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While having a large cash reserve is desirable, it may not always be achievable, especially if your business is new or fast growing. Aside from unexpected exigencies or opportunities, businesses also bear a variety of day-to-day expenses, such as staff salaries, office rent, inventory costs, marketing spend, regulatory costs and many more.
The current economic climate of high inflation, rising interest rates, and supply disruptions has also added to cost pressures faced by companies. This could lead to more clients failing to meet payment obligations on time or seeking credit extensions, as well as suppliers demanding upfront payment.
That’s why, it has become even more important for small-and-medium enterprises (SMEs) to know the different types of short-term loans that they can access today.
What Is An SME Short-Term Business Loan?
A short-term loan provides businesses with quick access to funds – typically for your operational needs. This may be to finance purchases from suppliers, general working capital, business opportunities, or other short-term business requirements.
As its name suggests, short-term loan terms usually last several weeks or months, but may stretch into a few years depending on the actual loan. Since SMEs come in all sizes and have varying business needs, the loan amount can range from a few thousand dollars to several hundred thousand dollars.
Given its duration, short-term loans are mostly unsecured, which means your business does not have to put up any collateral. However, this may also mean incurring higher-interest rates. Another drawback is becoming over-reliant on short-term loans, resulting in added stress of managing multiple repayments each month.
3 Common Types Of Short-Term Loans For Businesses In Singapore
#1 SME Working Capital Loan
As your business grows, so will its additional day-to-day operational expenses. Securing an SME Working Capital Loan is one way to finance short-term expenses and cover daily operational costs.
The government introduced the SME Working Capital Loan (WCL) to help SMEs across all industries get access to working capital for their business needs. The loan programme comes under the Enterprise Financing Scheme (EFS), with the government taking on a co-risk share of the borrowing amount.
Eligible SMEs that meet the conditions can borrow up to $300,000 (and up to $500,000 from 1 October 2022 to 31 March 2023), with a maximum repayment period of 5 years. The interest rate on this loan is subjected to the participating financial institutions’ (PFIs) assessment of the risks involved.
Companies can take up this government-assisted SME WCL from any of the 16 participating financial institutions, including OCBC Bank. You can easily make an online application for the loan and, if approved, the loan amount will be disbursed into your business bank account.
For businesses that have hit the financing cap for WCL, you may consider taking up a term loan, such as the OCBC Business Term Loan to fund day-to-day operations, business expansion or contingencies.
Read Also: Using The Government-Assisted SME Working Capital Loan To Grow Your Business
#2 Invoice Financing
Businesses that are growing fast or have a significant amount of their assets held up in receivables may consider Invoice Financing as a short-term loan to cover their working capital needs. There are two main ways for businesses to get advanced cash:
1) Based on the invoice that you have issued to customers, and
2) Based on invoices issued to you by your suppliers.
Invoice financing allows you to convert your unpaid invoices into cash and get access to immediate cashflow (usually around 70 to 90% of the invoice amount). Moreover, you only pay interest for the amount that you use. For example, OCBC Short-Term Financing charges only 0.5% interest per month, one of the cheapest forms of invoice financing that you can get for your business.
More importantly, you would not have to disrupt existing or new working relationships – being able to make prompt payments to your suppliers and continue to offer attractive payment terms to your customers, while maintaining cashflow and liquidity for business needs.
Additionally, you can use Invoice Financing to access funds to pay your suppliers based on the purchase invoices issued by them. In other words, your suppliers can get paid upfront while deferring your actual payment to a later date. A few reasons why you may want to consider this type of financing include negotiating potential discounts in return for an upfront payment with your supplier. You can also improve your payables on your balance sheet.
Read Also: What Is Invoice Financing And How Can It Help SMEs In Singapore With Their Cash Flow?
#3 Business Overdraft
Another short-term loan that companies can consider is the Business Overdraft, a standby credit facility that allows you to draw down up till your limit. This facility is suitable for companies who require quick funds to seize unexpected opportunities in a short period of time, typically within 2 months or less.
Overdraft facilities can be granted on either a secured or unsecured basis. A secured overdraft means having you pledge your fixed assets like properties, fixed deposits, or other assets deemed suitable by the bank. In return, you could get the loan at a lower interest rate as your risk to the bank is lowered. On the flipside, an unsecured overdraft could mean a higher interest rate for not having to pledge your assets for the loan.
Which Short-Term Financing Option Should You Choose For Your Business?
If your business meets the eligibility conditions for the government-assisted loans by Enterprise Singapore, they could be a good start for your short-term credit needs. For example, if you require short-term financing to cover your daily operational costs, you may seek a WCL, which currently has a borrowing limit of $300,000 (this amount will be revised to an upper limit of $500,000 from 1 October 2022 to 31 March 2023).
As the government participates in the risk-share, such loans may be cheaper. To apply for the WCL under the Enterprise Financing Scheme, borrowers would still need to engage one of the 16 participating financial institutions (PFIs) directly, such as OCBC Bank.
For businesses with a significant amount of assets locked up in receivables, you could instead consider Invoice Financing, a short-term loan that lets you access cash while your business awaits payments. For example, with OCBC’s Short-term Financing, you can get cash in as fast as 1 day (applicable for invoices uploaded before 4.30pm) and only need to pay 0.5% interest per month.
One of the advantages of using Invoice Financing is that you can turn your invoice into cash without adding more liability to your balance sheet. This means that while you can still offer longer payment terms to customers, business cashflow is not affected as you can immediately access the funds with Invoice Financing.
You also have the option to finance a purchase based on the invoice that you are billed by your suppliers. With this short-term financing, you can defer settling your payables past the actual invoice due date, which might give you better control of your cashflow. Other advantages of being able to pay your suppliers early or on time may include strengthening your relationship with your stakeholders as well as giving you more negotiating power in terms of discounts or receiving the goods early.
In addition to the government-assisted loan schemes and invoice financing facilities, businesses could also consider setting up a business overdraft facility to get convenient access to funds whenever the need arises. With an overdraft facility, companies only need to pay interest on the loan that they use, which would be available to them based on their limit, as and when they do it.
Regardless of which loan type you feel is best for your business, you must always consider the additional borrowing as part of your overall borrowing so as not to overleverage.
Need Financing Support During This Period?
Enjoy fast access to funds and receive your loan approval status instantly when you apply online with OCBC.
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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