What Is A Business Term Loan?
Business financing is often a necessity. When you need capital to expand your business or cashflow to improve your operations, it’s important to have the right lender.
There are various options available, including commercial banks or licensed lenders. But how can you apply for a loan and get the money you need to run your business?
Several factors will determine how quickly you get funding and how much you can expect to receive.
Let’s look at what is business term loan, the various factors that a lender considers for such a loan, and how to successfully apply for a business term loan.
Business Loan Options In Singapore
A business loan is any kind of financing that you use to help you grow, improve, or start a business.
Most lenders group business loans based on their purposes. There are business loans for managing cash, growing your business, buying machinery, or starting up a business.
Now let’s review the business loan options you can access from your lender.
Unsecured Business Loans
An unsecured business loan is the standard and most common type of financing.
You don’t need collateral when applying for this kind of loan. Most unsecured business loans have a tenure of up to five years.
Although you don’t need collateral for this loan, you will need to show the lender your business’s current and projected revenues, the number of years it has been operating, and your ability to repay the loan.
SME Working Capital And Temporary Bridging Loans
The SME Working Capital Loan is a government initiative in conjunction with banks.
The loan offers small businesses up to $1,000,000 to help in their day-to-day operations.
To qualify for the loan, the business must be registered in Singapore with a 30% shareholding belonging to a Singapore citizen. This loan has a loan tenure of five years.
Temporary Bridging Loans are also a type of government-assisted loan. They are administered by Enterprise Singapore (ESG) and a participating financial institutions (PFI).
Both working capital and temporary bridge loans include a government risk of up to 70%. A financial institution evaluates a business based on its financial performance, bank records, and guarantor credit records.
Start-Up Business Loans
These are also known as first business loans. This kind of loan is given to start-up businesses that have been in operation from six months to two years.
It’s one of the unsecured loans available to young businesses. Financial institutions don’t emphasise financial performance and the history of the company.
To get this loan, a start-up will need a guarantor with a good income and credit report.
Business Loans Vs. Personal Loans
A business loan is financing you receive from a lender to cater to your business.
On the other hand, a personal loan is cash you receive to settle personal needs such as weddings, emergencies, and others.
We look at the main differences between business and personal loans.
Documents Required During The Application Process
When applying for a business loan, you will need business plans, bank account statements, balance sheets, and income statements.
On the other hand, to get a personal loan, you only need your income statement and credit report.
Reason For The Loan Application
You can use a personal loan for a variety of purposes, while you can only use a business loan for the purpose you agreed on with the financial institution.
Before you get a business loan, you have to explain to the lender how you intend to use it.
Personal loans have no tax benefits. Interest paid on a business loan is tax deductible.
Personal loans are generally disbursed quickly as compared to business loans.
For business loans, financial institutions have to do due diligence to ensure the financial records of a business are true reflections.
This may take time, causing a disbursement delay.
Eligibility Criteria For Business Loans
Every lender has its eligibility criteria when assessing loan applications.
However, there are general eligibility requirements that all lenders adhere to when approving business loan applications.
Here are the main eligibility criteria:
- Incorporated in Singapore
- Been in operation for at least six months. Some financial institutions consider two years as the minimum period.
- The business must have a revenue of at least $30,000 per year
- The business that the loan will be used for must have at least 30% of the shareholding owned by a Singapore citizen or Singapore permanent resident
For a business to be eligible for a working capital or temporary bridging loan, it must meet the following criteria:
- Registered in Singapore with 30% of the shareholding owned by Singapore citizens
- Have annual sales of below $100,000
- The business should employ fewer than 200 people
How To Apply For A Business Loan
Before you apply for a business loan, you need to review the reasons why you need the money.
It’s important to apply for a loan that you can manage to pay and keep your business going. Ensure you have a healthy profit and loss statement.
Here is a typical business loan application process to follow.
Apply Online Or At The Branch
Most lenders have an online application portal where you can submit your business loan application. Alternatively, you can visit any of the lender’s branches and ask to apply for a business loan.
You will need to submit documents before the lender can approve your loan.
Here are some of the documents you will need to prepare:
- Identification documents such as your NRIC or other identification documents for the directors, partners, or principals
- Tax statements for the last 12 months
- Bank account statements for the previous six months
- Duly completed application form
- Board resolution to borrow the money
- Documents such as memorandums of association and articles of association
- A professional certificate relating to the business’s identity and proof of address
Select The Loan Amount And Tenure
The amount your business requires depends on the purpose of the loan.
If you need to purchase a machine, you need to get a quotation from a vendor. You have to tabulate the information and show the lender how you intend to use the amount you require.
After reviewing the information provided, the lender will let you know how much it can offer. Check your needs and your ability to pay.
Choose the loan amount that best suits your needs.
Likewise, select a loan tenure and repayment model that your business can afford.
Get Your Loan And Use It As Planned
Upon approval of your loan, the lender will disburse the money. You need to use the money as per your plan.
The bank may decide to issue the loan in installments as it needs to ensure you put the money into use as per the agreement.
Fees And Terms
The fees and terms of a business loan depend on various factors. Below are the main factors that determine the kind of fees you can expect to pay before you sign up for a business loan.
Type Of Loan
The type of loan you choose determines the fees and terms you can expect.
For instance, if you opt for a government working capital loan, the terms of the loan are different from that of an unsecured business loan.
Working capital loans that are government-backed have lower interest rates as compared to other types of loans.
Loans with longer loan tenures tend to have lower interest rates. The shorter the loan duration, the higher the interest rate.
That said, all loans have general fees and terms. Here are some of the fees and terms you can expect:
- An interest rate of 2-11%, depending on the kind of loan
- Annual fees, which depend on the lender. Some lenders don’t charge annual fees.
- An early repayment fee
- Cancellation fees
Before you sign up for a business loan, ensure you compare the various fees the lender charges. The higher the loan fees, the lower the amount you will receive.
Why Your Business Loan Application May be Rejected
There is a possibility that your lender may evaluate your business loan application and reject it. Let us look at the most common reasons why your loan application may be rejected.
Newly Incorporated Company
Financial institutions look at the track record of a company before they lend money.
Most young businesses will not have audited accounts. Even if they did, their finances may not be stable.
Lenders view such young businesses as a risk, and they are mostly unwilling to lend to them.
Furthermore, statistics show most businesses fail before their fifth year. Most lenders require a company to be more than a year old.
Losses In The Current Financial Year
If your business has made losses in the previous year, lenders will consider this a risky loan.
Most lenders require that your business make a profit in the last year. Losses could indicate problems in your business.
Most lenders have a minimum revenue requirement.
Your business must achieve the minimum revenue for your loan application to be approved. Failure to achieve the minimum revenue is likely to cause your loan application to be rejected.
Too Many Business Loans
A business with a high monthly debt obligation is considered leveraged. In which case, its loan application will be rejected.
This is because a business with too many loan obligations may not be sustainable. Most banks will not lend to such businesses.
Your Business Is In A Restricted Industry
Lenders avoid lending to businesses in certain industries.
Companies in the construction, oil, and gas industries are considered high-risk at certain times.
Jewellery and entertainment businesses pose a valuation challenge. Most lenders will avoid lending to businesses in such sectors.
A Business Loan May Be The Right Move To Make
Now that you know what is business term loan, you have probably realised a business loan can be a gateway to business growth.
Before you commit to a business loan, do your research and ensure you apply for the right loan product.
It is prudent to use the money borrowed as per your agreement with the lender and ensure you pay it back as per schedule.
BST Credit is a licensed money lender that you can trust.
If you are looking for cashflow to run or grow your business, then BST Credit is the right partner. Visit BST Credit for loans that suit your business needs.