Starting and growing a business is hard work, as any entrepreneur will tell you. When your business grows, you will probably reach a step where you'd need additional financing in order to scale up your business.
While taking on debt can seem scary for small business owners, a business loan can help you finance investments in your business that can result in higher returns.
But before applying for a business loan, it is important for every business owner to also do due diligence on every type of loan. Below is a breakdown of each type of financing option.
The numbers and figures reported above are up to the point of research. It is still important for you to do your own due diligence as SeedIn is not responsible for misrepresentation of the information above.
The following list here highlights some common questions you may also have, so that you can make a better decision before taking up a business loan.
1. What Is The Purpose For Taking Up A Business Loan?
Managing operational costs, expenses on equipment, growth, property and marketing can be overwhelming.
While you may have ideas about scaling up your business, you will need to ensure that there is enough
This is perhaps where taking on a business loan can solve your problem. However, loans come at a cost and if not managed well, can have significant impact on the finances of your business.
Therefore, you should be clear about the objectives for taking up a business loan so that you can choose the loan best catered to your needs.
Some reasons for taking up a loan include:
- Business expansion
- Inventory Purchase
- Increase Working Capital
- Equipment Purchase
Having a clear idea of what the loan is used for will help in choosing loans that are specific to your needs.
Each of them may require a different type of loan with different terms as the tenor is usually matched to the purpose of the loan.
Choosing the right loan is therefore very important in reducing unnecessary financing cost.
2. What Are My Financing Options?
There are many types of financing options available to business owners in Singapore and they do not come only from banks. The main issues businesses can face are eligibility and costs.
Business Term Loans – these are business loans that you can take up from banks. You can usually take up to $500,000 worth of loans at an effective interest rate of 9 to 13%.
The main problem you may face is that your company must be in operation for the last 2 years and there are pre-payment penalties.
Overdraft Facility – this is a credit facility that allows you to write cheques or withdraw cash and you only pay interest on the amount you overdraw.
Interests charged are usually higher than a term loan and the service is typically packaged with another type of business loan/product. Watch for hidden fees as well.
Alternative Financing – alternative financiers help to bridge the gap for businesses who may not qualify for financing by banks.
These are more flexible as well depending on your credit rating and loan term. The main concern is with hidden fees and how they calculate your interest payments. Try to ask for an upfront loan amortisation schedule to have a clear idea of your repayment terms.
3. How Much Do I Need?
This will depend on the purpose of your loan. More is certainly not better here. The main point is to not borrow more than what you need because you will end up paying for the financing costs.
4. Can I Afford The Loan?
The last thing you want is to over-extend yourself and not be able to repay your loan. You will need to assess your business credit score, your personal credit score as well as your business cashflow.
Lenders will take these information into consideration when deciding on the loan amount, terms and whether they even lend money to you eventually.
Make note of the collatoral you can use to support the loan as well – assets such as property, equipment or inventory can increase the loan amount.
Financiers may also require a guarantor or a personal guarantee. Traditionally, guarantors are called upon if you can’t make your repayment.
In this case, make sure you have a written agreement explaining your obligations to the guarantor should you default.
A personal guarantee is often required for some business loans as well. This requires you, the applicant, to place a personal guarantee that will make you personally liable for the business loan. Understand that when you do this, your personal assets and finances will become part of your business’ collateral.
While nobody goes into a loan intending to default, it is important for you to understand the consequences should the situation occur.
Find out what will happen if the bank/financier does not receive a monthly payment on time, how long will the grace period be and how many months of loan overdue will it take before the bank begin collection proceedings.
5. What Is The Cost And Payment Structure?
Business loans vary by lender and amount. There can different type of fees associated with taking up a loan.
For instance, there could be loan-initiation fee that are due up front, maintenance fees, different interest tiers or pre-payment penalties.
Be sure to ask about these and include them when you are calculating the cost of loans.
6. Do I Have All The Documentation I Need To Apply For The Loan?
Make sure you have all the relevant documentations before applying for a business loan so that you can get it in the shortest time possible. These include:
- General Business information: ACRA Registration number, management profile, business plans, purpose of loan and loan amount
- Business and Personal Credit report
- Pledged collateral documents
Remember that taking up any form of financing comes with a financial cost so think through the above questions carefully before you finally decide on the type of business loan that's most suitable for your needs.