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Taking up debt financing for your business will either come as the biggest leap to growth or the most dreadful and stressful period of your entrepreneurial journey depending on your lender of choice. It is called “leverage” after all. Aside from the vigilance required to verify the legitimacy of lenders which Lendingpot has gladly assured, selecting the lender for you will depend on your fit with one another.
With the numerous lenders available in the market, you’re now spoilt for choice. What exactly are businesses supposed to look out for in their lender? How will you know when you’ve snagged a good deal? The following are indicators of a good lender:
Looking at the lender of choice starts by looking at the type of loan offered. Afterall, the purpose of finding a lender stems from finding someone who can sufficiently and manageably finance your company’s operations. Some parameters of a good loan solution include the quality of its (a) Loan Tenor (b) Loanable Amount (c) Transparency of Fees and Terms, and (d) Flexibility of Contract and Repayment
Duration wise, businesses prefer to take on loans with longer repayment periods in order to have the flexibility of fluid cash. The longer the repayment period, the greater the freedom to operate the business.
Repayment duration for most banks may run from 5 to even 30 years long depending on whether or not the loan is secured. Secured loans, or loans backed by company assets, will typically have a longer repayment period as lenders are guaranteed a form of recuperation if the borrowing company defaults on payment. If you’re looking to extend your repayment timeline, you could opt for a secured loan if unsecured loans don’t fit well into your schedule. While the term “secured” is used loosely in most context, it typically only refers to a property-backed loan.
As for non-banks, tenors typically do not exceed 12 months, this is largely due to the loan nature which mainly acts as a bridging loan to tide you over short periods of liquidity shocks. Also, interest rates are charged per month and can range from 2-3%. There simply isn’t an economical case for this.
A cause of concern arises on the off-chance your lender has limited ability to finance your sudden increase in expenses, you may have to resort to borrowing from other lenders to finance the remaining expenditure. While some may choose to partner with different lenders for different types of loans to leverage on its respective benefits, it is ideal to stick to one lender. As such, when things go wrong, you only need to negotiate with a single party rather than to coordinate between multiple lenders with mistrust for each other. That can be a true nightmare.
Different lenders have varying levels of sweet spots when it comes to loans. Most non-bank lender have an appetite of S$30,000 to S$50,000 for unsecured business loans while banks usually lend between S$75,000 to S$200,000. As such, try to fit your needs within these levels to minimise the need for multiple lenders.
The key terms in a loan agreement would have to be the principal and interest rate, which should be kept transparent and upfront. When competing on interest rates, the lower the better. There have been instances where a promised interest rate, upon entering the contract, was not adhered to upon loan repayment.
To avoid any disagreements and inconsistencies, lenders could state what the interest rates will be tagged against. For example: “interest is at the average prime rates of DBS, OCBC and UOB on the 1st of each month at the commencement of loan repayment…” Alternatively, you could protect yourself by negotiating with the lender and fix a manageable interest rate chargeable upon repayment.
In order to stay competitive, some companies may decide to compete outside loanable amounts and interest rates. Instead, they cut processing fees and legal fees to appear more attractive and market their loans as “cost-free”. While tempting, these “cost-free” contracts often come with higher interest rates and it is advised that you run your numbers to verify the overall cost or benefits when competing against “cost-free” and high interest contracts.
There are other hidden fees to look out for such as prepayment fee, acceptance fee which is a fee that you agree to pay regardless of whether you drawdown the loan after acceptance of the letter of offer. Do make sure to ask for a full breakdown of all fees with your loan officer.
In a contract, it is also best to look for loans which are manageable and provide sufficient wiggle room in case of sudden costs or changes in your operations. Flexibility of repayment schedule gives you the ease of mind that given your past consistency of financial trustworthiness, a slight and temporary change in repayment would not affect your credit score.
For example, one flexible repayment option would be revenue-based repayment. As the name suggests, the repayment of the loan is dependent on your company’s respective cashflow for the month. You may pay off a greater percentage of your loan when you experience greater inflows, or lower percentages when faced with a lower performance. Another example is bullet or balloon repayment. Debtors can pay back their loans in smaller, incremental payment leading up to the final balloon repayment which retires the loan. Where there is a possibility you may not be able to fulfil the final balloon payment, your lender may safely opt back to equated monthly instalments, or EMIs, which operate like regular loans with fixed regular repayment amounts.
In whichever case, these, newer, flexible, repayment options can help to relieve concerns of having to keep up with your repayments based on how much your capacity to match up.
Flexibility is also valuable when deciding the loanable amount as sudden increases in spending are often urgent and driven by unexpected or uncontrollable factors. The greater the financial capacity of a lender, the more freedom you have to adapt to changes. Keeping these in mind, flexibility should also be applied to loan terms. Lenders should take into account the manageable term and fees for you to repay, considering how adept they are at forecasting your average inflows.
Having a flexible loan structure is great as it accounts for the uncontrollable circumstances affecting your cash flows. In any case, a safety net is a great option which allows you to work within your means without compromising on your credit score. Other forms of repayment methods might be a balloon repayment or bullet repayment where most of the principal is placed towards the end of the tenor. This helps ease obligations earlier on when a project that you are financing is just gaining traction.
Being in the entrepreneurial space opens doors to a myriad of opportunities for growth. Having a lender with expertise in both the loan application process and your industry can greatly help to fast track your company’s growth.
In the financing space, your lender should be able to walk you through the application process, from how to source for documents required to recommendations on which loans would be best suited for you. Especially for younger companies who may not be entirely familiar with the different terminologies used in contracts, having a lender who can patiently explain the ins and outs of the process would create a pleasant and informative experience for you.
The lending space can often come with an overwhelming amount of information which may not necessarily be your deciding factors at the point of entering the contract. Good lenders can support by running you through important points of information which in turn saves you time and energy when making informed decisions for the betterment of your company.
Lenders with expertise in your field could also help by providing additional forms of support. Apart from referring you to governmental subsidies and grants available, opportunities to connect with others in your field may create a great networking space for you. Those who are more familiar with the use of loans, may also propose managerial strategies to expand your company through financing at each stage of your development.
How a lender works together with you is also another vital point of consideration. As loans often exchange huge sums of money, it would be best to match with lenders who are communicative and direct. Apart from being transparent about the terms of the loan, they should also communicate efficiently with you over the course of repayment as well as consistently inform and justify any changes in your contract.
Companies should also look out for lenders who want to maintain good working relations. Just as a company’s credit score increases with its lending history, so does a lender’s. A debtor’s track record of lending, both in how they work and management of funds, is a telling sign of how they run their partnerships. One indicator of a good working relations could be how many regular clients they have as this reflects the level of trust between the two parties.
There may not always be a one size fits all solution to this. As the matching between lenders and borrowers also tends to depend on chemistry, let’s not give it too much pressure when it comes to securing a deal too quickly. Taking time to sieve through available sources of funding is a great way to start the possibly decades-long repayment with your lender.
Thankfully, Lendingpot provides free matching with lenders while keeping you at the centre of it all. Once you’ve received multiple loan offers from some of the 45 on board, take the time to assess the practical and interpersonal exchanges of your match and secure the right fit for you.
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.
Tarsilla has been an avid writer since 2019 and covers topics from event exclusives, photography, to finance. With a creative and explorative mind, she actively seeks opportunities to learn new things and takes challenges head-on.
