Last week, Lendingpot had the honour of being invited as a panelist on SME Centre@SMCCI’s webinar for its chamber members (watch the replay video on Facebook).
During the subsequent Q&A session, a question was raised by the moderator: “Are financial institutions in Singapore receptive of “third-party” guarantors as a form of security for an unsecured business loan?”
This article aims to explore and address the question in detail.
The most common business loan available for SMEs in Singapore is the Unsecured Business Term Loan.
The Unsecured Business Term Loan is a simple financing product, where a borrower receives the loan amount (loan quantum) upfront in a lump sum, and makes equal monthly repayments for a period of time (loan tenor), at a fixed interest rate.
The DBS Business Loan, OCBC Business Term Loan, UOB BizMoney, as well as the government-backed SME Working Capital Loan (EFS-WCL) & Temporary Bridging Loan Programme (TBLP) are some examples of Unsecured Business Term Loans with similar structures.
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As we have stated in previous articles, most SME loans are secured by personal guarantees of directors or shareholders (owners) of the business in Singapore.
Unsecured Business Term Loans are not secured by collateral (such as property) but will still require personal guarantees.
This requirement applies to all the loans mentioned above, including the government-backed credit facilities.
Firstly, Singapore’s legal system allows individuals to set up companies with limited liabilities.
Companies in Singapore can exist as a “legal entity, separate from its shareholders and its directors and can acquire assets, go into debt, enter into contracts, sue or be sued in its own name”.
Secondly, Singapore has a business-friendly regulatory environment, where the government tries not to over-regulate in order to encourage business activities.
SMEs under a certain size are exempted from producing audited financial statements. Singapore also does not have a mandatory, centralised SME Credit Bureau.
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These situations present unique challenges to financial institutions, as they are unable to accurately evaluate an SME’s credit rating as there is no credit bureau and nor audited financial statements, yet have to manage the risk that an SME can simply shut down the business after receiving the loan.
Thus, most financial institutions require personal guarantees from an SME’s shareholders/directors whenever an unsecured business loan is offered.
Personal guarantees will not only encourage the company directors to borrow funds strictly for business purposes, but it will also ensure that company directors work to repay the loan as they are also personally liable for any loss/non-repayment.
Third-party guarantors are individuals who are willing to give their personal guarantees to obtain the business loan but are:
Different financial institutions adopt different stances towards third-party guarantors.
| Institution | Stance on Third-party Guarantors |
|---|---|
| Local Bank A | Accepts third-party guarantors, as long as:
|
| Local Bank B | Does not accept third-party guarantors |
| Local Bank C | Does not accept third-party guarantors, unless that individual:
|
We have redacted the names of the financial institutions as the information provided is sensitive and not meant to be revealed to the public.
Make sure that these guarantors have good personal financial track records.
They should have sufficient income (approximately >$40,000), as declared in the Notice of Assessment (NOA), and also a good personal Credit Bureau Record (CBS Report).
Otherwise, having third-party guarantors will not improve the credit rating score of your company.
Similar articles: Your business loan application in Singapore requires these documents!
We have several other tips that would significantly help your business loan application if you would like to utilise third-party guarantors. Contact us now to find out more!
Disclaimer: This article is based on information that Lendingpot has received informally from partners. All the information is believed to be accurate; however, no claims, promises or guarantees about the accuracy, completeness or adequacy of the information are made. All information, commentary, recommendations or statements of opinion provided in this article are for general information purposes only. We do not claim to be authoritative. If there are any errors in our reporting, please contact ask@lendingpot.sg for rectification.
Lendingpot.sg operates a Business Loan Marketplace that allows an SME to connect to multiple lenders with just one application, allowing the SME to know who its prospective lenders are and the rates that they offer, in a very short time.
Eric Koh is passionate about helping SMEs grow and has spent years interacting with business owners at OCBC and IFS Capital. He is interested in 70s rock ‘n roll, the odd novel and copious amounts of historical trivia.
