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Small businesses are the lifeblood of many domestic economies. It’s no different in Singapore as SMEs make up 99% of all enterprises and employ 70% of the workforce in our country. However, the statistics also show that non-SMEs – comprising the remaining 1% of enterprises – contribute to about 57% of Singapore’s Gross Domestic Product (GDP).
However, we can take heart that almost every successful business came from a humble beginning. Most MNCs started small at some point in time. In fact, then-Minister for Trade and Industry Chan Chun Sing challenged local SMEs to think of themselves as “Singapore MNCs Emerging” with greater ambitions for growth.
To grow your business, you must be actively investing your resources – including time and money – into it. However, your operational cashflow alone may not be enough to support your expansion plans, or may hinder your ability to scale quickly. On this note, raising cash is one possible option to improve your business operations.
While taking on a SME business loan may seem unfamiliar and daunting, here are 5 reasons why business owners can consider taking one.
#1 Keep More Control Of Your Business
Most business owners would be familiar with the television series “Shark Tank”. Raising funds from investors is one way to fund your expansion plans. However, as you would have seen on the show, you must give up a tidy portion of your company in exchange for the funding, especially if you don’t have leverage in your negotiation (e.g. multiple investors competing to invest in your company).
Raising funds from investors means bringing in new shareholders to your cap table and possibly directors on your board, who you must manage and work with. This presents both advantages and disadvantages.
Equity investments are unlike debt, you do not have to pay interests for the amount that you raise. However, this does not mean there’s no pressure. In fact, you will have both new and existing shareholders who will hold you accountable for how you spend the funds raised. They need to be assured that you are utilising the funds to grow the business, as it impacts the value of their shares in your business.
By raising debt (e.g. taking an SME business loan), your operational liabilities will enlarge. However, there is no change to the equity structure in your business and how much of the company you own. Of course, for this benefit, you have a financial commitment to repay both an interest component and principal component on a regular basis.
#2 Making The Most Out Of Business Opportunities
When your business is growing, you want to strike while the iron is hot. This means two things: a) building your momentum rather than slowing down/plateauing and b) reacting to business opportunities quickly when they arise. Doing this often requires a heavy upfront investment in equipment, property and/or headcount, or deploying cash to purchase bulk inventory or raw materials at discounted rates.
Taking a business loan from a bank can be one of the quickest possible ways to raise funds. For example, OCBC states that the application process for a business loan can be done in less than 5 minutes via MyInfo or MyInfo Business and the loan amount approval can be granted in 1 business day.
Similarly, you may identify a commercial property that will contribute to your expansion plan, or it may simply be part of your plan to house your business in a premise that you own. Whatever your reason, this will be an expensive endeavour. A commercial property loan can provide up to 80% of the property purchase price or valuation. The loan can take as quickly as 72 hours for approval.
#3 Don’t Mix Work And Play
There are times when you may consider pouring your own savings into the business. One reason, as discussed above, is when you spot business opportunities. Another reason could be when a downturn hits, such as the recent COVID-19 economic crash in 2020, potentially drying up business and cash flow at the same time.
If you pour your own personal savings into the business, you may be draining an important financial safety net for you and your family. First, you may not have sufficient savings to tide through personal emergencies such as a family member falling into ill health or getting into an accident. In such a scenario, you would need to dip into your own savings – which is now depleted – to afford medical treatments and endure a potential loss of income for some time.
Over 43,000 business entities shut down in 2020. While no one wants to see their business failing, the unfortunate truth is that these things do happen. And, if it happens to you, you want to be able to draw on your personal savings to support you and your family until your next opportunity arises.
By taking a business loan, you can tackle the same situation, be it riding the expansion wave or overcoming the uncertainties of a downturn, without mixing your personal finances with your business finances. However, it’s worth noting that for many business loans, a personal guarantee may be needed to secure the loan which may require the shareholders of the company to guarantee the loan.
#4 Strengthening Your Operational Cash Flow
Upgrading and/or repairing your essential equipment will keep it running at an optimum efficiency. Of course, buying new equipment may also improve efficiency or even be part of your expansion plans.
Such expenditures are usually capital intensive and can weigh down your business’ cash flow. Thankfully, you can tap on equipment & machinery financing to purchase new equipment. For your daily operations, which includes upkeeping your existing equipment or simply having sufficient cash flow to pay rent, supplies and salaries, you can rely on the government-assisted SME working capital loan.
There are also several specialised loan options for specific sectors that you can leverage on to set up your business space. For example, OCBC provides Healthcare Practice Financing for medipreneurs setting up their clinics, including renovation, general working capital and acquisitions.
Of course, you can also choose to invest the existing cash flow you have in your business bank accounts. However, this will add unnecessary cash flow risks for your business. For example, a slowdown in your business may lead to an inability to pay salaries and shorter-term liabilities. This could potentially drive your business into insolvency.
For shorter-term capital requirements, you can make use of trade financing solutions. This can include getting paid faster even though your clients have not made full payment (via Invoice Financing Sales) or paying a vendor upfront even though you require longer payment terms (via Invoice Financing Purchase).
#5 Build Your Business Creditworthiness
Ironically, the best time to take a business loan is when you don’t need it. This is because you will be in a good financial position to know that you can repay your loan on time every month. Doing this builds a good track record for your creditworthiness.
Even if you’re not aggressively expanding or don’t need a business loan, you can start off with a smaller amount. This is because terms may be less than ideal when you lack a track record.
When you eventually need a loan in the future, there will not be any unnecessary delays. This is because you are already familiar with the process of applying for a loan. Moreover, the bank will also be more confident in your ability to repay the loan that you’re asking for – since your company has built a track record of repaying your loans.
A borrower with greater creditworthiness is also likely to be given lower interest rates. This matters when you need a loan more urgently and do not have the time to shop around.
Read Also: Why Open A Business Account With A Bank?
Setting Up Your Business For Success
For businesses that are progressing well, taking a loan to expand can seem unnecessary. However, seeing competitors taking over market share or stagnating may be a big risk to your business. At the same time, taking too many business loans can easily inundate your business and ramp up pressure on you.
As a business owner, you are tasked to chart the course for your SME. To grow, you need to invest. Yet, most businesses will not have the internal financial resources to finance all their expansion requirements. Hence, taking a loan may be an ideal solution.
Business loans come in many shapes and forms, and as mentioned, the government currently supports many of them. You can check out OCBC’s comprehensive suite of business loan offerings to understand which types of loans you require and how it will help your business succeed.
Here’s a handy infographic summarising the reasons for SMEs to consider taking a business loan:
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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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