Applying for a Business Loan in Singapore
What is a business loan?
In simple terms, a business loan is similar to a personal loan that is specially designed for business. You will be lent a fixed amount of money over a certain period of time, with a fixed interest rate and monthly payment. Different financial institutions may specialise in different types of business loans, for example business loans for startup companies versus business loans for small to medium enterprises (SMEs).
Requirements for a business loan.
Business loans tend to involve a considerable sum of money, thus most banks have rather stringent requirements you need to meet in order for them to approve of your loan application.
You need to have good credit.
As the business owner, your personal credit will also be taken into account by the financial institution when they are processing your application. Your creditworthiness reflects on the creditworthiness of your entire business. If you have a poor credit, financial institutions will feel that loaning to your business is a high risk venture for them. This may result in them rejecting your loan application.
Your business needs to have good credit.
If your business is more than a year old, it will gain a credit score of its own. This credit report will reflect the financial transaction history of your business. The better the credit score, the more creditworthy your business is. Having a good business credit is crucial if you want to stand any chance in getting a business loan at all.
You need to have a considerable amount of assets.
Most business loans (but not all) require collateral in the form of an asset. Collateral is more commonly required in loans for startup companies. It could be an office equipment, property, stock, machinery, anything that has considerable market value. Putting up your personal assets as collateral is possible as well.
You need to have a clear plan.
Your business plan will reflect how profitable your business will be in future. You need to have a plan that is solid enough to convince your lender that you will be able to make substantial profit should they grant you the loan. Through your plan, they will decide if they believe you have the ability to earn back the money you want to borrow.
You need to have experience.
Having prior experience in the industry boosts your credibility and potential. Creditors will have more faith placing their money with someone who knows what they’re doing, versus someone who looks as if they’re simply testing the waters with their business. The more they trust you, the more likely they will approve your loan. If you lack the experience, you should add an advisor to your team to make up for it.
Personal loan VS Business Loan
Taking a personal loan to fund a business may sound impractical, but numerous companies do it. Is it a viable option? Certainly. Is it the best option? Well… maybe, maybe not. Like all business decisions, there are both advantages and disadvantages to this option. Whether or not it is the best option for you depends on your needs and the needs of your business.
Advantages of a personal loan.
Personal loans have a higher approval rate than business loans. Financial institutions only consider your personal credit score when deciding whether to approve a personal loan application, but for a business loan application, not only your personal credit, but even your business credit, business plan and financial records will be scrutinised. A startup company that has only just been launched is unlikely to be able to fulfil all the requirements needed for a business loan. Furthermore, business loans can take a much longer time than personal loans to be processed due to the extensive background check that needs to be conducted. Hence, a personal loan is a much faster, easier and more accessible alternative to a business loan for startups that do not need a huge sum of money.
Another key advantage of personal loans is that they are typically unsecured. Not having collateral will render you unable to qualify for a business loan, thus unsecured personal loans is the best option for people without any valuable assets to put up as collateral.
Disadvantages of a personal loan.
Generally, the interest rates of using a personal loan is higher, and the maximum amount that can be borrowed is lower. Personal loans usually come with a maximum limit of S$200,000, while the limit for small business loans go up to as high as S$500,000. This is not the biggest disadvantage as not all companies will require such a huge sum to fund their business. The main concern about using a personal loan is that it forces you to be responsible for the debt of your company. This means that if your business default, your personal credit score will be affected. Contrarily, a business loan can be tied to your company such that your personal assets cannot be seized by your lender even if your company defaults on the loan and goes bankrupt.
Misconceptions about licensed money lenders.
Till this day, many are reluctant to seek out licensed money lending companies for financial aid due to the prejudice that licensed money lenders are just ‘legalised loan sharks’. Let’s get things straight once and for all: Licensed money lenders are not the same as loan sharks. They have a license for money lending that can be revoked if they were to do anything that goes against the Moneylenders Act. This means you don’t have to worry about red spray paint or a pig’s head hanging outside your door, because money lenders cannot resort to illegal harassment during debt collection.
Legal money lending is a professional service. While it cannot be denied that licensed money lenders charge higher interest rates than the a bank, there is a good reason behind it. People who seek out legal money lenders are typically the ones who’ve had their loan applications rejected by the bank. Why? Because of their poor credit. When a money lender approves of a business loan to a company that has failed to meet the requirements of the bank, they are essentially lending money to fund a business that they have no idea will flourish or fail. Their higher interest rates are justified by the higher risks associated with loaning to customers with poorer records.
If you are unable to meet the stringent requirements of the bank, don’t give up. Try sending in some applications to licensed money lenders instead. Loaning money from licensed money lenders is a legitimate alternative to bank loans. They are relatively more flexible and are much faster in responding to applications, since the background check done is not as thorough.
Things to look out for when choosing a licensed money lending company.
Even though licensed money lending companies are a legitimate alternative to banks, there are still factors that distinguish good money lending companies from subpar ones.
The first thing you should do is to double check if the money lending company is licensed. Some illegal organisations disguise themselves as legal companies in order to bait in unsuspecting customers. They send out mass texts and even set up legitimate-looking websites of their own. On the Ministry of Law website, there is a complete list of licensed money lending companies which is updated monthly. Confirm that the company’s name is listed there before engaging in any form of contact with them.
Check their experience and reputation.
Visit the company’s website and check their reviews. Be wary of companies that have all bad or all good reviews. Go one step further and check reviews of the company posted on other forums and websites, since bad reviews on the website could have been filtered out and deleted. Ensure that you check out testimonials from various sources before deciding if the company is legitimate or not. It would be wise to choose companies with substantial experience as it reflects on their performance over the years.
Check their attitude.
Ensure that the staff are professional in their work. Some money lending companies tend to treat their clients carelessly because of the stereotype that customers who seek loans are needy people who are in no position to complain about how they are being treated. Choose a company with professional employees who are responsive to customers and will treat you with the basic courtesy and respect you deserve.
Check their rates and charges.
Whether you choose to apply for a business loan or personal loan, you’ll want to get the lowest rates possible. Money lending is a fairly competitive industry, so the rates will vary across different companies. Some companies may lower their rates in order to attract more business, while others may come up with attractive packages so that they can stand out against their competition. Double check for any additional costs or hidden clauses that will bring up the total cost of your loan. Compare the rates and charges across as many companies as possible so that you can get the best deal for yourself.
Check their loan flexibility.
Even though licensed money lenders are relatively more flexible with their loans, they still do not approve of every single loan application they receive. If you have a bad credit rating, you should look for money lenders with less strict policies so that you stand a better chance of getting your loan approved. A flexible money lending company may allow the terms of your loan to be modified such that it suits your specific needs, and you might even find a company willing to approve an application for a business loan.
Check their terms and conditions.
Before deciding to take up any kind of loan, you must know what you’re signing up for. Know the contract like the back of your hand. Read through the terms and conditions carefully. Be aware of what is expected of you, and what is expected of your lender. Make sure you agree with all the terms proposed. Once you sign the contract, there’s no going back anymore.
No matter how urgently you might need the money, do not be impulsive in choosing your money lender. All the extra effort is worth it if it helps you to find a good company that can match your needs just right.
Know and protect your rights.
It is important that you know what your rights are. According to the Ministry of Law, money lenders are not supposed to:
- Use abusive language, or behave in a threatening manner towards you.
- Ask for your SingPass user ID and/or password.
- Retain your NRIC card or any other personal ID documents (e.g. driver’s licence, passport,work permit, employment pass or ATM card).
- Ask you to sign on a blank or incomplete contract for the loan.
- Grant you a loan without giving you a copy of the contract for the loan and/or without properly explaining to you all the terms and conditions.
- Grant you a loan without exercising due diligence (e.g. approving a loan over the phone, SMS or email before even receiving your loan application form and supporting documents, such as the income tax assessment and payslips).
- Withhold any part of your principal loan amount for any reason.
You are protected by the law. Should your money lender engage in any of the above activities, you have every right to file a complaint to the Ministry of Law.
You play the biggest part in protecting your own rights. When your money lender grants you the loan, it is your responsibility to ensure they gave you the right amount. Money lenders are only allowed to deduct a maximum of 10% off the principal amount as administrative fees, and can only charge a maximum interest rate of 4% per month. Ensure that you get a dated and signed receipt everytime you make a payment, and keep your transaction records safe as proof in case anything were to happen. Check your credit record through the Credit Bureau Singapore at least once every six months and correct any errors.
Most businesses are bound to need financial assistance at some point. Having access to funds can allow you to upgrade your company’s equipment, obtain more inventories and increase your overall productivity. The future of your business hangs in the balance. If you decide to take a loan, consider all your options carefully.