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Among all business structures, sole proprietorships are the easiest ones to set up and operate but the flipside is, this entity type might face challenges when it comes to raising SME loan in Singapore.
In business-friendly Singapore, registering a sole proprietorship is a breeze. If you’re a Singaporean or permanent resident, you can simply apply for registration online and the process should not take more than 30 minutes.
There are minimal regulatory filings and reporting to be done, compared to the more common Private Limited entity. Compliance costs are also lower as a sole proprietor need not adhere to certain regulatory requirements such as preparing yearly financial reports and appointing a corporate secretary.
Without business partners or external shareholders to account to, you don’t need approval from anyone. You run the show.
There are downsides too that tip the balance. Let’s look at some of them.
Applying sole proprietorship loan
Most mainstream banks are able to accept business loan applications from sole proprietors.
However, some financial institutions and alternative lenders such as P2P crowdfunding platforms might not be able to extend financing to sole proprietorships.
The reason why so is due to perceived lack of formal business structure of sole proprietors and also certain restrictions on these financial institutions lending licenses.
As a sole proprietor or partnership is legally treated as the same entity as the owner/s, by lending to the sole proprietor some financial institutions might be subject to the Moneylenders Act which regulates lending to individuals.
That is why some financial institutions only conduct borrowing activities to private limited companies which are are not regulated under the Moneylenders Act since limited liability companies are legally separate entities from the shareholders.
Is it harder for sole proprietor to take a business loan?
Although most mainstream banks are able to offer SME loans to sole proprietors, compared to private limited companies, sole proprietors might find it slightly harder to qualify for a SME business loan.
Some banks’ lending algorithm and credit scoring program might discount credit scoring of sole proprietors. Possible reason why so might be due to banks having less financial inform to conduct credit assessment on sole proprietors.
Unlike private limited companies, sole proprietors are not required to file mandatory detailed financial reports and annual regulatory filing.
However, if a sole proprietorship has strong cash flow, well prepared financial documents such as Profit & Loss and Balance Sheet and fairly high reported income in NOA (Notice of Assessment), it should not be harder to obtain a loan vs a Private Limited company that has a weaker financial profile.
Perceived lack of credibility
The general perception, in respect of business financing, is that sole proprietorships lack credibility compared to Private Limited enterprises.
There is a general perception that a sole proprietorship lacks structure and accountability unlike a Private Limited company. Because of this lack of credibility where a sole proprietor is essentially seen as just a one-man show, most banks might not be as keen to finance sole proprietors.
Sole proprietors are also technically not required to prepare full set of financial report. Therefore, some bootstrapped entrepreneurs will prefer to start operating their business under a sole proprietor as it saves compliance costs and resources.
This however might be a detriment when the sole proprietor is trying to apply for a bank business loan in Singapore as without a financial report or detailed set of account statements, banks are not able to give much weight to the loan assessment.
As an owner of a sole proprietorship, you are personally liable to all types of debts incurred by the business, including to vendors and suppliers. There is no separate legal entity recognition unlike a private limited company where the directors and the company are treated as separate legal entities.
In terms of bank financing, liability for owner of a Private Limited firm is similar to that of a sole proprietorship.
Beneficial owners of a Private Limited enterprise are required to furnish their personal guarantee for unsecured SME loans undertaken by their companies.
Limited opportunity for growth
Corporations wanting to lure investors may opt to sell shares of the company through a stock offering. It is only logical for an investor to want a piece of the company’s equity in exchange for a sum of money he’ll invest in the business.
If you are a sole proprietor, this option isn’t available to you if you want to expand yet retain your business’ structure. Raising funds for expansion, for instance, can be difficult or close to impossible without the ability to issue shares and equity. Valuation of the company will also be tricky since equity is usually an integral part of measuring value.
For this reason, it can be quite difficult for a sole proprietor to raise capital via equity to scale up business, unless it is converted to a Private Limited entity.
Although a sole proprietor can write off related business expenses in their income statement, he or she is taxed the net profit of the business at the personal individual tax rate.
A private limited exempt company that is newly incorporated however enjoy certain tax benefits. At the time of this writing, newly incorporated companies get 75% tax exemption on the first $100K of normal chargeable income and a further 50% exemption on the next $100k for the first three consecutive years of tax assessment.
Separation of legal entity and assets
An exempt private company is considered a separate legal entity from the company's owner. Thus, the beneficial owner of a company is able to separate his/her assets from the business.
A company can also, through the setting up of an investment holding entity, hold its real estate assets acquired through a commercial property loan. This could help create another layer of buffer separation from the operating entity and assets of the investment holding company. A sole proprietor would not be able to structure such separation of business assets.
A sole proprietorship is great for small businesses to set up and get running immediately without too much distractions on regulatory, accounting and compliance issues.
There is generally no issue nor restrictions for a sole proprietorship to apply for banks business loans. However, it could be tougher to qualify for financing due to perceived lack of structure and paid up capital, as well as proper financials accounting records.
However, once the business is on track and more resources available, conversion to a private limited company should be considered. This will improve the perceived credibility and access to financing for the business and makes it easier to establish trust with bankers.
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