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SME Financing Ultimate Guide – Insider’s Tips To Secure Funding

Home SME Financing Singapore Ultimate Guide – Insider’s Tips To Secure Funding


In this comprehensive SME financing Singapore guide, you will find practical information on how to secure a
SME loan easily.

You can compare over 20+ banks and financial institutions SME business loans products and view all your eligible funding options instantly!

Use our free loan assessment tool to check your company’s indicative loan eligibility and see all available financing options instantly.

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From the chart below indicating total loans to businesses [1] extended by banks in Singapore, the data seems to indicate an uptick in business loans throughout 2018 to 1st quarter 2019.

 

MAS total loans to businesses


However, Singapore’s economic figures took a beating in 2nd quarter 2019 on the backdrop of the US-China trade war. As a trade reliant economy, Singapore’s GDP shrank by 3.4% in the 2nd quarter of 2019 from the previous quarter, the biggest decline since 2012. [2]

If the macro economy continue to slow, banks might taper lending to businesses. SMEs will usually experience the credit crunch first, due to perceived higher credit risk profile.

SME owners must manage their working capital cash flow prudently and plan ahead on financing. You’ll find useful, actionable information here to help your company secure funding.

Content
1.When Should I Apply For SME Financing?
2.Where can I apply for SME financing in Singapore?
3.Types of SME financing facilities
4.SME Financing Interest Rate
5.Criteria to qualify for SME financing
6.Documents and information required for SME financing application
7.How to optimize approval of SME financing applications
8.Bonus Content
9.What you should do next?


When Should I Apply For SME Financing?

There is an old adage:

“A bank is a place that will lend you money if you can prove that you don’t need it.”

This is true. The best time to apply for SME financing is when you can prove that you don’t need it. The worst time to seek financing is when you need it the most.

Unfortunately…

Many SME owners will only start sourcing for financing when they face a cash flow crunch.

Many of these applications will regrettably be declined by banks. Banks are in the business of managing risk and will not indiscriminately offer SME financing to companies with no clear demonstration of repayment ability.

Therefore, it is always a good practice to plan ahead and start initiating your loan applications when your company is in its best financial shape.

sme-loans-compare

Where can I apply for SME financing in Singapore? 

Banks

Banks will most certainly be the first port of call for most SMEs when it comes to financing.

Banks have well-structured and regulated credit lending functions. They provide almost all forms of SME financing instruments.

There are many banks with SME presence locally:

Aside from the three local banks DBS, UOB and OCBC, many foreign banks active in SME financing in Singapore include:

Maybank, Standard Chartered Bank, Citibank, HSBC, RHB and many others.

All banks have varying credit criteria. 

Interest rates, financing quantum and terms differ across these banks as well. It would be prudent to compare all bank products as widely as possible.

Business loans from banks are generally the cheapest financing option. However, securing an approval is tough and can be a long strenuous process for many SMEs.

Due to the perceived higher risk and default rate in SME lending, most banks’ credit assessment is stringent and robust.

Banks do not publicize their SME loan application approval rates. From a 2015 study conducted by Visa and Deloitte [3], it was found that 40% of SMEs do not have any banking support.

Visa Deloitte Study SME financing Singapore

Credit: http://www.visa.com.sg/aboutvisa/mediacenter/NR_SGP_231015.html


If your company has sound financials, healthy cash flow and prepared to wait few weeks to a month on the assessment process, business loans from banks would be the best choice.


Financial institutions

Financial institutions (FIs) also conduct lending activities to SMEs but operate without a full banking license.

There are many FIs serving the SME market:

Hong Leong Finance, Singapura Finance, Sing Investments & Finance and many others.

Although FIs provide unsecured SME loans too like banks, most FIs are specialist lenders and usually focus on asset based lending such as factoring or equipment loan.

In February 2017, MAS announced new regulation [4] allowing finance companies to offer larger amount of unsecured SME financing up to 25% of their of their capital funds from previous cap of 10%.

This is expected to free up an estimated $550 million of SME loans finance companies can potentially provide.

In Q3 2018, Singapore’s largest finance company Hong Leong Finance saw it’s loan book to SMEs increased to S$10.3B from year to date, the highest record in it’s 57 year history [5] following the relaxing of lending rules in Feb 2017.


P2P crowdfunding

Peer to peer crowdfunding is one of the latest fin-tech trend that’s gaining traction. P2P crowdfunding provides debt financing to companies via pooling of funds from a group of investors, facilitated via an online crowdfunding platform.

Such platforms bring together borrowers (SMEs) and lenders (individual investors) and facilitate financing between them.

These platforms originate business loans by listing potential borrowers on their platform. Individual investors of these platforms can view basic financial profile of these listings and participate in the funding process.

Crowdfunding is a viable option for SMEs not qualified for traditional bank loans, as the credit criteria is usually less stringent.

However, to compensate investors for taking a higher capital risk, interest rates for such loans are also higher than bank loans.

Most P2P small business loans bear short term tenure ranging from one month to a year. 

As of June 2016, P2P platforms operating locally must be regulated by MAS and be issued a Capital Market Service license to operate.

 

Alternative lenders 

There are also many alternative lenders operating in the SME financing sphere. Most of these alternative lenders are small scale operators and serves a niche market.

Some of these lenders are private investors whom lend directly to SMEs. Some are online lending platforms operating as direct lenders.

Interest rates for these alternative lenders tend to be the highest among all funding options. These are usually considered lenders of last resort.

 sme-loans-compare


Types of SME financing facilities

Unsecured business term loans

This is a lump sum loan without collateral. Repayments are made via equal monthly installments, for tenure between one to five years.

Business term loan is the most common form of SME financing and is a plan vanilla product for banks.

It’s the most popular SME financing product for SMEs with its flexibility and ease of use. There is no restriction on usage of funds.


Government financing schemes

There are a multitude of financing schemes administered by Enterprise Singapore.

For most of these schemes, the government co-shares a portion of the lending risk with participating financing institutions.

Here’s a summary of the various schemes:

SME Micro Loan

  • For local SMEs with annual turnover $1M or less OR employees 10 or less
  • Maximum funding amount $100K
  • Repayment period up to 4 years

SME Working Capital Loan 

  • For local SMEs group annual turnover <$100M or group employment size < 200
  • Maximum funding amount $300K
  • Repayment period up to 5 years

SME Equipment & Factory Loans

  • Automating/upgrading of equipment or purchasing HDB/JTC premises
  • Up to $15M funding

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
  • Financing of inventory, receivables discounting & pre-delivery working capital

Bridging Loan for Marine and Offshore Engineering companies

  • For marine and offshore engineering companies, to help with sector slowdown
  • Maximum funding of $5M per company
  • Repayment period up to 6 years


Equipment and machinery loan  

For purchase of fixed asset such as equipment or machinery for your business.

Usually structured under a hire purchase agreement or leasing agreement similar to car loans.

As this is a secured loan with the equipment/machinery pledged as collateral, interest tends to be lower than unsecured loans.

The financing bank usually finance 70% to 90% of the purchase price of the equipment with loan tenure typically between one to five years.

 

Commercial and industrial property loan

commercial property business loan singapore

A commercial or industrial property loan bears the lowest interest among all SME financing facilities.

Although property loan is considered less risky to the bank versus unsecured business loan, the banks do assess the company’s repayment ability as well.

Banks usually can finance up to 80% of the purchase price of the property or current market valuation, whichever is lower. 

Many savvy SME bosses with commercial and industrial properties will also use their property as collateral for business financing.

Tip:

If you are considering purchasing your own commercial/industrial property, do note to apply for financing first before committing option to purchase to seller. This is to gauge the maximum financing amount your company is eligible for.


Factoring and receivables invoice financing

Factoring/receivables invoice financing is a suitable facility to unlock cash stuck in your customer’s unpaid invoices if you sell B2B on credit terms.

You sell your invoices to the financier, getting a cash advance upfront, while financiers takes over the debt.

With factoring/invoice financing, you could get a cash advance of between 80%-90% on the value of your outstanding invoices. The remaining % will be paid to you after financier receives payment from your customer.

It’s an ideal solution if you extend long credit terms or sell to big name blue chip clients. In factoring, financiers prefers financing invoices to reputable large companies or government bodies. 


Trade financing

Trade-Finance-Diagram

Trade financing are credit instruments used to finance your company’s trade cycle. For SMEs, banks usually offer import financing as the primary trade finance product.

This is a pre-approved revolving credit line granted for financing your raw material or inventory purchases from suppliers.

Banks will pay your suppliers invoices directly while granting you credit terms of between 90 to 120 days.

With a trade financing credit line, you can issue bank’s LC (Letters of Credit) to your overseas suppliers or pay directly to local supplier whom have delivered goods to you. You can then convert the LC to a TR (Trust Receipt) with 90 to 120 days credit terms.

You’ll only pay interest on the limit you utilize and is an extremely useful financing tool for funding short term trading cycles.

 

Business Overdraft

business loan overdraft

An overdraft facility (OD) is simply a revolving line of credit granted to a company. You can withdraw cash anytime within the initial credit limit granted, for any usage.

You only pay interest if you utilize the overdraft limit.

The way banks calculate interest for overdraft is different from business term loan.

For unsecured business term loan, interest is calculated by monthly reducing amortization basis. For OD, interest is usually calculated daily and debited monthly.

As such, you are accruing interest on daily basis once you utilize your credit limit. Interest on overdraft also tends to be slightly higher then term loan.

OD is a useful facility to plug short term (few weeks to a month) working capital gaps. But they should never be relied on as a long-term SME financing tool.


SME Financing Interest Rate

  • Unsecured business term loan interest rates range between 8% to 12% p.a. effective rate.
  • Government financing schemes bears interest of about 7% to 9% p.a. effective rate.
  • Secured loans for equipment and machinery loans interest ranges between 2% to 7% p.a. flat rate.
  • Revolving facilities such as trade financing and factoring interest is between 6% to 9% p.a. effective rate.
  • Property financing is the cheapest form of financing with interest between 2% to 4% p.a. effective rate.

Interest rates varies between different banks. Generally, interest is determined by the credit profile of the borrower, the loan quantum and whether if loan is collateralize.

Most Singapore business loan interest rates are calculated via monthly reducing rest basis, with principal loan amortized over the loan tenure on monthly rest.

For a more detailed guide on how to derive effective interest rate, do check out our business loan interest rate page.

 

Criteria to qualify for SME financing

Industry and business nature

Some banks have specific industries that they don’t finance due to existing heavy credit exposure or high default rates in their books.

Macro-economic issues and negative sentiments will also affect bank’s financing on particular industries.

The negative outlook for the offshore and marine sector in 2016-2018 has been well documented [6] and this affects all companies operating in the industry when applying for financing during that period.

If your company does not qualify for a loan with one bank due to your industry nature, it is not necessary that all other banks will follow suit. Different banks may have varying outlook on the same industries.

 

Years of operational history

Most banks and financial institutions will require two to three years of operating history before considering extending financing.

Therefore, new startups are usually not able to qualify for traditional business loans. Startup business loans are not common in Singapore and loan options are usually very limited.


Annual revenue 

You will need to have a recommended minimum annual revenue of at least $200k. 

Your annual revenue will also determine your eligible loan quantum.


Financial report analysis

financial report for sme loan singapore

Most banks will require to assess your company’s financial reports. 

There are many factors banks will analyze when scoring your financial report. Without going into an accounting 101 lecture, the most important figures to note in your financial report is your net profit/loss in your Profit & Loss statement and your total equity figure in your Balance Sheet.

In general, if your company is reporting a net loss or reflects negative equity, it will be challenging convincing the banks to extend a small business loan.

However, in certain situations, an experienced SME loan broker might be able to help mitigate weakness in your financials if there are other mitigating factors to help support the application.


Bank statement analysis

Your company’s bank statement is very important for banks’ loan evaluation.

Factors such as the average cash float maintained, crediting and debiting amounts, month end balances and cash flow fluctuations will affect loan eligibility.

Returned cheques are detrimental to business loan assessment. The banks weight this heavily as it indicates signs of credit unworthiness and tardiness in managing cash flow.

It is recommended to maintain bare minimally $10k to $20k in your average daily balances and month end balances for the last 3 to 6 months prior to SME financing application.


Director’s personal income and credit history

Banks will also consider director’s personal income and personal credit history for a business loan.

Most banks require directors with minimum $30k personal income reported in Notice of Assessment.

Director’s personal credit bureau checks will be conducted as well. You can check your personal credit bureau score by purchasing it at www.creditbureau.com.sg.

In your credit bureau report, the overall credit grading is at the end of the report. This grading ranges from AA which is the best grading to HH.

credit bureau report score for sme loan singapore

Not all banks will solely base their credit assessment on this credit bureau score but you should target for overall score between AA to DD and avoid GG to HH scores.

To improve your credit score, ensure prompt payments on all your personal credit facilities. Making full payment on your credit cards instead of rolling over balances will also improve scoring.

 

Documents and information required for SME financing application

Financial reports

Most banks require latest 2 years financial report for SME financing assessment. The latest financial year report should be within 18 months from loan application.

If your accountant has not prepared the full set financial report yet, you can supplement the application with a set of internal draft management accounts which minimally should reflect the Profit and Loss Statement plus Balance Sheet.

Bank statements

Most banks will require latest 3 to 6 months bank statements for business loan assessment.

Tip: If you anticipate an upcoming cash flow crunch or large payments out, try to plan ahead and apply for a loan earlier. Your bank statements will score better if most recent months’ cash balances are healthy.

Debtor’s and creditor’s ageing list

You might need to furnish your latest debtor’s and creditor’s ageing payment list if available.

Director’s IC and Notice of Assessment

Director’s IC copy to verify identity and personal Notice of Assessment (NOA) for latest 2 years are required. 

GST Form F5

If your company is GST registered, some banks might also require last 4 quarters of GST form F5 returns.

Existing loan facilities

If you have existing SME financing facilities from other banks, you would need to furnish the details.

Information required would be the names of the lenders, type of facilities, outstanding loan amount, outstanding tenure, interest rate, and monthly installment.

Site visit photos

Some banks might require to conduct a site visit to your company’s operating premises.

The purpose of this is to verify the company’s operating address and to conduct due diligence. If you don’t have a proper operating premises, it might affect the application. 

Brief write up on company’s information

Not compulsory, but a loan application that comes with a brief 1-2 page write up on company’s business nature, key customers, management team profile, working capital requirements and projected future plans might be useful to improve approval chances.

 

How to optimize approval of SME financing applications

These are the steps you can take to improve the chances of approval.

  • Plan and submit applications ahead of time

Start planning ahead, prepare for business loan applications before you need it. If you have an upcoming order or project that requires additional working capital support, try to plan your applications earlier.

Be prepared to wait two to three weeks for application status.

  • Always review your company’s bank statements and financials

It is good practice to review your bank statements and accounts monthly to keep on top of your financials.

If you realize that your cash flows are tight, take steps to improve working capital cycle either by chasing debtors payments or negotiating longer credit terms from suppliers.

  • Ensure prompt repayment on personal credit facilities

Ensure your personal credit facilities such as credit cards and car loans are paid promptly. Some SME owners neglect this and have their personal credit score impacted.

Your personal credit score has a high weightage in a SME loan assessment. Business loan applications can be declined due to director’s tardy personal credit conduct.

  • Keep your financing options open and always compare

No two banks have the exact same credit criteria. Interest rates and financing terms differs across lenders as well.

It is best to keep your options open when initiating financing applications. Compare as broadly as possible to make sure you get the lowest rates with most favorable terms.


Bonus Content

Thank you for making it so far. Here’s a bonus content to thank you for staying with us:

 

What you should do next?

Now you have a clear understanding on the business loan landscape and assessment process, it would be much easier when you next apply for funding.

If you would like to compare all banks loan products, try our SME financing comparison tool and see your loan options instantly!

sme-loans-compare

Resources and references:

[1] https://secure.mas.gov.sg/msb-xml/Report.aspx?tableSetID=I&tableID=I.5A
[2] www.bloomberg.com/news/articles/2019-07-12/singapore-s-economy-contracts-sharply-as-manufacturing-slumps
[3] https://www2.deloitte.com/sg/en/pages/financial-services/articles/digital-banking-for-smes.html
[4] http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/Changes-to-Finance-Company-Regulations-to-Enhance-their-Ability-to-Finance-SMEs.aspx
[5] https://www.businesstimes.com.sg/banking-finance/finance-firms-loans-hitting-records-on-relaxed-sme-lending-rules
[6] http://www.straitstimes.com/business/companies-markets/oil-troubles-spill-over

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