If you own a small business and have been sourcing for a business loan in Singapore with a few banks and financial institutions, you will have known by now that there are a lot of loan products available in the market.
Lenders may offer you a business credit card, invoice financing, business overdraft, or term loan. There will be instances when a loan package that includes a bundle of these financing facilities is offered also.
But no matter what form of financing offered to you, you are in the best position to determine which loan type or loan amount is practical for your business. Should you apply for multiple SME loans from different banks at the same time? Or should you just approach a single bank one at a time?
To help you make a smart decision, here are the pros and cons of availing of multiple loans.
Let’s start off with the pros.
As a business owner, you may have been caught off guard by a sudden need for capital financing at one point in time. While businesses depend on and stick to a plan or budget, sometimes the unpredictable happens. New opportunities, technological advancements, discoveries, and even changes in leadership and policies may affect a business and its future plans and programs. For instance, the launching of new cost-saving equipment/technology in your industry may trigger a change in initial plans to delay capital asset purchases.
If you had an existing credit line in place, you may be able to pursue buying this cost-saving equipment without delay. Probably, you might be able to avail of a limited introductory price offer on this purchase because you have a credit line to draw funds from immediately. Credit lines are perfect for those times when a funding need arises quite unexpectedly for short term purpose.
You can react fast enough because you have eliminated funding issues and can concentrate on other pressing matters that aren’t financial in nature.
Typically, a business loan would take weeks to process, from the time you submit your loan application up to the final drawdown. Having a credit line in addition to an existing term loan would have been a boon in this case.
After utilizing the credit line for the down payment of the equipment to take advantage of early bird discount or first mover advantage in your industry, you can then apply for a longer term (1 to 4 years) term loan to service the loan.
Flexibility in financing
By applying for multiple business term loans with different loan tenure, you could also stagger your repayments to enjoy greater flexibility and usage of funding.
For example, if you apply for 3 separate term loans from 3 banks, the loan tenure for each bank could be staggered from 1 year for the first bank, 2 years for the second bank and 3 years for the third bank.
With this form of staggered repayments, you can avoid a lumpy monthly instalment with one single large loan and also the flexibility in juggling funds as you can still utilize on the unpaid principal amount from the second and third loan after the first year to draw down on if required.
This method would work even better if the term loans have no early repayment penalty clause attached, such as the SME Micro Loan from Spring Singapore. This will allow even greater flexibility as you can decide whether or not to redeem some of the loans earlier.
Offers more alternatives
For every funding need, there is a loan type that best fits that need. Imagine your business needs funds for payroll. You can always notify your lender about your intention to draw from the credit line if you have one.
Moreover, you can always borrow short-term, 60 days or less, for instance. On the other hand, if you need to purchase commercial property, you’ll need to rely on medium to long-term loan facilities. This scenario shows that if you have multiple loans, you have access to funding alternatives that matches your requirement at the moment.
You can also spread your banking and financing risks where existing bankers suddenly cut your financing lines. For example, if you’re a local SME and mainly does domestic business only, you could consider spreading your financing across all 3 local banks for a start.
By approaching multiple banks for business loans, you can compare local banks business loans and also establish a banking relationship with all 3. This will offer you more alternatives and options in future financing rounds and also diversify the risk of one single bank pulling the plug on your financing options.
Tax relief benefit
Having a loan that you pay off regularly offers a slight tax relief. A business can offset the cost of financing for interest paid on loans against the net income. So the more loans you have (as in the case of multiple loans), the more tax savings you’ll get in the form of tax reliefs.
While it is true that having multiple loans can be beneficial to business owners, there’s another side to it. It can be a burden too.
Increased probability of default
First and foremost, ask yourself if you can afford to pay off multiple loans as they come due. You are in the best position to determine if your current and future cash position can sustain these payables until they are fully paid.
Your capacity to pay is critical. Even the slightest delay in payment could mean disaster and could disrupt your cash flow. Lenders charge late payment penalties and fees to encourage prompt payments.
Once you default on several installments, you might end up on the receiving end of a legal action from the banks. Do not avail of multiple loans unless you are certain that you can manage your debt obligations.
Diversion of funds
Misuse of borrowed funds is possible for a business owner who does not practice prudence and discipline. Sometimes, having multiple loans at your disposal could lead to more problems.
It is possible for borrowers to divert the loans to other projects other than the one it was originally intended for. It may seem all right if it were channeled to other operational concerns of the business (assuming it doesn’t constitute a violation of the loan agreement).
But if you happen to use it for other purposes that don’t guarantee a good chance of positive return, then that would be a different story.
Availing of multiple loans isn’t totally a burden. In fact, based on experiences of some business owners I’ve encountered, it has helped them grow their business. We sometimes do structure multiple financing sources at the same time in certain scenarios for our clients, if the situation calls for it.
However, all SME owners should exercise prudence and responsible borrowing when it comes to taking on too excessive debts. Be mindful of your debt servicing ratio and other commercial loan ratios that could indicate you’re excessively leveraged.
Do not take on too much risk you’re not comfortable with and always keep an eye on your company’s cash flow.