If you are an SME business owner in Singapore, you will most likely require business financing at some point in your business journey. The additional capital may be used to expand your business, plug working capital gaps, or finance inventory or property purchases.
In Singapore, the most common business loan product is the unsecured business term loan, where borrowers receive a lump-sum amount at the start and make equal monthly repayments at a fixed interest rate, usually over a period of several years. (“Structure”)
Examples of unsecured business term loans include Enterprise Singapore’s SME Working Loan, Temporary Bridging Loan Programme, term loans offered by peer-to-peer (P2P) lenders, and SME Help Funds.
Unsecured business term loans are not secured by physical collateral such as property or equipment, but by company directors’ personal guarantees. Financial Institutions will evaluate a company holistically based on its past financial performance, current bank statement records, and by taking into account its guarantors’ personal credit records. (“Evaluation Criteria”)
This article explores 5 types of business financing products (currently available) that have either a different “Structure” or “Evaluation Criteria” for SMEs that are unwilling or unable to obtain an unsecured business term loan.
The Merchant Cash Advance (MCA) is a niche financing product that is only available to retail or F&B businesses that use credit card terminals.
Evaluation Criteria
The main evaluation criteria for an MCA facility is the SME’s credit card transactions over the last 6 months.
The financials, profitability and guarantors of the SME will play a smaller role and be evaluated only if the SME requests for a larger-than-usual loan amount.
Structure
The MCA’s advance amount (loan quantum) is first calculated by averaging monthly credit card transactions over the last 6 months and multiplying this amount by 1.5 to 4 times (e.g. if the average monthly transaction is $10,000, the advance amount available may be $15,000 to $40,000).
This loan amount will be given to the SME at the start of the facility and the repayment will be made over a period of 6 to 9 months.
The financial institution will open a new joint bank account with the SME and direct all credit card transactions into this account where monthly repayments will be deducted automatically.
If the monthly credit card transactions exceed the monthly repayment amount, the financial institution will hand over the excess cash to the SME. However, if the monthly credit card transactions fall below the repayment amount, the repayment period will be extended by 1 month (may last 6 to 9 months).
Recommendation
The MCA is useful for retailers who do not qualify for a typical business term loan but still require working capital for daily wages or inventory.
Invoice financing in Singapore refers to credit facilities that use invoices as collateral.
Evaluation Criteria
The main evaluation criteria of an invoice financing facility is the financial strength of the SME’s customers. Government or multi-national corporation (MNC) customers are usually preferred over SME customers.
The borrower needs to provide a proven track record of service performance or past transaction history. The profitability and financial performance of the SME will play a smaller role during the credit evaluation process.
Structure
SMEs usually issue invoices to their customers after performing a service or completing a sale.
While awaiting payment, these SMEs may use these invoices as collateral to receive early payment for their work done.
Once approved for an invoice financing credit line (i.e. $100,000), the SME will be able to draw down up to 80% of the invoice value (i.e. 80% of a $10,000 invoice is $8,000) for each invoice until the credit limit has been reached.
The financial institution will receive payment for each invoice directly from the SME’s customer after 30 days and refund the remaining value of the payment (20% of invoice value) to the SME after deducting interest and fees.
This should not be mistaken for purchase financing, where an SME borrows capital (using the supplier-issued invoice) to make payment to their suppliers. This arrangement is essentially another form of an unsecured business term loan.
Recommendation
Invoice financing allows SMEs to unlock funds stuck in account receivables.
It enable SMEs to recycle capital faster and provides the liquidity to take on more projects in a shorter period of time.
This is particularly useful for SMEs that provide services to MNCs that usually pay late (e.g. construction, shipyards).
An unsecured overdraft (OD) facility is typically viewed as an alternative to business term loans and recommended for SMEs who require short-term working capital.
Evaluation Criteria
There is no difference between the evaluation criteria of an unsecured business term loan and an unsecured OD facility.
The SME will also be evaluated holistically based on its past financial performance and current bank statement records. The personal credit records of its guarantors will also be taken into account.
Structure
However, the structure of an OD facility is vastly different compared to an unsecured term loan.
An OD facility provides the SME with a line of credit instead of a lump sum amount. Interest is only charged on the amount that is used. The OD line also allows multiple withdrawals of any amount up to the credit limit.
Unlike the fixed monthly repayment of a term loan, SMEs are required to make a minimum monthly repayment of 20% of the outstanding amount in their OD credit line. This is similar to credit card facilities.
Interest will only be charged for the amount withdrawn and the period of usage (daily interest rate).
Find out more details about the OD facility in our previous article about OCBC’s Business Short Term Revolving Loan (discontinued in 2020).
Recommendations
The OD facility is recommended for SMEs that prefer the flexibility of having a standby credit facility or those that only require short-term financing.
This facility is an unsecured term loan that caters to young start-ups registered and operating in Singapore between 6 months and 2 years.
It is one of the few business loans available to young start-ups, and is offered by OCBC Bank.
Evaluation Criteria
Unlike the usual unsecured business term loan, there will be less emphasis on the financial performance and history of the company due to the lack of records.
The main evaluation criteria for this facility is the company directors’ (guarantors) declared incomes and personal credit records. At least 1 guarantor must have a minimum income of S$30,000 per annum.
From experience, an SME may obtain a higher loan quantum up to a maximum of S$100,000, if (a) there is more than 1 guarantor, (b) guarantors have high declared incomes (combined) or (c) guarantors have good personal credit records.
Structure
The Business First Loan has the same structure as the term loan. SMEs will receive a lump sum amount at the start, and will be required to make equal monthly repayments, for a maximum tenure of 4 years.
Recommendations
This facility is suitable for young companies as their first financing product with the bank.
Venture Debt Financing is a type of unsecured business term loan available to start-ups backed by venture capital investors. This facility is offered by DBS and OCBC.
Banks are traditionally unable to provide debt financing for companies that are unprofitable. However, in recent years, start-ups have been able to obtain multi-million (or billion) dollar venture investments while still unprofitable.
The Venture Debt Financing facility was created to address the financing gap for these companies.
Evaluation Criteria
The financial institution will evaluate the company based on the amount of equity funding obtained from venture investors, its innovation solution and/or business model.
Less emphasis is placed on the company’s history and financial performance, as start-ups applying for this facility are not profitable.
The maximum loan quantum of the venture debt facility is limited to 30% of the total venture capital raised in the last equity round.
Structure
The Venture Debt Financing facility will have the same format as the term loan. SMEs will receive a lump sum amount at the start, and will be required to make equal monthly repayment.
Recommendation
From the stated eligibility criteria, this product may only apply to a small group of SMEs.
DBS requires:
OCBC requires companies to:
We hope that these suggestions are helpful to SMEs that have encountered difficulty in obtaining the government-backed EFS-WCL and TBLP, especially when the interest rates for these loans have been reduced by more than 50%.
As part of the Lendingpot team, we are ready to extend our support and assist SMEs in matters pertaining to business loans.
Together, we will be able to overcome this.
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.
