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Practical Guide To Understanding SME Loans In Singapore

Big or small, cash flow is the lifeline that businesses cannot live without.


This article is written in collaboration with OCBC Business Banking. Views expressed in the article is the independent opinion of DollarsAndSense.sg.

Taking a business loan is part and parcel of building a business. During this COVID-19 outbreak, Singapore, like many other countries, have taken the drastic but necessary step to close non-essential workplaces and schools.

This unprecedent move will affect all businesses. Companies that have a strong cash flow will be able to sustain themselves during this period, especially if their employees are able to continue working from home effectively. Others will struggle, as sales and output will likely decline in the next few months.

Previously profitable businesses that never needed a loan may now find themselves bleeding cash during this period.  Business loans, when used correctly, can help a business survive during this period.

However, business owners who have never take a loan before may be overwhelmed by the different types of SME-related loans available, particularly if they do not have an experienced finance manager in their team to help them navigate through the available options.

In this article, we’ll give an overview of the various types of business loans available for Small Medium Enterprises (SMEs) in Singapore, and how each type of loan can support their business.

Working Capital VS Fixed Asset Loans

Responsible businesses borrow for different (and valid) reasons.

Broadly categorised, there are two main reasons why most SMEs would borrow money. For working capital and for investing in fixed assets.

Working capital loans refer to borrowing money that is needed for day-to-day operational use. This includes paying of suppliers, employees and rent. Working capital loans are usually needed for companies that operate in a business environment where they need to incur costs (e.g. pay suppliers) first, before can receive payment.

Fixed asset loans are needed when a business has to make a one-off investment in a fixed asset (usually a property, machinery or equipment), which is essential for its business growth. For example, a company may need to invest in a piece of machinery needed for a project. This machinery could help the company increase its revenue over the course of its lifetime, but the company has to pay for the machine today first. This is where a fixed asset loan is useful in helping businesses fund their purchase.

Types Of Working Capital Loans

Within the category of working capital loans, there are a few different types of loans you can tap on. Here are some examples.

Temporary Bridging Loan

The Temporary Bridging Loan is a government-assisted loan to help SMEs that have been impacted by the COVID-19 outbreak. The objective of the loan is to allow businesses to have access to working capital to ease their short-term cash flow problems during this period.

Eligible SMEs can borrow up to $5 million over 5 years through the Temporary Bridging Loan with the interest capped at 5% p.a. Similarly, the government provides 90% of risk-share on these loan for loan applications between 8 April 2020 till 31 March 2021.

As announced at the Solidarity Budget, the Temporary Bridging Loan, which was initially rolled out only to the tourism sector, is now available to enterprises in all sectors. With this enhancement, companies which have been hard hit by the COVID-19 outbreak can now get quick access to loans that could potentially keep their businesses going.

With interest rates being offered as low as below 3% and capped at a maximum of 5%, this is an exceptionally low interest rate for an unsecured loan. Not surprisingly, this is a cheap and attractive source of financing currently for Singapore companies during this uncertain period.

SME Working Capital Loan

The SME Working Capital Loan is also a government-supported loan which falls under the Enterprise Financing Scheme. It helps businesses finance daily operational cash flow requirements. Each company can borrow up to $1,000,000, which can be repaid over five years, as announced during the Solidarity Budget 2020.

Similar to the Temporary Bridging Loan, the risk-share undertaken by the government will also increase to 90%.

Read Also: Singapore Entrepreneurs Share With Us Their Experience Taking Business Loans, And How It Helped Them Grow Their Businesses

For both the Temporary Bridging Loan & the SME Working Capital Loan, eligible SMEs can apply  to defer their principal repayments for the loan for a period of up to one year, subject to the approval of the financial institution that they borrow from.

Given the challenging business climate that we are facing in Singapore this year, it’s likely that many SMEs will find it useful to be able to take this government supported loan to tide them through this period. You have to apply for the loan through an approved financial institution such as OCBC.

Types Of Fixed Asset Loans

There are different fixed asset loans for businesses to invest in various physical assets such as properties or equipment.

Commercial Property Loan

Similar to buying a home, you can take a commercial property loan if your business is looking to purchase a commercial property. OCBC Business Banking allows businesses to borrow up to 80% of the property price or valuation of the property (whichever is lower) with a repayment period of up to 30 years.

SMEs can opt to defer principal payments on their secured loan up to 31 December 2020. They can also choose to extend the tenure of the loan by the corresponding number of months that their principal payment has been deferred. Do note however that they still need to pay interest on their loan during the deferment period and will incur higher monthly payment subsequently when their repayment schedule resumes.

Equipment & Machinery Financing

This loan allows you to finance the purchase of equipment or machinery, up to 90% of its purchase price or valuation, whichever is lower, with a repayment period that can extend up to eight years. Eligible businesses may also be able to tap on the Enterprise Financing Scheme for this loan.

Loans Should Support Your Business Plans

In order to sustain themselves, businesses need to have commercially viable plans that generate sufficient revenue to cover their operational costs.

Any business loans taken need to fit into these commercially viable plans. Loans can be thought of as part of a business owner’s toolbox. When used correctly, carefully and at the right time, they can be extremely useful. However, when deployed poorly, they would incur additional cost for the business and cause additional strain.

To apply for any of these business loans described above, or if you are still unsure of which financing solution is most suitable for your business, you can check out the loans offered by OCBC Business Banking. Find out how OCBC, as Asia’s best bank for SMEs, can partner with you on your business requirements and help you scale greater heights.

Read Also: 3 Ways The Digital Business Dashboard By OCBC Has Helped Us Manage Our Business

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