Loans are vital to the success of any thriving economy, providing businesses with the financial leeway to adapt to changing market conditions, invest in growth opportunities, and sustain operations during challenging times.
However, access to financing has been one of the key challenges faced by SMEs in Singapore; this is precisely why Lendingpot was established: to help businesses access the best financial products tailored to their needs.
While financial institutions in both the public and private sectors are making efforts to strengthen financial support for SMEs, it becomes increasingly important for businesses to educate themselves on the various loan options available, the terms involved, and the factors that influence loan interest rates.
With that in mind, in this article, we want to explore what constitutes a reasonable SME loan interest rate and how businesses can assess the most suitable financing options for their specific needs.
Before we delve into how SME loan interest rates work, it’s important to understand that banks and other financial institutions are, in essence, businesses, with their earnings derived from interest. Interest rates represent a portion of your principal amount borrowed that has to be paid to the lender as part of the cost of borrowing. There are several types of interest systems practised by local banks and lenders, below are some of the few you will encounter.
A flat interest rate remains the same throughout your repayment period. It is calculated as a percentage based on your original principal loan quantum. This amount is then divided by your loan tenor, which is the number of months your repayment will last for. Each month’s interest amount remains the same, even though your outstanding unpaid principal decreases over time.
Flat rates are rarely used by banks but you will see them quite abit for private lenders. As flat rates typically lower than effective rates, you have the be extra careful not to be fooled by lower flat rates.
The concept of EIR is closely tied to the understanding of loan interest rates as a whole. EIRs refer to the total cost of your loan, and is often higher than the Flat or Afvertised Rate (AR) which is charged on your principal loan amount.
Essentially, the EIR includes administrative charges, processing fees, stamping fees, upfront fees and similar charges which will be levied along with your loan. It also takes into account your reducing balance when you pay back your instalment. When all of these costs are factored in, you’ll find that the actual cost of your loan increases slightly from the nominal interest rate. It is important for you to know the EIR of your loan so you can gauge your capabilities for loan repayment.
The type of interest rate, in addition to factors such as loan type (secured or unsecured), market conditions, loan product (e.g term loan, line of credit, working capital, e.t.c), type of lender (bank, moneylender, government institution) as well as administrative fees makes it difficult to establish a single interest rate that is considered appropriate across the board.
That being said, interest rates typically vary between 7% to 12% per annum. The table below outlines average business loan interest rates in Singapore as of 17 September 2024.
Fortunately, there are several steps that you can take to improve your chance of obtaining a favourable SME loan interest rate, and we’ve highlighted them here.
If you wish to obtain the favourable interest rates on your SME loan, the best way to do so is comparing the various financing products available to you in your current position. Lendingpot offers you an easy-to-use and efficient way to achieve this, with a quick sign-up process you will be able to receive loan offers from our more than 45+ lending partners which include banks and non-bank lenders. Sign up today to take your business to the next level.
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.
