The start-up dream is often foiled by endless challenges with one of them being the ability to get funds. In this series we will provide in as much clarity as we can what you can do to get financing for your dream idea and who are the main providers for them.
Many start-ups make applications on Lendingpot only to realise that they get directed to a personal loan lender instead. This is because one of the biggest struggle that new companies face is the lack of track record or even an existing operation. Thus, it becomes almost impossible to obtain a traditional business loan. Even if a loan is obtained, it is likely that you might be faced with a high interest loan (possibly 3-4% per month). As such, when you actually do the math, a personal loan might actually be a way better option. Here’s a few reason why.
As new companies are often subject to high interest rates from alternative lenders (3-4% per month). Personal loans rely on your annual income and can go as low as 6-8% p.a. If you have collaterals, they can even be as low as 2-3% p.a.
Business loans are disbursed at a proportion of your revenue which is negligible for a start-up or pre-revenue company. However personal loans are provided at a multiple of your monthly income. This can stretch up to 8x for some banks which can be a good boost for your business.
Reduce the need for administration with a business loan which entails, monthly reporting, provision of financials and bank statements etc. With a personal loan all information required are often already captured through MyInfo with no additional documentation required.
A personal loan is properly defined as a loan that is disbursed into a borrower’s personal bank account. This is not to be mistaken with other loans typically associated with it such as an auto loan or a renovation loan. The two mentioned are loans that are paid directly to the car dealer and contractor and not into the personal bank account. As such, auto loans and renovation loans are not appropriate for business use as there is no flexibility in its usage.
1. It all starts with your income
Depending on your annual income, you may be entitled to a loan quantum that is a multiple of your monthly income. See table below.
As you can see, banks in Singapore only serve the segment earning more than $30,000 a year and can lend up to 8 times your monthly income. Thus, anyone earning less than S$30,000 can only borrow from a licensed money lender.
Individuals earning S$20,000 to S$30,000 are best served by a money lender as they can borrow up to 6x of their monthly income. For individuals with no declared income, or income lesser than $20,000, the maximum loan they can obtain is S$3,000.
2. Your credit bureau score
The second most important thing that many lenders see is your Credit Bureau Report. Here’s a quick guide to understand your credit bureau report.
While there are many things to look at the report, the 3 things that can determine your eligibility are:
• Overall Grade
• Presence of default or bankruptcy
• Absence of score
See table below to see how each factor affects your eligibility:
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3. Figure out your Interest rates
As you can see, banks present a significantly cheaper option with rates ranging from 6-8% p.a. (EIR). Licensed money lenders on the other hand charge monthly interest rates and can go up to 4% per month. This is a upper cap regulated by Monetary Authority of Singapore (MAS).
4. Lastly, figure out your tenor
One of the great benefits of banks is that they can lend for an extended tenor up to 5 years which significantly reduces your monthly instalments. As for money lenders, because interest rates are almost 3-4x, it seldom makes sense for a loan to go past 2 years.
How do you make your pick eventually? The choice between banks and licensed money lenders is not entirely obvious for personal loans as there is a gap that money lenders are able to fill that traditional banks cannot. While banks are the preferred choice in most scenarios, here’s 3 scenarios you want to go with a money lender.
1. Your income is less than $20,000: Licensed Money Lenders can provide loans up to $3,000
2. You do not have a good CBS record: As long as you are not in default, licensed money lenders are still open to providing credit
3. You need a larger quantum but earn less than $40,000: While most banks can only extend up to 2 times, License money lenders can lend up to 6 times your monthly income
If the classic personal loan doesn’t work out for you, there are other alternatives for debt with security. One of them is a property-backed loan which may be the cheapest form of financing if there is still equity left in your property. Another two option are a share-backed loan where you can take a loan off public shares held with your broker, and insurance backed loan where you can take a loan on the guaranteed surrender value of your insurance policy.
If loans just generally don’t work out, try getting equity investors in. A good pitch goes a long way and a good partner even further.
Nonetheless, we encourage all you to make an application nonetheless to assess where you stand in terms of your financing options. Figure out how much it will take to start making good cashflow on your idea and see if the cost of funds make sense. From there you can make the best decision forward. Good luck!
Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.
