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SME Financing Guide – Getting to Know Your Options Where Financing Your Business is Concerned
Most businesses start small unless it is a large scale business legacy that is passed down the generations. Business sizes aside, all companies would eventually need financial help to expand or to continue business during cash flow disruption. The most common business entity that requires financial assistance is the small and medium enterprise (SME). Here is an SME financing guide for you to take points.
The Best Time
Have you noticed that banks suddenly approach you to offer financial solutions when you are in a good financial position? Well, it is because you are implying to them that you have proper financial management and knowing you can pay it back. The same applies to a company. If you wish to obtain financing from banks, it is best done when your business financial statements are in the pink of health. The banks will avoid you and your loan applications when you need the money the most. So, even when you are in the black, it is the best time to start applying for your business financing.
There are plenty of financiers that could loan your company the money needed. There are:-
- Banks – The most common financier for almost everything. With the SME trend rising, all banks in Singapore offer SME financing instruments. Each bank will have a set of criteria for SMEs to qualify for loans. Business loans are the cheapest financing option, yet the toughest to be approved. Keep your options open and compare each bank’s SME financing.
- Financial institutions – Similar to banks, they are specific lenders and regularly focus on asset-based lending. The Monetary Authority of Singapore (MAS) has announced a new regulation to allow finance companies to offer unsecured SME financing up to 25% of their capital funds.
- P2P crowdfunding – The latest trend in financial options pools funds from a group of investors through an online crowdfunding platform. The online platform will put up a list of potential borrowers with their primary financial profile. Interested investors can view, choose to participate and provide funding. This method suits SMEs not qualified for traditional loans, usually start-ups.
- Alternative lenders – These are mostly private lenders that lend directly to the SMEs. Their interest rates are usually the highest of all.
Guide to the Types of SME Financing
The following are the types of SME financing available in the market.
- Unsecured business loan: It is a lump sum loan without collateral, repaid monthly between one to five years.
- Government financing schemes: Various financing schemes are administered by Enterprise Singapore such as SME Micro Loan, SME Working Capital Loan, SME Equipment & Factory Loans, Loan Insurance Scheme and Bridging Loan for Marine & Offshore Engineering companies.
- Equipment and machinery loan: SMEs wanting to buy permanent equipment can obtain a loan using the machine as collateral. Interests of this kind loan are lower with banks financing 70% to 90% of the equipment purchase price.
- Industrial or commercial property loan: It is the financing with the lowest interest as it is likened to other property loans. It is common for banks to finance up to 80% of the property price.
- Factoring: You sell your invoices to the financier, getting a cash advance upfront and financiers take over the debt. This works if you extend long credit terms or sell to large companies. Financiers also favour invoices to government bodies or reputable companies.
- Trade Financing: It is a pre-approved revolving credit line to finance raw materials or inventory purchases. However, SMEs are usually offered import financing. It is useful to finance short term trading cycles.
- Business Overdraft (OD): Just like any other overdraft facility, you can withdraw cash on short notice for just about anything. Its interest rate is higher as it is calculated daily and billed monthly. It is an excellent financing facility to plug in working capital gaps, never, ever as a long term financing tool.
The Interest Rate
So, now you know the financing facilities available, here are the interest rates for your general estimation.
- Unsecured business loans interest rates are between eight per cent to twelve per cent per annum effective rate.
- Government financing schemes charge interest between 7 to 9 per cent per annum effective rate.
- Equipment and machinery loans interest rate is 2 to 7 per cent per annum flat rate.
- Trade financing or factoring interest is 6 to 9 per cent per annum effective rate.
- Property financing has the lowest interest rate at two to four per cent per annum effective rate.
Banks or financial institutions commonly assess your business via the following criteria:
- The industry and nature of business – Some banks do not finance specific industries or business nature due to negative prospect or history. Some banks do, so keep on trying.
- Years of operation – Traditionally, banks require at least two to three years of services. Hence, start-ups have minimal options for business term loans in Singapore.
- Annual revenue – The minimum recommended yearly income of at least $200,000.
- Financial report analysis – Banks require your financial statements to ultimately see your net profit and loss as well as total equity in your balance sheet. The healthier your financial position, the better the chances to get financing.
- Bank statement analysis – The statement should display your company cash flow and its management.
- Director’s income and credit history – The company director will be expected to report a minimum $30,000 personal income in Notice of Assessment. A company director can also have their credit score graded at the Credit Bureau Singapore.
The Crucial Documents
The following are critical documents you must prepare when applying for SME financing.
- The latest two years of financial reports
- Latest three to six months bank statements
- Debtor’s and creditor’s ageing payment list
- A copy of the director’s identification card and the most recent personal notice of assessment (NOA)
- If your company is registered for GST, prepare at least last four quarters of GST form 5 returns
- Details of existing loan facilities (if any)
- Company premise photos (if required by banks)
- Brief company profile
Improve Your Chances of Approval
Not all banks will quickly approve a business term loan. But, if you can prove that you can pay them back, banks are more than happy to lend money. Start by planning and submit applications ahead of time. This is important because you will have to wait two to three weeks for application status. Your company financial standing will also be an indication for banks to either approve or reject your loan application. Be on top of your financials to ensure healthy cash flow. As you chase your debtors for payments, you should also be a good paymaster. Such a prompt reaction will provide a positive credit score and increase your chances of approval.
Last but not least, keep your options open. If you cannot get financing via traditional methods, there are always other financing options available. Hope this SME financing guide has enlightened you in one way or the other.