Term loans are the most common type of financing offered to small businesses. They generally involve a fixed amount and set repayment periods.
However, term loans may not be ideal for some small businesses, due to their fixed structure. Depending on the business model, they may be unsuitable, challenging to fulfil or difficult to obtain. Fortunately, there are several alternative small business financing options to term loans, which we will discuss in detail below.
Credit lines, also known as Unsecured Overdraft Facilities, are a revolving credit facility, where a company withdraws financing (called a draw down) whenever they need, as long as it is within their credit limit.
Repayments of both principal and interest commence the month after a draw down is made, with a tenors lasting up 3-6 months. Interest rates range from 0.5-3% per month.
When the limit is reached, you will have to complete the repayments of at least one of their draw downs before being allowed to take out financing again. The great thing about a credit line is that you can draw down only when required and make the repayment as early as one day! If you are borrowing only for 3 days, the absolute interest can be as low as 0.05%.
Invoice financing, also known as Account Receivable financing, allows companies to borrow funds against their outstanding or unpaid customer invoices. Lenders offer funding up to 80 - 90% of the invoice’s face value, usually within 24 hours.
Financiers will then claim the outstanding invoice from their borrower’s debtors. Once they are successful in reclaiming the outstanding amount, they will refund the remaining 10-20% of the invoice to the client, minus fees and interests. Some lenders, however, do not refund the remaining amount to their clients, but claim it as part of their profit or earnings after a successful invoice recovery.
Business owners may choose to take out a loan guaranteed by a collateral, which usually allows access to higher funding compared to unsecured loans. In this case, their property. They may cash out this loan using residential, commercial, industrial or shophouse properties under their personal name or under the business.
The maximum amount that can be cashed out depends on the loan to value (LTV) rate, outstanding property loan amount on the asset and total CPF funds used to purchase the property. In general, banks offer an LTV ratio of 60-70% whereas alternative lenders offer a higher LTV of about 70-85%.
Some financial institutions offer start-up loans to entrepreneurs who have not yet started their businesses and are looking for capital. Other financiers also offer loans to existing new companies aged between 6 months to 2 years old. Start-up loans can take several forms, including the classic personal loan, shares backed loan and insurance backed loan.
This unique form of financing is only made available to retailers and those in the F&B industry that make use of credit card terminals. With a Merchant Cash Advance, the average credit card transactions received by the business over the past 6 months will be calculated. The lender will then offer a loan quantum between 1.5X to 4X the average transactions per month.
Repayments for this loan facility will be made by direct deduction of a joint bank account made between the lender and business. All credit card transactions for the business will be directed to this account, and repayment deductions will be carried out within a 6 to 9 month period.
Small business loans are not confined to just term loans, and some of the examples we shared above can offer your business the breathing room it needs to continue thriving. Lendingpot provides access to multiple loan providers, who offer different types of loans for your business, including term loans, invoice financing, credit lines, revenue based financing and many more.
Register easily with your Singpass business credentials to start receiving offers from more than 45 lending partners, including banks, P2P lenders, private money lenders and others.
Lina heads up all things marketing and branding at Lendingpot. With a keen aesthetic eye, she believes in the use of design to communicate with our SME community and aspires to turn Lendingpot into a household name. Out of work, she is an avid camper and appreciator of nature’s best works.
