How to Apply for a Business Loan?

A business loan is a flexible and cost-efficient way for SMEs and small business owners to find their operations. There are several options available, ranging from term loans and revolving credit from banks, to government-financing schemes aimed at specific business needs of Singapore-owned enterprises or even personal loans. 

If you’re an entrepreneur or business owner, read on to learn how to apply for a business loan, eligibility requirements, and what to do if your business loan gets rejected.

There are several options for business loans in Singapore that business owners and entrepreneurs can choose from. They can be grouped into main categories:

• Business loan from banks
• Government-backed business loans

Between these sources you’ll find a variety of business loans, each with their own pros and cons. The key is to identify the business need you are trying to fulfil so you can zoom in on the most appropriate financing solution. 

When selecting a business loan, pay attention to your total cost of borrowing. This means comparing not just interest rates, but checking whether there are any fees or charges attached. Also, be sure to check the Effective Interest Rate (EIR) and not just the flat rate or advertised rate. EIR will give you a more accurate idea of how much you will end up paying for your loan. 

Once you’ve selected your business loan, the next step is to check the eligibility requirements and gather up the necessary documents. You may then proceed to submit your business loan application to your preferred provider. 

Should all go well, you will be informed of the success of your business loan application and the funds will shortly be disbursed to your company bank account. 

You will also receive a business loan confirmation letter along with instructions for how to repay your loan. Make a note of your loan repayment date and amount, and be sure to make payments on time.

Bank business loans are a well-known choice for many entrepreneurs and business owners. They are widely available from several different providers and come with competitive interest rates.

Such loans are open to all businesses, including those that do not qualify for government-backed loans. Banks typically offer the following types of business loans.

Business term loans provide a lump sum that can be put to any business use, making them one of the most flexible options available. Such loans are offered on unsecured terms, which means no collateral is required. 

Repayment is carried out via fixed instalments (usually monthly, but other terms such as weekly or quarterly may be available upon request) with loan tenures ranging from one to five years. You may borrow up to S$500,000 or more, depending on your bank.

Businesses and SMEs looking to implement more sustainable business practices can tap on green loans to help fund the necessary upgrades. Doing so can help them better align with consumer preferences, and fulfil their role in offering more environmentally friendly choices to the market.

Some areas of funding available under green loans include energy efficiency; pollution prevention and control; circular economy; clean transportation; sustainable water and wastewater management; and climate adaptation.

Short-term financing options are designed to help owners of small businesses meet temporary cashflow needs and avoid disruption to day-to-day operations. Compared to term loans where a lump sum is provided once, short-term business financing has a more continuous quality. 

One form of short-term financing is invoice financing, where a business “borrows” against the value of invoices that have been issued, but not yet paid. Invoice financing is useful in helping SMEs to shorten the duration till they receive payment.

Another short-term financing option is an overdraft facility or credit line. This is a revolving credit facility from which businesses can draw upon whenever required, and pay back amounts owed on their own schedule.

A mini version of a business term loan, startup loans are designed to help entrepreneurs get their new business ventures off the ground. As such, startup loans have less strict eligibility requirements, but also come with lower loan limits. Typically, startup loans may offer around S$50,000 to S$100,000.

Singaporean SMEs can access various government financing schemes to help them with certain aspects of their business operations. These are available under the Enterprise Financing Scheme (EFS), administered by Enterprise Singapore.

Note that EFS business loans are funded by partner lenders which include banks and financial institutions. However, EFS business loans are risk-shared by the government for between 50% to 70% of the loan amount. 

This facilitates Singapore-owned businesses in securing business capital, while lowering default risk for banks and lenders, allowing for lower interest rates. 

Business loans offered under EFS cover seven areas, explained below.

To apply for a business loan, you’ll need to furnish a fair amount of paperwork that will be used to assess your creditworthiness, as well as the financial stability of your business. This is so the lender can more accurately determine the credit risk of the loan you are requesting. 

For bank loans, you will typically need to provide:

• Credit Bureau Singapore credit report
• Latest six months bank statements
• Latest Notice of Assessment
• Last two years’ financial statements of your business
• Outstanding loans declaration
• Accounts receivable ageing report (this shows upland invoices, amounts owed, duration, etc)

 If you’re applying for government financing under EFS, your business has to fulfil the following requirements:

• Business entity registered and operating in Singapore
• Company has at least 30% local shareholding held directly or indirectly by Singaporean(s) and/or Singapore PR(s), determined by the ultimate individual ownership
• Company has a Group Annual Sales Turnover not exceeding S$500 million
  • For “SME Working Capital” and “SME Fixed Assets”, an SME is defined as having a group revenue of up to S$100 million or maximum employment size of 200 employees

Thus, you would also need to prepare these relevant documents in addition to those listed for bank loans.

Your business loan may be rejected for several reasons, some of which may be redeemable. Thus, if your loan application is rejected, you should clarify with the lender, and if possible, take remedial actions such as providing further verification or additional supporting documents. 

Some common reasons that may cause your business loan to be rejected include:

Your personal credit score matters even when taking a business loan. Missteps such as not paying your bills on time, or a pattern of reckless borrowing can lower your credit score, causing lenders to doubt your ability to properly responsibly manage your loan obligations. Thus, a low credit score may be the reason why your small business loan was rejected, and you should take steps to remedy it before trying again.

If your business has a poor track record such as low profitability or underperformance in key metrics, your business loan application may be declined. Most business term loans require at least two years of audited financial statements, which means young companies that have been in business for less than three years may face difficulties in getting their loan approved. Newer companies who have not yet established the necessary track record can turn to startup loans instead, which do not have this requirement.

To raise capital via government financing schemes, your business will need to be at least 30% owned by Singaporeans. Failing to meet this requirement will disqualify your small business loan application. Companies that do not satisfy ownership share requirements for government loans may consider taking a business term loan from banks instead.

If you fail to secure a business loan, you may wonder if you should try using a personal loan to raise the capital you need. Depending on how much you actually need, and your personal indebtedness, this could be a viable option. 

There are two considerations here. Firstly, personal loans are capped at 4x your monthly income. This may prove insufficient if you’re looking for a large capital sum. 

Secondly, you’ll need to beware of your Total Debt Servicing Ratio (TDSR). Combined debt repayments each month cannot exceed 55% of your gross monthly income, which means taking a personal loan that is too large may jeopardise your ability to obtain other loans, such as a home mortgage.

For these reasons, personal loans are best reserved for when you only need a relatively small amount of capital. Note that personal loans are likely to have higher interest rates, which is another compelling reason to use them only as a last resort.