COVID-19 has been an unforgiving teacher imparting many tough lessons for businesses – whether you like it or not. Chief among them is the importance of cash flow and liquidity to tide through unforeseen situations as well as invest towards the future.
Profitability is vital in the long-term, but if one cannot fulfil monthly operational obligations, such as rent, salaries, and supplies, then everything else would be for nothing. Even a profitable company that does not have the cash flow for these payments would become insolvent.
Obviously, there are also downsides to keeping a large cash buffer for a rainy day. The more cash businesses set aside, the less they are able to invest in their growth and the lower their return on equity (ROE) will be for shareholders and investors.
Here’s where financing options like SME Working Capital Loans come in to provide companies with the flexibility they need, when they need it.
What Is Working Capital – And What Are Your Options To Get It?
In the course of running your business, there are costs that you will incur on a regular basis. Rent, salaries, and loan repayments are recurring costs you incur. There are also variable or ad-hoc costs that you incur to generate revenue, such as deposits, marketing, paying suppliers for materials, or spending on sales.
You can pay for these expenses in various ways.
Retained Profits: As mentioned earlier, companies can keep a cash buffer from profits generated previously, rather than paying everything out to shareholders as dividends. This can be challenging for companies that might not yet be profitable or are new.
Fundraising: Undertaking a fundraising exercise might be necessary to fund large-scale expansion plans, but it can be time-consuming and costly. Not to mention, existing owners would likely be giving up more control of the company if you are sourcing external fundraising.
Financing Options: Taking a loan provides companies with the flexibility of financing whenever they need it – at a cost (interest). Also, it is imperative companies understand the repayment terms and ensure they are able to meet them.
What Is The Government-Assisted SME Working Capital Loan?
In order to give companies greater access to financing options to keep their operations afloat and to seize new opportunities in the market, the government announced enhancements to the SME Working Capital Loan.
Eligible companies can now borrow up to $300,000, repaid over a maximum of 5 years, with no early repayment fee. The loan is collateral-free and can be applied for (and approved) online in around 5 minutes (using your SingPass/CorpPass).
Under the Enterprise Financing Scheme (EFS) by Enterprise Singapore (ESG), you can use the SME Working Capital Loan for a range of business needs, from paying your staff, buying equipment, investing in software, or doing marketing. This is unlike other more specific, more restrictive loans.
What Is The Interest Rate For Government-Assisted Working Capital Loans?
Interest rates for the government-assisted SME Working Capital Loan are determined by the financial institution that you get the loan. There are 17 participating financial institutions (PFIs), including OCBC, DBS, UOB and more.
To encourage financial institutions to provide the loans required and to keep interest rate costs low for SMEs, the government takes on 50% of the risk-share. For younger companies, formed within the past 5 years, the government risk-share is at 70%.
What this means is that you continue to be liable for the full loan amount. However, in a situation of default, the government’s share of the loss will be capped at 50% (or 70% for younger companies).
The government-assisted SME Working Capital Loan is part of the Enterprise Financing Scheme, which was on 29 October 2019. On the back of COVID-19, this has been enhanced a few times. Most recently, the loan amount was reduced to $300,000, but the scheme has been extended to 30 September 2022.
Eligibility Criteria For SME Working Capital Loan
The eligibility criteria for the SME Working Capital Loan are the same across all the participating financial institutions. It is part of the larger suite of solutions under the Enterprise Financing Scheme (EFS).
To qualify, your company needs to:
1) Be incorporated in Singapore for at least 2 years
2) Have at least 30% Singaporean/PR shareholding
3) Having group annual sales of not more than $100 million, or group employment size of not more than 200*
* Computation on a group basis means all levels up for corporate shareholders owning more than 50% of the applicant company, as well as any subsequent corporate parents and subsidiaries all levels down.
Companies can approach different participating financial institutions to borrow varying amounts under the SME Working Capital loan, but the total amount must not exceed the $300,000 limit. Interest rates and approval is dependent on the respective financial institutions.
Do note that the borrower is responsible for the repayment of 100% of the loan amount. If defaults occur, the Participating Financial Institutions (PFIs) are obligated to follow their standard commercial recovery procedure, including the realisation of security, before they can make a claim against Enterprise Singapore for the unrecovered amount in proportion to risk share percentage.
How To Apply For The SME Working Capital Loan
To apply for the SME Working Capital loan, you can approach your participating financial institution of choice. Each would have their respective application procedures.
For example, if you wish to use OCBC for their SME Working Capital Loan – or other schemes under the Enterprise Financing Scheme – you can visit their website and apply online using your SingPass/CorpPass, and receive approval in 5 minutes.
There are also interactive calculators you can use to get a sense of your monthly repayment, based on your selected loan tenure. You can also review other business loan options you have on the individual banks’ websites – including the Temporary Bridging Loan (TBL), SME Overseas Loan, Equipment and Machinery Financing, and many others.
This article was first published on 12 October 2020 and has been updated with the latest information
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For SMEs that are just six months into operations, secure up to S$100,000 with the OCBC Business First Loan . If your SME is above two years old, secure up to S$700,000 with the OCBC Business Term Loan – good for funding business operations or expansion. Terms and conditions apply.
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