So many dreams, so little money: Although startups often find it near impossible to get capital if they are pre-revenue, there are a few options they can try. Photo credit: Unsplash
There is a Chinese saying that goes something like “Everything is difficult in the beginning”.
Even more so if you are running a startup – the age-old problem being, quite simply, where can you find the funds you need when you are at the pre-revenue stage?
This would also beg the question of whether there is such a thing as a startup loan? The quick answer is no, there isn’t.
However, there are other avenues you can tap to get startup financing or that seemingly elusive working capital loan.
The Startup SG Loan programme puts the spotlight on government-backed loans for young enterprises as they try to forge a growth path.
First launched on 29th October 2019, the Enterprise Financing Scheme (EFS) streamlined existing financing schemes and extended the support given to young companies.
There are six categories that are covered under the EFS, namely:
1. SME Working Capital
This type of SME financing helps to finance operational cashflow needs – up to S$300,000 per borrower*.
2. SME Fixed Assets
This SME loan finances the investment of domestic and overseas fixed assets – up to S$30 million per borrower*.
3. Venture Debt
This finances the growth of innovative enterprises through venture debt and warrants – up to S$8 million per borrower.
4. Trade Loan
The EFS – Trade Loan (EFS-TL) finances trade needs – up to S$5 million per borrower – until 30th September 2022, as per Budget 2022.
Its revised parameters are as follows – S$5 million per borrower, S$20 million per borrower group, maximum repayment period of 1 year and the risk-share percentage at 70%, then 50% after 30th September 2022.
5. Project Loan
The EFS – Project Loan (EFS-PL) will be extended for another year to 31st March 2023 to support construction enterprises in fulfilling their domestic projects.
The maximum loan quantum will be S$30 million per borrower or per borrower group for domestic projects, with a maximum repayment period of 15 years, and government risk-share percentage at 50%, and 70% for young enterprises.
Young enterprises are firms formed within the past 5 years with at least one employee, and more than 50% equity owned by individuals.
6. Mergers and acquisitions
The EFS – Merger & Acquisition Loan (EFS-M&A), which supports Singapore-based enterprises’ acquisition of overseas or local enterprises, will be enhanced for four years, from 1st April 2022 to 31st March 2026.
The maximum loan quantum will be S$50 million per borrower or borrower group, with a maximum repayment period of 5 years, and government risk-share percentage at 50%, and 70% for young enterprises.
To find out more about various financing areas under the EFS, go here.
*Borrowers are subject to an overall borrower group limit for each facility.
Never mind if your business is less than six months old and in a nascent stage (read: with no discernable revenue to speak of).
Under such conditions, you most probably will not be able to get a business loan, but you can always try opting for a personal loan.
If you are not mired in debt, stuck in a lawsuit or bankrupt, and if you have quite a good credit rating, you stand a good chance of getting your personal loan approved.
That said, be sure to approach a licensed moneylender though, and be aware of what to look out for.
If you don’t have any assets or collateral to pledge, you will likely need to opt for an unsecured loan.
This presents a certain level of risk to lenders, be they banks or peer-to-peer lenders.
So you would need to find a guarantor – someone who is preferably holding down a stable job, earning at least S$30,000 per annum (do check – this varies from lender to lender), and a Singaporean or Singapore permanent resident usually between 21 and 62 years of age.
The abovementioned constitute the guarantor criteria for the OCBC Business First Loan, one of the few bank loans out there that cater to startups between six months to 2 years old.
Tip: Your chances of having your loan approved may be higher if you can find more than one guarantor, because it presents the lender with additional security and peace of mind.
However, if you do have collateral to pledge, all the better! However, if you unfortunately end up having to default on your loan, the collaterals you have will be used to recover the lenders’ losses.
Examples of collaterals include invoices, equipment, a vehicle, or a residential (non-HDB), commercial or industrial property. Note that you need to be the owner of the asset you are pledging.
Not all collaterals are the same to lenders. Depending on the loan amount and tenor, and purpose of the loan, some types of collaterals will be deemed more attractive to a lender; while some, less so. The lender will look at the value of the asset and come to a decision after considering other criteria.
If the value of the asset is depreciating, the lender will appraise it based on its value at the end of the loan, instead of its market price at the start of the loan.
At times, the lender may request for more assets to be pledged if it seems the collateral you are offering may suffer a further depreciation in its market value.
If you already have another company or affiliate that is bearing revenue, you can try using the company’s assets as collateral – for example, its invoices.
Or try applying for a business loan using the last six months’ bank statements of said company, its year-end financial statements, NOAs of the directors, and their credit reports.
Needless to say, it will take a while for your startup to begin having any revenue. Still, you can be pro-active about building a good credit record before that happens.
For instance, begin developing a line of credit. Start sourcing for working capital facilities and establish small credit track records with lenders and banks, so that you have a network of contacts when you feel ready to apply for a business loan.
Another avenue for startups would be venture debt financing. Venture debt companies offer new businesses financing solutions, through which startups can get the growth or working capital they need to expand or buy equipment at the initial stage of their business.
Some of these companies offer revenue-based financing, where a percentage of whatever your business earns for the month goes toward payment after a lump sum is disbursed and flat fee is charged. Others may seek equity in return for whatever funds that are loaned to you.
Most of such companies move quite quickly, and are likely able to draw up a customized solution for you if you give them a good overview of where your business is headed.
Lastly, you could also try crowdfunding as an extra option.
Or simply register to make a loan application on digital business loan marketplace Lendingpot, and reach 45 lenders at once – for free.
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.
Get more loan options from the 45 lenders that are onboard our digital business loan marketplace.
Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.
