalty is also the highest at 6.88%.

P.S. Although all 3 banks publish their maximum loan quantum, do note in our experience, it’s not easy to qualify for their maximum limit. Most borrowers, we think, will not be offered the maximum amount unless financials and all credit aspects are exceedingly strong.

If you:

Intend to redeem your business loan earlier than the approved loan tenure, you should go for DBS’s business loan as it allows early redemption at any time with no penalty.

The above figures are for reference only. Although product features are similar, do note that all 3 banks have different internal credit criteria.

For example:

OCBC will require the applicant company for its business term loan to be registered for minimum 2 years while UOB will require minimum 3 years of incorporation.

Which means for newly registered companies less than 2 years’ incorporation looking for a startup business loan, the 3 business loan products reviewed here might not be eligible.

There are other multiple factors and credit criteria that differ between the 3 banks, including age limit of director, industry nature of business, minimum annual revenue requirements etc…

Aside from our 3 local banks, do you know that there are about 20 different banks, financial institutions and alternative lenders that offer financing for SMEs?

To help you navigate the different criteria and credit requirements of all financiers, you can easily compare all banks’ business loan in Singapore with a free online loan assessment and see all your loan options instantly!

 

Disclaimer: Linkflow Capital Pte Ltd does not purport to represent any of the 3 local banks in any manner. We are not able to guarantee the accuracy of the information presented here perpetually as the banks might adjust their product features over time. All information on the 3 local banks business loan products presented in this article were obtained in April 2017 via their respective websites and hotlines. The information presented here is not meant to be relied on solely. If in doubt, please verify information again with the respective banks or seek professional help.

 

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outsource financing

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective outsourcing of certain non-critical business functions will enable a SME to focus resources on key tasks for growth. Which aspects of the business should be outsourced and which to keep in-house?

For most SME owners, you are most likely wearing a lot of hats in the business. You are most the likely the Chief Officer of everything. For new business start-ups, it’s common for the business owner to provide a lot of sweat equity and elbow grease in the initial phases.

Into your small business’s second to fifth years, you likely have experienced some growth. Your small start-up might be growing into an operational nightmare and you soon realized managing the business is sucking more of your time.

At this stage, you’re probably looking into outsourcing some functions to stay lean and manage your time more effectively.

It might be difficult to let go initially since you’re used to over-seeing all aspects of your company. However, without letting go and delegating some roles, it’s tough to scale up and regain sanity over your work-life balance.

Which business functions should be outsourced out?

 

  • Advertising, marketing & branding

You should already have a deep understanding of your key markets and ideal customer profile. With this basic info, you can begin outsourcing your advertising and marketing functions to an agency to manage.

A competent marketing agency should be able to enhance your company’s brand image and market positioning. They should also be able to come up with ad messages that resonate well with your target market.

Do not outsource this function if you’re a brand new start-up. Reason is because most companies will need one to two years to slowly iterate their key product offer and scope out their ideal buyer persona after spending time and money in the trenches.

If you’re a brand new start up, do not expect the marketing agency to know how best to position your company message, key product and market positioning if you’ve not tested it in the market yet.

  • Customer service

Never ever contract out your customer service.  Especially if you’re in a highly competitive and increasingly commoditized industry such as fashion retailing.

In highly commoditized industries where consumers are price sensitive, an exceptional customer service culture is a powerful differentiator between you and your competitors.

Unless your company is a monopoly or oligopoly in your industry and consumers do not have much choices (i.e. telco market), it might be cost effective to outsource your customer service department.

  • Software development

To improve productivity, you might start exploring the idea of developing customized software solutions such as CRM (customer relationship management) or inventory management software.

For such highly technical services such as software development, you should definitely outsource to external vendor instead of hiring an in-house IT team.

Unless you are a high tech innovation start-up,, contracting out software application design and development could be a big error- particularly if that’s core to your product and services.

  • Recruitment

This is another job function you could outsource out especially if your company’s headcount is not high and you don’t have a need to upkeep an internal HR department.

For senior positions that you’re hiring for, recruiters might be able to tap onto their extensive candidate’s database to help you source for a suitable hire.

Most recruiters also do not charge upfront fees and placement fees are only charged when they managed to source suitable candidates that you like.

Outsourcing recruitment will save you hours of your precious time filtering un-qualified resumes.

  • SME loan Singapore application

You might require external financing at certain stages of your business to expand and size growth opportunities.

Applying for a SME business loan either for working capital purpose or additional capital to fund expansion could be a tedious process.

If you’re not familiar with all the banks’ various credit criteria and process, it might be more effective outsourcing this function to a SME financing specialist.

A SME loan Singapore consultant could help you source and identify the lowest business loan interest rate and suitable banks for your financing needs.

Save time and hassle of approaching multiple banks to check the lowest rates and the tedious application process.

  • Accounting and bookkeeping

If you’re running a small SME, you should definitely outsource your accounting and bookkeeping roles to a qualified accountant.

Accounting is not a core function for many SMEs and delegating this role will save you weeks, if not months of numbers crunching work.

However, it is still good practice to meet up with your accountant at least half yearly to review the company’s figures and have a good overview of key financial figures.

All SME owners should know their biggest expense item, revenue trajectory for the last 3 years and liquidity ratio.

 

Effective outsourcing and delegation of non-core activities will ensure that your company does not become too bloated and remain competitively agile.

As the company owner, you should also identify which areas of the business you enjoy working in the most. Do not outsource this area but instead, immerse yourself and deploy most of your resources into it

This will help you prevent burn out while keeping your passion for the business thriving. If you’re the sales type, designate yourself as the chief business development officer. Maintain all key accounts and buyers with your own personal touch. Concentrate on growing revenue while delegating administrative functions to external parties.

If you’re the product development type, assign the role of product development head to yourself. Use your time effectively by researching and developing the innovative and ground breaking product that will smash the competition.

Outsource and delegate smartly and you soon find that you have more time on your hands. By effectively channeling this extra time to more productive areas of your business, you will build up momentum over time for your business to thrive and scale effortlessly.

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business loan criteria

 

You might require a working capital loan to support your company’s growth phase. While there are many aspects of banks’ loan assessment, below are the 4 critical factors that influences the credit decision.

  • Financial statements and tax returns to prove net worth and income

Financial statements including profit and loss statement will tell the banks your company’s performance for the latest year.

Banks will assess whether if your business is able to generate enough income to cover existing expenditures. Most importantly, lenders want to be assured that your business is able to service the loan repayments on existing cash flow.

Validating your earnings will require 2 sets of documents. Aside from the above mentioned latest year to date financial statements, banks might also require your company’s tax returns to reflect the profit or loss declared.

If you’re able to show with certainty that company is profitable for last few years, you should have more funding choices when sourcing for business loan Singapore.

  • Credit rating of the director

From a loan provider’s view, your credit rating is a strong indicator of your credit worthiness. You’ll have accessibility to more working capital loan funding options if you have a high personal credit grade.

If you have bad repayment records and poor credit grading, your alternatives for financing will certainly be a lot more restricted.

Be prepared to be quoted with higher business loan interest rates as well as lenders would have to charge a higher interest to mitigate the higher risk of default.

Since the director’s personal credit grading is a strong signal of credit worthiness and reliability, it is essential that you always maintain prompt payment records for your existing personal facilities.

This is a critical and essential factor when it comes to loan assessment.

3. Cash float maintained in bank account

Banks will assess the average cash balances you carry in your company’s bank account during loan application assessment. The more cash float you have, the more positive the assessment.

A very common question we get often is why would I want to have so much cash in my account when I’m applying for financing. If I have cash for working capital, why would I require even more? Nevertheless, banks would still like to know exactly how much liquidity you have in your accounts you can instantly access if required.

 Profitability is a mark of running an effective business. Lenders are not as much interested in just your profits— they want to know exactly what you do with the profit after you make it. Credit approvers would like to see if you could preserve adequate cash flow buffer in your accounts or if you re-allocate it as quickly it comes into your bank.

Despite your revenue figures, banks wish to see that you have sufficient liquid cash to roll. This raises their confidence that your company will be a going-concern and you have enough cash on hand to repay the loan.

Preferably, most banks would like to have enough cash flow to cover at least 3 months of overheads as well as loan repayment installments.

  • Period of operations

Most SMEs will cease business within first 3 years. The percentage of small businesses that can make it past 5 years will be even narrower.

With such dismal survival rates, it’s no surprise that banks would very much prefer to finance companies with at least 3 years of operational history versus brand new start up.

Therefore, the period that you have stayed in business is another major factor on your capability to acquire funding. If you are a new start up operating less than 2 years. you could be better off managing with your existing resources first or seek other alternative funding.

Wait till your company is a little bit a lot more well established before exploring mainstream banks financing.

 

There are too many other factors that affects your chances of qualifying for working capital loans. The above 4 factors are the most critical ones that all SME owners should take note of.

In summary, be mindful of the above discussed 4 critical factors and you should be in a good position the next time you are sourcing funding.

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Have you wondered what exactly is the business loan criteria to qualify for financing in Singapore? Did you ever had your business loan application rejected by banks?

It is a common practice for most banks and financiers not to reveal the reason for business loan rejections. Most SME owners are usually left in the dark as to the specific reasons why their applications were rejected.

You might chance upon a business opportunity to expand your company but lack of capital is hindering your plans. It is therefore vital that you have some basic information on the credit criteria of banks for business financing.

With this knowledge, you’ll be well prepared to optimize your chances of securing an approval when opportunity strikes and you require financing to exploit a good business deal.

Banks will not openly disclose their credit criteria for obvious reasons. Further, no two banks have the exact same credit assessment. It is perplexing for SME owners not in the know to guess what are the loan assessment factors of banks.

Thankfully, we can reference upon a classic old school credit assessment methodology which most business lending criteria is loosely based on.

And that is:

The 5 Cs of credit

5Cs of credit

Source: http://www.crestmark.com/the-five-cs-of-credit/

 

The 5 Cs comprise the basic steps that are used to evaluate a business’s credit worthiness. The following frame of reference is adopted by banks as business loan criteria.

  1. Character:

The first thing judged in a potential borrower is his credit history. This can also comprise records of your personal credit history as well as the history of your business. Banks usually analyze your credit bureau report on payment conduct, your existing loans and how long you took to clear your outstanding loans.

It is logical that someone who’s tardy in their payment conduct will likely not be a prompt paymaster.

  1. Capital:

The amount of money that had been invested in the business by the borrower, is acknowledged as capital or equity. The banks’ credit officers inspect the amount of capital of the business.

Of course, the higher the capital the more safety buffer lenders have in event of loan default. But if capital is negative, i.e. total liabilities are more than total assets, the borrower is deemed to be “negative equity”. This will be extremely adverse for loan assessment.

  1. Collateral:

If unfortunately, a borrower defaults on a loan, then the bank has the legal rights to make claims on any valuable financial asset, to compensate for the unpaid arrears. These assets pledged to the bank for facilities granted is known as collateral.

An intangible collateral in the form of personal guarantees can also be signed by a third party who, agrees to pay your arrears, if you are unable to. A strong collateral secures the trust of the lender and provides additional assurance.

  1. Condition:

A lender’s first question is usually asked in relation to why a loan is required. It can be understood as what is the borrower’s intent behind acquiring a loan. It might be needed as a capital required for investment in a business, to expand your business or even to purchase new inventory and equipment.

The condition may also refer to the prevailing circumstances of the local economy. If there is an ongoing recessive economy conditions, then it might lower your prospects of securing a small business loan.

  1. Capacity:

Your ability to repay the loan is considered as capacity. Bank lenders are mostly interested in how you plan to pay your debt and how long it will take to settle your loan. This can be calculated by analyzing your debt-to-income ratio.

With a higher debt-to-income ratio, lenders usually hesitate to issue a loan. Mainlining a healthy positive cash flow will also aid in the assessment of capacity to repay your dues.

business loan approved

No modern banks still rely solely on the 5Cs as business loan criteria today. But this methodology will still give you a good overview on the fundamentals of credit criteria that influences lender’s decision to grant a business loan.

Landing a business loan Singapore is not much of an arduous task. Be mindful of the 5 Cs discussed above and that should put you in a good position to have your business financing approved.

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P2P Crowdfunding Trend in Singapore

The vibrant fintech scene in Singapore for the past 2 to 3 years has been growing, with much credit due to the Singapore government. Singapore is making a determined effort to maintain and entrench its status as one of the world’s leading global financial center.

The relevant authorities such as MAS (Monetary Authority of Singapore) has widely been acknowledged as forward looking with regards to supporting the growth of the fintech industry in Singapore.

The financial industry contributes 12.5% of Singapore’s GDP as of 2015 and is considered one of the key pillars of our economy.

Sector Singapore GDP contribution

The disruption of traditional industries is in full swing globally and the financial industry with decades old large banks and financial institutions is ripe for massive disruption as most players in fintech today would believe.

Some of the common sub segments of the fintech space includes payments and remittances, blockchain technology, and peer to peer lending (P2P). Here’s a list of the top 30 fintech startups locally: http://fintechnews.sg/top-30-fintech-startups-in-singapore/

The most notable sub segment of fintech in terms of media coverage and exposure would be P2P crowdfunding. Some of the early pioneer crowdfunding platforms includes Moolahsense and Funding Societies.

What is P2P lending? It is basically a form of crowdfunding where a group of retail investors can pool their individual funds and lend it to companies for working capital.

There will be usually a crowdfunding platform which will consolidate these investors’ funds and facilitate the loan origination. These platforms will list potential companies and SMEs as borrowers on their platform. Investors get to view these borrower’s basic financial profile and key statistics while deciding whether to invest in the listing.

The basic premise of crowdfunding lies in disruption of lending which was traditionally carried out by the banks. On a very simple illustration, our local banks pays interest of less than 1% p.a for fixed deposits. However, banks’ business loan interest to SMEs can be as high as 11% p.a.

In an over-simplified context, the core business of banks are utilizing deposits from savers and lending them to companies or other individuals, with a high markup on interest which represents the bank’s net interest margin.

Most crowdfunding platforms aim to disrupt this traditional lending conduit by establishing a platform marketplace where borrowers and lenders can come together to facilitate borrowing/lending bypassing the high margin markup of the market intermediaries, the banks.

All parties are supposed to benefit in this arrangement with investors getting higher returns, borrowers securing loans which might otherwise be rejected from banks and the platform receiving a slice of the loan origination fees.

Some crowdfunding investors have reportedly managed to hit a return of 12% p.a. for 2016, which is a very attractive rate of return in today’s low yield market.

All this looks good on paper but will P2P lending take off in Singapore as a legitimate and viable investment asset class? Should the banks be concerned about crowdfunding disrupting their dominance in their core business?

It’s a mixed bag of reviews for the nascent P2P lending industry in Singapore currently. Globally, P2P lending remains dominated by US and UK, whom were the first to kick off P2P crowdfunding on a large scale. China played catch up in this domain but is now a viable contender itself with over 332 platforms operating within as of 2016. Chinese crowdfunding platforms has also attracted millions of VC capital in the last few years.

Lending Club, one of the leading and earliest pioneer in P2P lending in the US originated loans of $8.4 billion in 2015. It is also a listed company with a $9 billion valuation. Without a doubt, Lending Club is a successful case study of P2P crowdfunding platform that exited successfully via IPO.

However, it’s not possible for Singapore’s current crowdfunding platforms to emulate the success of Lending Club and other similar platforms as Lending Club’s borrowers are predominately individuals. Singapore has regulations in place and P2P lending from individuals to other individuals will most likely fall under the purview of the Money Lender’s Act. Singapore also does not have a large enough market size to scale easily within the domestic scene.

Most crowdfunding platforms operating in Singapore now are facilitating loans to SMEs and companies. Credit risk is higher as most of these SME borrowers might not be eligible for credit from mainstream banks.

There are inherent platform risks as well with previous cases of suspected fraud and scams by entities that fronted themselves as crowdfunding platforms promising investors of high returns. Some of the loans defaulted with fraud suspected and the police were alerted.

For the slightly more established platforms, news of the first potential loan default also made the rounds in mainstream media. It is a guaranteed in the lending business that there will eventually be defaults in loans. Even mainstream banks set aside accounting provision for non-performing loans. However, as P2P lending is a relatively new concept here, the potential default did raise some eyebrows locally.

MAS will probably have the Lehman Brothers mini-bonds crisis of 2007/8 in the back of their mind while pondering specifics to regulate the industry.

One of the biggest crowdfunding fraud took place in China. Ezubao, a platform that was found subsequently to be operating a Ponzi scheme collected over $7.6 billion from investors. Authorities found out after investigations that almost all investment products listed in the platform were not genuine.

Local regulator MAS has also moved to regulate the industry. In June 2016, MAS announced measures to improve access to P2P for investors as well as borrowers. Crowdfunding platforms are required to have an CMS (Capital Markets Services) license to operate.

The move by MAS is not inferred as a restrictive one for the industry but instead serves to better protect retail investors and to lay out a comprehensive regulatory environment for all stakeholders involved.

In fact, the MAS has been open to fintech in Singapore and seeks to be an enabler without excessive stifling of innovative cutting edge ideas and technologies. The regulatory sandbox guidelines issued by MAS is an example of accommodating policy where fintech startups have the space to experiment and grow at their own pace.

2015 was also a challenging year for the local economy with GDP growth estimated to be 1.8% for the full year, the lowest since the last major economic crisis post 2008. SMEs whom are the main target borrowers for P2P lending struggled to obtain financing and to keep afloat.

As the various crowdfunding platforms classify loan defaults differently, we don’t have a conclusive statistic on the defaults percentage across all platforms. With the slowing economy, we feel that non performing loans for the P2P industry will remain a concern for 2016.

A prevailing problem is the very nature of P2P lending itself. As the platforms have to offer returns that is high enough to incentive borrowers to lend as well as to compensate them for the high risk involved, most borrowers whom will accept relatively high interest rates are usually ‘un-bankable’.

These SMEs might face difficulty qualifying for business loans from mainstream banks and thus turn to crowdfunding to access financing. If the sector lies unregulated and credit underwriting of platforms are not robust, loans default will go up and investors might lose their entire capital amounts.

We observe the recent trend of platforms moving to securitize loans in the form of invoice financing and factoring. As most SMEs would not be able to provide hard assets such as property or equipment as collateral, extending loans that are backed by receivables with quality debtors is a positive move in view of the slowing economic landscape.

Overall, we are not optimistic that P2P lending will take off in a big way in Singapore. The expectations of investors on risk to return yield is tough to match against borrowing costs quality borrowers are currently paying to banks in interest. The market in Singapore is also too small to accommodate the current number of platforms.

For the rate of return to be driven down to attract otherwise bankable and quality borrowers, platforms must be able to scale fast and attract large numbers of borrowers and listings to diversify investment risk.

This is an uphill task as only major banks with structural advantages over startups can originate loans with large lending volume to diversify lending risk. Banks also have access to data that might not be privy to the platforms and credit bureaus such as credit and demographic profiling.

Crowdfunding platforms monetize via loans origination. Critics of P2P lending will point out that the platforms can only generate revenue by listing as many borrowers online as possible and does not have to bear any default risk. Interests of the platform might not be totally aligned with that of its investors.

Another trend that we observe is the emergence of second and third wave of new crowdfunding entrants. Most of these new players does not bring much groundbreaking innovation and by and large, business models are the same as the initial platforms.

Their presence might encourage refinancing of problem loans where borrowers on pioneer platforms whom are on the verge of default roll over their debt to the new platforms.

The new platform entrants might not be aware of repayment issues of such borrowers and in a bid to gain traction, on-board these borrowers. This will result in a game of musical chairs where the last platform holding on to the ticking time bomb will implode.

There are even some platform that promotes their problem borrowers to their competitors in a bid to avoid default being triggered on their platform.

A prevailing practice is the non-disclosure of borrower’s company name in listings. Reason citied was by reflecting the names of borrower on their platforms as was done initially, competitors will call up these borrowers in a bid to swing them over to competing platforms. This results in diminished transparency for investors as due diligence can’t be carried out prior to actual investment.

We feel that P2P lending will not displace the role of the banks anytime soon due to the massive structural and branding advantage banks have.

As an alternative investment class, investors might still be able to generate above market returns but proper due diligence and risk diversification is key.

For SMEs whom like to compare financing options available for traditional bank loans and alternative P2P crowdfunding loans, our comparison site smeloan.sg offers an instant loan assessment tool.

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How US Rates Hike Affect Singapore SMEs

The US Federal Reserve raises rates on 14 December 2016 for the first time in nearly a decade, and how does this affect Singapore SMEs? For one, cost of business loans are expected to creep up.

There are several other ripple effects the Fed rates hikes might have on our SMEs which we’ll discuss below. Before that, why would US increase their federal fund rates after almost a decade and almost 8 years of extraordinary super low rates environment from 2008’s financial crisis?

The 2008 global financial crisis, triggered by the defaults combustion of the US subprime mortgage sector, embroiled global financial markets into the worst crisis since the Great Depression of 1930s. The US Federal Reserve chairman Ben Bernanke then rolled out what was a controversial monetary policy of quantitative easing (QE), where money supply was increased drastically.

The multiple rounds of QE from the US and later the central banks of some of the world’s developed economies flushed the global market with cheap money by lowering borrowing costs. This monetary policy was pursued to kick start the free falling economy by encouraging businesses to borrow for investment and consumers to increase spending. Global interest rates remain depressed from 2008 till 2016 as money supply flooded financial markets.

This heralded the era of abnormally low interest rates. Some countries such as Sweden, Japan and Switzerland even experienced negative interest rates. This is an interesting situation where savers technically have to pay the bank interest to deposit their funds.

Closer to home, our domestic benchmark interest rate SIBOR (Singapore Interbank Offered Rates)  has largely moved in tandem with US rates.

 

business loan

From the chart above, Sibor ticked up close to 1.2% by December 2015 as markets start to price in the expected rates hike from the US Fed.

Citing an improvement in recent US economic and jobs growth, the current chair of the Fed Janet Yellen announced the widely expected increase in the Federal funds target range from historical lows of 0.25%-0.5% to the revised range of 0.5%-0.75%.

If the Fed deems that jobs growth indicators are positive in the near to mid-term, there would be no impetus for them to continue keeping rates low which was intended to encourage US businesses to borrow for investment and expansion, creating jobs in the process.

The Fed’s move to increase rates was not an unexpected one. However, what some economists did not anticipate was Yellen’s indication of a further three more hikes in 2017 where only two were expected. The main reason for the rates increase mentioned in Yellen’s announcement was that inflation expectations have increased “considerably” due to the moderate pace of expansion from economic activities.

A common policy tool that central banks will adjust levers on to keep inflation fears in check is increasing benchmark interest rates. By gradually increasing rates, central banks attempt to slow down inflation and prevent over heating of the economy.

As the world’s biggest economy and Singapore’s third largest trading partner in 2015, how will the Fed rates hike affect SMEs in Singapore? And how should small businesses react to these impacts?

  • Higher business loan and property loan interest rate

The most obvious and direct impact US rates hike would have on local SMEs would be an expected increase in costs of borrowing. As Sibor rate is closely correlated with the movement in US interest rates, it does not take an economics professor to deduce higher business loan interest rates locally.

For SMEs whom are servicing commercial and industrial property loans for their business premises, they might find their mortgage instalments increasing from 2017.

Most companies’ property loans are variable rates package tied to bank’s board rates or Sibor rates as reference rates. These variable rates packages would have served the companies well from 2008 to 2014 as interest rates remain subdued at historical lows.

If interest rates begin to “normalize”, companies might see their property loan instalments spike up significantly in the near future. In perspective, the Sibor rate prior to the 2008 global financial crisis from 2000 to 2007 was averagely at 2.01%.

3 month sibor

Compared to the average Sibor rate of 0.61% from 2008 to 2015, current Sibor rates potentially have room to increase more than 300% with reversion back to the mean.

In view of the expected increase in property loan interest, SMEs whom are still servicing property loans can explore fixed rates property loan packages when their current property loan is out of the current financier’s lock in period.

Although banks will generally place a premium on fixed rates packages which is priced higher than variable rates, SMEs might consider refinancing their property loans to fixed rates to hedge against rates volatility and uncertain times ahead.

A fixed monthly instalment with assured rates will enable the SME owner to plan and manage cash flow ahead. Receiving letters from the bank informing of property loan instalment increase every quarter will only add to uncertainty.

Apart from property loans, unsecured business loan interest rates might trend upwards as well. With increase in interest rates, SMEs face a double whammy of higher financing costs amidst a current protracted economic slowdown.

SMEs are already experiencing signs of higher interest, tightened access to credit and higher collateral required from the banks. In a recent 2016 SME Development Survey, more SMEs are expressing concern on higher costs of financing.

Facing higher business loan interest rates and restrictive access to financing, SMEs can instead tap on other non-mainstream ways to access financing including crowd funding and government aided financing schemes.

Alternatively, SMEs can make direct comparisons through business loan Singapore comparison portals to source for the most optimized loan options available.

  • Slower VC funding for startups

The startup scene is Singapore has been heating up in recent years. VC (venture capital) investments in Singapore exceeded $1B in 2014. Between 2012 to 2015, Singapore moved up seven places to 10th in an international report ranking startup ecosystems. From January to May 2016, Singapore attracted some US$1.15B in VC investments, the highest amount from a South-east Asian country.

VC funding 2015

Picture credit: Singapore Business Review. 2015 Singapore VC funding.

The impending interest rates hike however could slow down the growth of VC funding in the region. Traditional brick and mortar SMEs rely on business loans as main source of financing while startups typically raise financing via VCs. They should be slightly more insulated against interest rates hike but the ripple effect will play a factor in the VC fraternity as well.

It’s no coincidence that most of the billion dollar technology firms in recent history like Uber and Snapchat existed only after the 2008 financial crisis where benchmark interest rates were at almost zero.

In the low interest, low yield environment from 2008-2015, technology startups attract hot money like bees to honey. Startups have the potential to grow fast with a prospective high yield exit and are an attractive option in an environment where attractive yield finds are barren.

However, with rates increasing higher, speculative hot money flowing into startups will likely slow down. Investors might also channel funds into fixed income or dividend paying equities which offers a more attractive alternative to riskier startup bets.

This will all mean that SME startups that have no problem raising multiple series of funding previously during the boom years might see capital liquidity drying up. To deal with this potential market correction, startups can try to cut non-core expenses, turn cash flow positive in a shorter time or raise funds at lower valuations.

Another alternative to VC money is seeking funding through startup grants from the government such as the ACE startup grant or IMDA.

Ultimately, there is no stopping the technology revolution worldwide that is at full momentum now. Startups that can demonstrate the potential to deliver a viable product with means to scale substantially will find no lack of funding suitors.

  • US dollar appreciation against Singapore dollar

With Donald Trump’s electoral victory for the US Presidency, the US dollar began appreciating against the Singapore dollar and most Asian currencies. Pre-election, the exchange rate between USD to SGD was 1.39. This went up sharply to 1.41 post-election.

After the Fed rates hike announcement on 14th December, the USD spiked further up and at the time of writing (26 December 2016), USD/SGD is at 1.44.

USD to SGD chart

Photo credit: XE.com

Both Trump’s election victory and the Fed rates hike played a heavy hand on USD’s sharp appreciation in November to December 2016.

Trump has indicated that he’s open to large scale infrastructural projects and increase government spending within the US. The market’s expectations on Tump’s fiscal policies and higher interest on USD will attract more foreign funds to the US. This resulted in a natural appreciation of the USD and indirectly, capital flight away from Asian emerging markets.

With a weaker Singapore dollar as a result of the appreciating USD, local exporters can find some relief from the current economic slowdown. Our exports will become more competitive and manufacturing activities might see some tailwinds.

Inversely, for the smaller number of SMEs whom are net importers of goods priced in USD, the depreciating SGD would be negative for trade.  The adverse effects of USD’s appreciation would be negated for these companies however, if they are selling their end products overseas also in USD, forming a natural currency hedge.

But for SMEs whom import in USD and sells locally in SGD or overseas in other currencies, the stronger USD might affect gross margins and profitability as it cost more per unit of purchase now.

For businesses that might be affected by such foreign exchange movements, it is best to hedge against their forex exposure to minimize volatility. Most banks will provide FX (forex) line for companies with trade financing (LC/TR) credit lines to hedge against cross currency exposure.

Companies whom buy and sell in different currencies can utilize the FX line to purchase forward or spot contracts to hedge against their foreign currency purchases. Alternatively, non-bank service providers such as Western Union can also offer FX hedging solutions.

  • Domestic sector slow down

SMEs that are narrowly focused and reliant on the domestic sector might experience protracted slowdown in their revenue figures following the Fed rates hike.

Singapore’s economy is already facing stresses due to external events such as China’s growth deceleration and internal restructuring. An increase in domestic interest rates will have an indirect impact on local retailers and F&B players in the mid to high end segment.

When the banks move to increase interest rates, property loans which form the largest component of household debt will see an increase in monthly mortgage servicing.  With a higher property loan instalment, households will have lower disposable income at the end of the month and discretionary purchases might drop.

Local retailers and F&B restaurateurs might see a further drop in revenue and lower demand of consumption could lead to a contraction in domestic economy activity.

SMEs in the construction trade will likely be affected as well by the rates hike. With higher borrowing costs, local property purchases which are usually leveraged with mortgages might go south.

Property investors buying for rental yield might also defer their investment decisions as property yields are compressed with higher interest. These investors might divert their resources instead to fixed income bonds or securities as bond prices typically have an inverse relationship with interest.

With the real estate industry and developers in a doldrums, SMEs in the construction industry further down the supply chain such as sub-contractors and building materials distributors will be negatively impacted.

For SMEs in these segments, all is not doom and gloom. During lean times, SMEs can take this opportunity to further improve their productivity and undertake simple cost rationalization exercises.

Small retailers could move part of their business onto e-commerce platforms or create their own web stores to reach out to more consumers. Available off-the-shelf technologies such as RFID and inventory management software could also help identify product trends and prevent overstock.

F&B restaurant owners can tie up with food delivery app players such as Foodpanda and Deliveroo to reach out to a bigger consumer market. Certain manual processes in the kitchen could be eliminated with investment in automated kitchen equipment.  Self –ordering menu software or apps could also reduce the number of waiting staff and shorten ordering to kitchen turnaround time.

Similarly, SMEs in the construction industry could also relook into their current workflow and think up of new process that could reduce reliance of manual manpower. Prefabrication is one area where the authorities are investing much resource on for the local construction industry. Certain tools and equipment could be deployed to reduce manual labour.

Summary

In conclusion, the rates hike from the US is not an entirely negative event for Singapore SMEs. By moving benchmark interest up, the US is confident its economy has moved on from the malaise of 2008’s financial crisis.

If the world’s biggest economy is recovering, there would be higher aggregate demand for Asia’s goods and services. Should the US economy could take on the key engine driver role for the global economy’s recovery which remains sluggish now, Singapore’s economy might benefit from the spill over effects.

Also, it remains uncertain if the Fed would phase in the three rates hikes planned for in 2017. This is especially so if another major external event such as a debt crisis in China’s economy occurs or if inflation falls short of the Fed’s target of 2%.

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In the recent 2016 SME Development Survey conducted by DP Information Group, the usual cost challenges faced by SMEs in Singapore in recent years continued to dominate concerns from the survey participants. Data from the 2,513 SME respondents polled indicates that rental, materials and manpower costs continue to be pertinent issues SMEs face in 2016.

However, a key finding of concern is the increase of business loan financing costs cited by 22% of respondents, up from 6% in last year’s survey sample. About half (46%) of SME respondents facing financing issues named higher business loan interest rates as their biggest problem when grappling with financing costs. 34% said their suppliers were tightening credit access and 19% mentioned they had to provide more collateral to maintain their existing bank facilities.

http://www.sbf.org.sg/images/SMEDS2016MediaRelease.pdf

 

Image: http://www.sbf.org.sg/images/SMEDS2016MediaRelease.pdf

In a Business Times article on 3rd November 2016 regarding the findings of the survey, Mr Lincoln Teo, COO of DP Info mentioned:

“Banks and institutions have become more cautious about lending to SMEs, and this is reflected in a higher cost of funds.”

Singapore’s economy has been facing strong headwinds in 2016 and growth has been tepid with most key business indicators and economists expressing pessimism throughout the year and further into 2017. Channel News Asia reported on 14th October 2016 that advance estimates from the Ministry of Trade & Industry shows Singapore’s economy expanded by a paltry 0.6% for 3rd quarter 2016 compared to the same period last year. This showing failed to meet the 1.7% growth forecast by private sector economists.

Several senior government ministers have also publicly warned of the economic challenges faced by Singapore with Manpower Minister Lim Swee Say saying our “old model of growth was unsustainable”, Deputy Prime Minister Tharman Shanmugaratnam warning that “the Singapore economy is in for a tough period that will last for a while” and  Prime Minister Lee Hsien Loong forewarning that “Singapore must prepare for economic slowdown”.

Causes for the weakening economy involve external global events as well as domestic restructuring and policy changes. Singapore is an extremely trade reliant economy, with the highest trade to GDP ratio in the world averaging 400%. Recent external episodes such as Brexit, increasingly protectionist and populist stances in Europe and US as well as growth deceleration in China, Singapore’s largest trading partner all bodes negatively for Singapore’s external trade figures.

Internal domestic issues such as government policy shifts in decreasing foreign manpower supply, tight local employment market resulting in escalating manpower costs as well as displacement of traditional industries by rapid technology disruptions has also resulted in further strains to local SMEs whom might find it challenging to even keep afloat in today’s environment.

The economy is clearly stagnating for 2016 and likely throughout 2017. Estimates from the Ministry of Trade and Industry indicates Singapore’s economy to expand by only 1 to 2% in 2016, potentially the slowest year since the last financial crisis in 2009.

In view of the weak general economy, it is no surprise that banks and financial institutions will take a more conservative view in credit underwriting. It is a given that SMEs are not as well capitalised as large corporates and MNCs and will find it even more taxing to tide through the protracted slowdown we are currently experiencing without access to financing at non-prohibitive costs.

Data from MAS is already pointing out the corresponding slowdown in loans growth from banks with a Business Times article published on 31st August 2016 indicating drop in bank loans for 10 consecutive month as at July 2016. To put this date in perspective, the last time Singapore experienced similar extended loan decline was in the 1980s when total bank lending shrank for a consecutive 12 months. Expectedly, the decline in bank loans was largely attributed to lending to businesses.

We have also done a research on MAS’s (Monetary Authority of Singapore) published statistics on total bank loans and advances to business excluding banking and financial services industries. From the below data, loans to businesses have continued to decline from January to October 2016 from corresponding months in 2015. For this 10 months’ period, loans to businesses declined on average to about 6.7% year on year.

 

mas1mas2

Loans & Advances to Businesses (Non-bank customers & financial institutions)
https://secure.mas.gov.sg/msb-xml/Report.aspx?tableSetID=I&tableID=I.5B

In the prior mentioned 2016 SME Development Survey, SMEs are also experiencing higher cost of financing in the form of higher interest rates demanded by banks and lenders. This is in line with the decline in bank loans to business as banks would have to price their capital accordingly with lower loan volume as well as heightened volatility in SMEs cash flow and possible increase in loans defaults.

In an informal survey conducted by Linkflow Capital Pte Ltd, a SME financing consultancy firm, internal data of clients indicated an overall 9.5% drop in banks’ approval of unsecured business loan quantum (excluding secured loans with collateral) down from $21 million in 2015 to $19M in 2016. Approval percentage for business loans applications handled by Linkflow Capital on behalf of SME clients remains constant at 57% approval rate in 2016 versus 58% in 2015, measured across 307 business loan applications from 2015 to 2016.  Approval percentage citied however is unlikely to be representative of the domestic lending sector as it only represents a small subset of all SME borrowers, derived from the firm’s internal data. Also, as specialists in SME financing, the firm will likely obtain higher approval percentage compared to the entire domestic SME market.

Banks operating in Singapore typically do not publicly disclose their lending approval rates against SME loans applications received but it’s likely to be lower in 2016 compared to the immediate preceding years. Outside of quantitative statistics from internal data churned, Linkflow Capital does observe an increasingly tighter credit environment from most major banks and financial institutions in the SME lending sector for 2016.

Banks will foreseeably continue to tighten credit underwriting through 2017 to protect asset quality if domestic and global economic conditions does not show signs of improvement. Costs of borrowing will likely creep upward if non-performing loans (NPL) ratios deteriorate further in 2017. 2nd quarter 2016 results from DBS and OCBC both reported increase in NPL ratio to 1.1% inching up from 1.0% in the preceding quarter. The 3rd local bank UOB held NPL steady at 1.4%.

NPL local banks
Image: Channel News Asia

Financial markets are still sloshed with excess liquidity from central banks’ monetary quantitative easing exercises following the last financial crisis in 2008. Global interest rates remain depressed since 2008 due to the credit liquidity but rates are forecasted to gradually increase as economists expect the US Federal Reserve to announce rates hikes in December 2016 following several positive US trade and jobs growth indicators. Singapore’s benchmark reference lending rate Sibor (Singapore Interbank Lending Rate) moves in close tandem with US lending rates and is also expected to increase following any moves from the Fed on rates hike.

This double whammy of tougher access to bank financing as well as higher interest costs could potentially tighten the noose around the SME which is not sufficiently capitalized.

Cash flow is the life line of all businesses and access to credit facilities not priced at a premium is vital for today’s SME to tide through the downturn while undertaking internal restructuring to improve productivity, enhance processes and revamp itself to adapt and thrive in current market conditions.

Without access to financing, local SMEs would also find it hard to expand beyond our borders and heed the call from the government to internationalize and seek opportunities overseas.

Within this challenging credit environment in business lending, SMEs can undertake the below 4 ways to tap into financing if they are facing issues with securing business loans for their companies:

  1. Personal bank loan

SME owners whom are not able to meet the banks increasingly stringent credit underwriting criteria for business lending can turn to personal loans from banks instead. Personal loans generally have less red tape compared to business loans as banks will only analyse the director’s personal credit history and conduct and not the company’s financials & cash flow.

If the company’s financial reports are deteriorating and cashflow is weak, it might be tough convincing bank’s credit underwriters to approve a business loan application. If the director’s personal credit history is still healthy, banks’ personal loans can be an alternative.

Personal loan comparison websites such as moneysmart.sg and singsaver.com.sg can help an individual compare most banks’ personal loan offerings and interest rates with few clicks of the mouse.

However, personal loans are recommended only if the company has no other means to qualify for business loans and just require a quick cash injection of a small amount to tide through a short period of cash flow crunch.

Some personal loans bear higher interest than business loans and quantum extended are typically much smaller than business loans. If the director of the company approaches too many banks in the same time frame to raise the required amount of financing through personal loans, his/her personal credit score could be adversely impacted, resulting in even lower chances of approval for future business loan applications.

MAS has also tightened policies in personal unsecured credit limits limiting individuals’ unsecured personal credit limits across all banks not more than 18 times of monthly income from June 2017 and further decrease to not more than 12 times monthly income from June 2019.

High gearing in personal loans might also affect refinancing of your existing personal residential property loans with the MAS TDSR (total debt servicing ratio) policy that mandates an individual’s total personal credit monthly commitments not crossing 60% of monthly income when banks assess property loan applications.

In summary, SME business owners should only turn to bank personal loans when facing difficulty with business loans, if they require a relatively small amount of financing over a short period (3 to 6 months) and not looking to apply for any home loan financing or refinancing during this period.

  1. Crowdfunding

For SMEs in high growth industries such as tech development, e-commerce, pharmaceuticals or logistics, equity crowdfunding is another alternative to business loans that can provide that much needed capital to fund expansion plans.

In a pure equity deal, the business owners can also minimize personal liability on loans while having access to funding. The downside of course is the dilution of equity in the business. A crowdfunding platform that lists companies seeking to raise equity funding via crowd funding is www.fundedhere.com.

For SMEs whom are in more traditional industries and less likely to attract equity investors, another new innovative way to access funding that is gaining traction in Singapore is P2B crowdfunding. These crowdfunding platforms act as aggregators to list suitable companies’ funding requests on their online platform to a group of retail investors to fund the business loan applications.

Crowdfunding platforms seek to fund the segment of under served SMEs whom mainstream banks might not be able to finance. As the credit underwriting of some of these crowd funding platforms are less restrictive than the banks, the chances of securing an approval here might be higher.

The con is higher costs of financing generally compared to SME loan interest rates as investors demand higher yield of return from the higher risk they undertake in funding applications. Popular crowd funding platforms for debt financing locally includes fundingsocieties.com and moolahsense.com.

  1. Invoice financing/factoring

For SMEs facing rejections from banks on business loan applications, factoring is another tool in the funding tool box. Businesses selling to other companies on credit terms are suitable for factoring.

In a factoring arrangement, invoices to business customers that are unpaid can be factored to a financier whom typically can advance cash to you up to 80% of the invoice value. Depending on whether if the factoring is on disclosed or non-notified basis, the financer may or may not collect the payment of invoice directly from your customer when due.

After the financier receives the payment from your customer, any interest or fees are deducted from the remaining 20% invoice value not advanced and returned to you. This method of financing works best if your receivable books consist of mainly large corporates, listed companies or statutory boards with long credit terms i.e. more than 30 days. For factoring, the financier is primarily concerned on the credit quality of the invoice they are buying over instead of just solely assessing the borrowing entity’s credit profile.

This method of financing is again less stringent on credit underwriting compared to traditional unsecured business loans, if the credit profile of the borrower’s debtor is strong. The drawback is the financing can only come in towards the final stage of the supply chain after goods or services have been sold and pending payment.

It is an extremely useful tool to unlock cash sitting in receivable books but would not help the SME which requires long term working capital to be repaid over 3 to 5 years. It cannot be deployed during the initial stage of the supply chain to help company fund inventory and raw materials to be purchased to fulfill a confirmed order.

  1. Tap into government financing schemes

The Singapore government recognizes the importance of SMEs in our economic development, whom make up 99% of all enterprises in Singapore with contribution of almost 50% GDP and employing about 70% of our workforce. There are many grants and financing schemes in place that aim to encourage a vibrant and strong local SME sector.

Most of the government assisted financing schemes are administered by Spring Singapore and IE Singapore, which are government affiliated agencies with mission to assist SMEs in their growth. Most of the financing schemes administered has some form of risk sharing between the Government and participating financial institutions.

The purpose of these financing schemes with risk co-sharing is to encourage banks to increase credit lending to SMEs especially during an economy slowdown as banks grows cautious with SME lending, traditionally considered to be of higher risk.

Some of the relevant financing schemes listed below:

Spring Singapore Micro Loan

  • For local SMEs with annual turnover $1M or less OR employees 10 or less
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Maximum funding amount $100K
  • Repayment period up to 4 years

Spring Singapore Working Capital Loan

  • For local SMEs group annual turnover <$100M or group employment size < 200
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Maximum funding amount $300K
  • Repayment period up to 5 years

Loan Insurance Scheme (LIS)

  • Credit insurance for SMEs to obtain trade finance facilities from financial institutions
  • A portion of the credit insurance is supported by IE Singapore
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Financing of inventory, receivables discounting & pre-delivery working capital

Bridging Loan for Marine and Offshore Engineering companies (Spring Singapore)

  • For marine and offshore engineering companies, to help with sector slowdown
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Maximum funding of $5M per company
  • Repayment period up to 6 years

There are up to 12-15 participating banks in the above schemes. Various banks have different credit criteria and companies can consider engaging a SME loan Singapore consultant to help identify the suitable schemes and facilities to tap on.

As specialists in SME financing, a competent consultant can also provide advice on common pitfalls to avoid when preparing the SME loan application as well as tips to improve approval chances.

 

In summary, although statistics and data are pointing to another rough year ahead for Singapore’s economy in 2017, there are still bright spots and silver lining for SMEs to tap into. With the digital revolution in full swing, we must accept the current environment as it is and agilely adapt accordingly instead of futilely insisting that markets should operate the way we think it should be.

Business as usual might no longer work in future. Accept the fact that change is a constant and continue to undertake innovative ways to access financing and re-position our business to survive and thrive in the new world order.

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sme loan singapore approved

Running a SME in Singapore is challenging. High rental costs, tight manpower market and no easy access to bank financing are some of the pertinent challenges most SME owners face when trying to scale their operations.

Heading into the last quarter of 2016, Singapore’s economic data has been gloomy and the weakening economic situation will present SMEs with a challenging landscape throughout 2016 and very likely deep into 2017 as well.

GDP growth for 3Q 16 grew by a dismal 0.6% [1] weakening against the 2% GDP growth in 2Q 16 and 1.8% in 3Q 15. On quarter-on-quarter seasonally adjusted annualized basis, the economy contracted by 4.1%, reversing a 0.2% growth in the preceding quarter. Employment growth slows to lowest in 12 years with just 31,800 more people employed in end of 2015 [2], with unemployment rate rising to 3.1% in Q2 2016 [3].

Fortunately, the Singapore government is very supportive of the SME industry with a myriad of grants and government aided financing schemes available for SMEs to tap into. SMEs made up 99% of all enterprises in Singapore, contributing almost 50% of GDP and employs about 70% of the workforce. The government has in place various grants and financing schemes that strives to support SMEs and encourage a vibrant SME sector in Singapore.

Most of the government assisted financing schemes for SMEs are administered by Spring Singapore and IE Singapore, both government affiliated agencies to aid SMEs in their growth. Most of the financing schemes administered in the form of business loans have some form of risk sharing between the government and participating financial institutions. This will help encourage banks and financial institutions to spur credit lending to SMEs which traditionally are considered high risk segment to banks due to lack of credit information and higher default rates.

With the risk sharing element from the government, banks participating in these schemes usually (disclaimer: not definitely) will also offer lower interest rates for these schemes as well since the risk of default  will be co-shared by the government.

These government financing schemes will also help to improve funding liquidity in the banking credit ecosystem as most banks will generally slow down lending to mitigate risks during a downturn. With access to funding cut off, SMEs will face a double whammy with declining revenue and working capital squeeze. The government funding schemes therefore aims to encourage bank lending and lower capital costs for SMEs.

There are more than 12+ banks and financial institutions participating in some of the government aided financing schemes. Every bank and financial institution have their own credit risk assessment, interest rates and criteria which might vary widely at times. A competent SME loan consultant would be able to assist a SME to narrow down the financing options to identify suitable banks and financing schemes, saving time and interest costs for the applicant company.

You can also use our online SME loan Singapore comparison tool to see available loan options instantly.

Below is a summary of the various government financing schemes SMEs can tap on to expand their business:

Spring Singapore Micro Loan

  • For local SMEs with annual turnover $1M or less OR employees 10 or less
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Maximum funding amount $100K
  • Repayment period up to 4 years

Spring Singapore SME Working Capital Loan

  • For local SMEs group annual turnover <$100M or group employment size < 200
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Maximum funding amount $300K
  • Repayment period up to 5 years

Loan Insurance Scheme (LIS)

  • Credit insurance for SMEs to obtain trade finance facilities from financial institutions
  • A portion of the credit insurance is supported by IE Singapore
  • Minimum 30% local shareholdings (Singaporean or PR)
  • Financing of inventory, receivables discounting & pre-delivery working capital

SME Equipment & Factory Loans

  • Automating/upgrading of equipment or purchasing HDB/JTC premises
  • Up to $15M funding
  • Minimum 30% local shareholdings (Singaporean or PR)

In a recessionary economy, there will usually be a merger and consolidation phase. It is vital for businesses to ensure sufficient access to credit sources to ride out the slowdown. Cash flow is the life line of a business and strong funding sources will ensure stable cash flow to tap into opportunities in a down market and to restructure operations.

SMEs should tap into the available financing schemes and government supported business loans as part of their overall strategy to restructure and subsequently expand when the economy recovers.

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SME Loan Singapore Ultimate Guide

Businesses need to have access to a reliable source of funds to run their day-to-day operations. A shortage of finance at a crucial time can have serious consequences for any organisation.

According to a recent Singapore Business Federation and DP Information Group survey of 3,600 SMEs, raising finances is being viewed as an increasingly difficult task. Those polled say that over the last four quarters, their access to financing has been consistently declining. [1]

Raising funds requires specialized skills and many SMEs approach this task in an ad-hoc manner that can result in higher interest rates or outright rejection in their applications.

Unless you handle the job of raising business loans for your SME very carefully and in a systematic manner, you could set your business back in terms of lost opportunities and lower sales.

Worst of all, you could damage the reputation that you have carefully built up over the years if you are unable to make payments that you have promised.

Here is what you need to do to ensure that you go about your fund-raising exercise in a manner that provides your business with the ability to get funds at the best rates and at the correct time.

Approach Banks And Financial Institutions

This is probably the most important decision that you have to take and also the most difficult.
It is important because approaching the wrong bank can result in a lengthy and tedious application process that may ultimately result in your application being rejected.

Deciding which bank to approach can be very confusing. Most of them present their loan facilities in very general terms and it is practically impossible to get an idea of whether your SME company will be able to get its business loan approved.

To add to the difficulty of the task of selecting a bank is the fact that each of them has a list of sectors which they can finance and another list of industries to whom they deem to be of high risk.

Banks also have internal limits for each industry they make loans to. You have no way of knowing whether the bank that you are approaching has achieved its target for the industry to which your company belongs.

Given the complexity of the problem, it may be best to approach an Singapore SME loan consultancy firm for their advice. Their experience and knowledge can be invaluable and result in massive savings for your company in addition to making the entire process of raising a loan much simpler and faster.

Understand Which Type Of SME Loan Is Suitable For Your Company

Banks and financial institutions have various business loan products specially designed for SMEs. These are structured to address specific business needs and it is crucial that you apply for the right facility.

The lender that you approach will conduct its credit appraisal process on the basis of the type of loan that you have requested and its understanding of your ability to pay it back.

Even if you have strong financials and an established business, you are liable to be turned down for a loan if you apply for the incorrect facility.

Of course, you can submit a new application with the correct type of loan but the entire process can set you back by weeks if not months.

Briefly, the various types of loans that you can apply for are:

 

Business Term loans

These are for a period of one to ten years although most banks restrict them to five years. They can be used for the running of the business or general working capital.

This is a good option if you require money for the long term. Buying machinery or other fixed assets with a term loan is a good idea because the period for which the machine would remain productive could be matched with the tenure of the loan.

Trade financing

This facility can be for domestic or international trade. Having an efficient and well-reputed bank on your side can make a huge difference to your operations.

If you need to import materials from overseas, you will need your bank to issue a letter of credit (LC) that assures your supplier of payment. While most banks offer this facility, you should identify one that is specialised in dealing with the countries that you import from.

Factoring

While you may be able to get factoring services from banks, non-bank lenders can be more flexible in offering you a means of financing your receivables.

Factoring services essentially involve a lender giving you money against the invoices that you have raised on customers. When the customer actually pays, say after 30, 60 or 90 days, the money is taken by the factoring company.

Obviously, there is an interest element in the transaction with the sum you receive in advance being less than the invoice amount. Interest will be charged on the tenure of the invoice.

This can be one of the greatest boons for SMEs who need to sell on credit. An added advantage is that an SME that has been turned down by a bank may be eligible for factoring services from a non-bank lender.

Accounts receivable financing

Somewhat like factoring, accounts receivable financing allows you to raise funds against the security of the sales that you have made to your customers. The loan that you receive is secured against the amounts due to you.

Banks readily offer this facility to SMEs and are even willing to take over the task of collecting amounts from your customers.

Asset financing

As the name implies, a bank will provide a loan to purchase business premises, an industrial warehouse or a fixed asset like a ship or machinery. The loan will be secured against the asset that is financed in addition to other collaterals and guarantees that may be required.

Getting a loan of this type can be time-consuming with bankers asking detailed questions about your business, the asset to be acquired and the proposed use that it will be put to. It is best to start the application process several months in advance for this type of loan.

Project-based financing

Banks have extensive expertise in the area of project financing and their experience in raising funds for other borrowers can be of great advantage to you.

If you need to arrange funds for your project, you should identify a bank that is knowledgeable about your industry. While practically all banks cater to the entire range of projects, each is strong in a particular sector.

If you can identify the bank that best suits your needs, it can prove to be of immense benefit to your project.

 

Check Your Banker’s Lending Limit

 

Image Source: Bizforge

When your company’s business loan application gets approved by a bank, a limit is imposed on the amount of money that can be advanced. This limit is usually set based on what you have asked for and the amount that the bank is comfortable advancing to you.

Many SMEs make the mistake of not keeping a close tab on the limit and its utilization. This can result in an unpleasant surprise in the form of non-availability of funds when you need them most.

If a bank is requested to increase the limit, it will ask for a great amount of information and then process your request over a period of several weeks. The entire exercise may even get delayed as the bank could ask for your company’s financials for the current period.

The best approach is to apply for an increase in limit well before you need it. This will give you adequate time to collect all the documents and information that is required. Additionally, since you will not be in a hurry to get funds you can even try to get terms that are more favourable to you.

Know Your Financials

 

Image Source: Investopedia

As a business owner, it is essential that you are familiar with your financial records. Do not make the mistake of leaving the entire job to your accountant.

While you will have to rely on your finance department for its technical expertise, you should be familiar with your company’s balance sheet, income statement and cash flow statement.

This is another area where an SME consultancy firm can be of great help. The consultant knows what banks and financial institutions look for when studying a company’s accounting records.

They can advise you on the type of information that you need to compile and submit to your bankers to help get your loan approved.

Make Sure That You Have A Good Personal Credit Record

 

Image Source: Ez Credit Consulting

When your company applies for a SME loan, it is important that as the business owner, you have an impeccable personal credit history.

If your credit card payments are delayed or you have a poor credit score it can have an adverse impact on your company’s loan application. Spend a little extra time and make sure that all your payments are up to date.

Be Prepared To Wait

 

Image Source: Pragzter

 

Although most banks advertise that they will convey a decision in a couple of days, the process usually takes longer than that.

The bank needs typically close to two weeks after the information that it has requested is submitted. So, if a query is raised a week after your loan application, the bank may need two weeks more once you submit the required details.

Of course, you could get a decision much sooner if the case is straight forward. If they are any concerns the banks’ credit approver might have on your application, they could raise queries or request for additional information. This would effectively delay the process by another one to two weeks.

But the worst thing you could do is to make a loan application and then keep asking the bank for approval.

Final Tips: Prepare Your Loan Application With Great Care

 

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Your loan application and the other documents that you plan to submit to the bank should be carefully screened before they are handed over. Every bit of information that you furnish may be carefully studied and you could be asked for details to back up what you have stated.

Most banks also do not review subsequent applications for the next 6 to 12 months from the last application submitted date. If your business loan application is declined across several banks, that could derail your plans.

An SME loan consultancy firm will be in a position to help you as they are aware of the type of query that can be raised by banks.

You can make the process of getting a loan simpler if you follow a few simple steps:

  • Keep a list of your existing loan facilities ready if any

  • Maintain an updated file with details of your financial reports and personal tax records.

  • Prepare a brief business plan and your projections for the next three years.

  • If the bank you are applying for a loan to is not the same one where you maintain your company’s account, keep copies of the last six months bank statement ready.

Many SMEs are denied financing by banks despite being credit worthy. The reason for this is poor paperwork and the inability to provide satisfactory replies to the bank’s credit approver on their financials figures. If your company can overcome this problem it will find the task of raising a business loan much easier.

And finally, begin the process of arranging finance as early as you can. This will help you source the most suitable bank for your business. Remember that it is much easier to arrange finance when you don’t really need it.

The worst time to apply for a business loan is when your company’s financial situation deteriorates. Plan and forecast your financing needs well in advance to position your company with the best chance of approval.

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why sme loan singapore rejected

It’s never a good feeling, seeing a letter that begins with, “We regret to inform you…” or answering a phone call to hear, “I’m sorry, but you’ve been denied.” Securing an SME loan in Singapore for your business can be nerve-wracking enough, so finding out your application has been denied is a moral letdown (and a financial one, too.)

But hindsight is 20/20, as they say, so it’s best to take a look at just what happened to see where everything went wrong in your SME loan application.

I went to a bunch of different banks.

There are lots of different banks and financial institutions serving the SME financing segment, and all of them have different credit criteria and risk appetite — and you may not have been able to tell which banks were right for you. So, like a lot of people, you went to every bank you could find.

This approach, unfortunately, often leads to a lot of wasted time and resources speaking with banks that are not suitable for the company profile. Some banks even shun certain industries, like food & beverage or construction, whereas other banks might be welcoming to those very same industries!

I only paid attention to my company’s credit standing.

Did you assume that your business financing applications would be assessed solely on your company’s credit standing? You are in for a surprise: most banks actually assess the business owner’s personal credit profile when processing a loan application.

A tardy repayment record on your personal credit cards may have been detrimental to your business financing application, no matter how stellar your company’s financial performance looked. There are, of course, some other factors that an experienced SME financing consultant could present to banks to mitigate this issue.

I didn’t check my banker’s lending limit.

You may have already had a banker. And, as your company grew, bigger projects may have necessitated more financial support.  Unfortunately, most banks have a cap on financing limits, and SMEs may find that applications to their existing bankers are rejected due to the maximum limits imposed. An SME consultant would advise that small business owners seek out other banks to diversify credit sources should growth opportunities arise.

I didn’t really understand my financials.

Most business owners are so immersed in the day-to-day operations of their companies that the accounting books are left under the supervision of others (or, worse, to gather dust in a filing cabinet). Banks often place heavy emphasis on a company’s financial report during the credit assessment, and poor financial figures usually lead to a number of rejections.

SME financing consultants are able to conduct initial assessments on a company’s financials to determine eligibility and gather relevant information. They have the expertise needed to mitigate weakness in financial ratios when presenting credit proposals for applications.

What now?

If you didn’t do any of the above, then something else went awry in the loan application — and an SME consultant can review your case to see what happened, and help you secure a SME loan in the future.

 

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