Most business loans are taken with the intention of helping the business startup or expand, or even to tide through periods of low revenue, but some businesses need more help when it comes to day-to-day working cashflow.
Businesses which operate on a project basis need to ensure that they have the necessary logistics before starting work on the project. This usually involves spending large amounts of money upfront to purchase the raw materials. Taking home renovation companies for example, tiles, fixtures, and other raw materials need to be purchased before renovation work can begin.
For some businesses, clients only make payment when the project is complete, or when certain milestones are met. Again, using the home renovation example, clients usually make full payment when the flat is fully renovated, and the client is satisfied, otherwise the client may withhold payment until the defects are rectified.
Having insufficient cash to purchase raw materials means delaying the next project, or even passing up lucrative contracts, making cashflow management vital for these companies. One way that companies can acquire the necessary cash is through loans.
Read Also: [2024 Edition] Complete Guide To SME Business Loans In Singapore
Revolving Term Loans Allow Re-Borrowing
Revolving term loans are loans which allow for flexible repayment and re-borrowing (or drawdown) as required. Businesses are given an approved credit limit and may borrow flexibly up to this limit. As the name suggests, it is a loan which typically does not have a fixed repayment term.
Source: OCBC
Once money is borrowed, the rest of the credit limit remains available. Businesses can choose to pay off the loan early to save on interest fees.
Source: OCBC
As the loan is paid off, the loan capital that was paid off gets returned to the available credit. Interest will only be charged on the remaining used credit for the next period. Revolving Term Loans usually do not charge early repayment fees, allowing the business to repay the loan in full at any time.
Source: OCBC
Businesses can choose to make additional loans drawing from the available credit. Most lending institutions provide the cash within 1 working day.
Perhaps the best part of a revolving term loan is the fact that businesses do not need to keep reapplying for new loans.
Fixed-Term Loans Are Not Flexible Enough
Many fixed-term business loans take 2 weeks or more to approve, which could increase the lead time to purchasing materials. Securing the loan before being awarded the contract is risky since the amount of money required may change before the contract is awarded. In the event where the contract is not awarded, early repayment penalties still apply.
Additionally, fixed-term business loans usually require regular, fixed repayments, which adds financial strain to a company which only gets payment on completion of the project.
Money used to pay off the loan cannot be re-borrowed, which means that if a business needs more money for a separate project, they have to apply for a separate loan. Servicing multiple loans with different payment deadlines adds to the administrative work.
Revolving Term Loan Vs Business Term Loan
OCBC’s Business Term Loan allows for loan amounts of up to $700,000 and a loan tenure of up to 5 years. The interest rate will be provided based on the parameters of the loan.
OCBC also offers a Revolving Term Loan, which gives a maximum credit limit of up to $200,000. Businesses can make loans of $10,000 or more (in multiples of $5,000) and choose to repay in 6 or 12 months at an effective interest rate of 8.88% p.a.
Both loans require fixed monthly repayments, but do not provide penalties for early repayments. The Business Term Loan allows businesses to borrow larger sums of money over longer periods of time, making this more suitable for expanding your business or tiding through difficult times. The Revolving Term Loan allows for multiple re-borrowings, making it more suitable for helping a business even out its cashflow.
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