What are the Different Types of Loans for Businesses?

SMEs and small businesses have a wide variety of financing options, including different types of loans for business needs. Learn about the types of loans businesses can choose from and how to apply for them.

When it comes to business financing, there are several options that go beyond instalment term loans. Indeed, entrepreneurs, SMEs and small businesses can choose from different types of loans for business needs, including secured loans, green loans, fixed asset loans and lines of credit. 

Let’s take a closer look at the different types of loans for businesses available in Singapore.

Table of contents:

• Overview of different types of loans for businesses
• Government-assisted Enterprise Financing Scheme
• Bank business loans
• SME financing platforms
• Things to note when applying for a business loan in Singapore
• Alternative options to business loans
• Frequently Asked Questions (FAQs)

Overview of different types of loans for businesses

There are certainly many different financing schemes and types of loans for businesses, ranging from micro-loans for startups to mergers and acquisitions loans catered for companies looking to expand their presence internationally. 

To keep the discussion concise, we will be looking at three common types of loans for businesses – government-assisted funding, bank business loans and SME financing platforms. 

Government-assisted Enterprise Financing Scheme

The first type of business loans are grouped under the Enterprise Financing Scheme, which is a government-assisted funding programme administered by Enterprise Singapore. It covers seven different areas of funding, as summarised in the following table. 

The key difference that sets these loans apart is that the government offers 50% risk-sharing, up to 70% for younger enterprises. This reduces the risk to lenders, reducing friction in the loan application process. Note that borrowers are still 100% liable to repay the loan. 

Eligibility for Government-assisted Enterprise Financing Scheme Loans

To qualify for these business loans, SMEs should fulfil the following:

• 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 a maximum employment size of 200 employees.

Bank business loans 

A second type of business loan that is readily available is a bank business loan. These are available for a variety of needs, including startup funding, working capital, or purchase of property and equipment. There are even bank loans that allow you to borrow against the value of real estate that your company owns. Here are some of the most common types of bank business loans.

Entrepreneur or micro-loans

Micro-loans are small business loans, usually up to S$100,000, ment to help startups or entrepreneurs get their business off the ground. These loans are offered on a unsecured basis, and are open to fledgling business ventures with less than a year in operation. 

Business term loans

Business term loans offer SMEs lump-sum funding that is repaid in fixed monthly instalments over a predetermined duration. Both the principal and interest charges are repaid in each instalment, which are due on the same date every month. 

The fixed and stable nature of business term loans makes it easy for SMEs and companies to keep track of their loan obligations, which is a leading reason for their popularity. Bank business term loans are available from S$100,000 to S$700,000, serving a wide range of different enterprises. 

Business green loans

Many banks also offer business green loans that companies can tap into to finance ESG certification, as well as the associated business changes that accompany it. For instance, a plastics products company may decide to invest in advanced plastic recycling equipment to improve post-consumer yield in their products, making their products carbon-neutral. 

To carry out this initiative, the company could apply for a green loan to fund equipment purchases, staff training, and consultancy services. 

Fixed asset loans

Fixed assets loans are designed for SMEs to purchase commercial real estate, equipment, vehicles and vessels necessary to develop their business operations. These expenditures are regarded as fixed assets, and may be funded with a fixed asset loan from a bank. 

For vehicles or vessels, a bank fixed asset loan may offer a loan-to-value ratio of up to 70% to 90% of value. Meanwhile, fixed asset loans for offices and factories are capped at a fixed amount. 

Eligibility for bank business loans 

Eligibility requirements vary according to the type of bank business loan you are applying for. However, in general, companies should be:

• Registered and operating in Singapore
• With local shareholding of at least 30%

Please refer to the product pages of specific bank loans for further eligibility requirements. 

SME financing platforms

Besides business loans offered under the Enterprise Financing Scheme, and commercial loans from banks, small businesses can also access business funding from SME financing platforms. 

Such platforms tend to offer different types of loans for businesses, and you can make enquiries to find out more about a particular business loan or financing scheme you are interested in. 

Three of the most popular SME financing platforms include:

• Funding Societies, a debt investment platform that offers unsecured business loans, invoice financing, revolving credit lines and secured property financing. The latter is a financing scheme that lets you borrow against the value of properties owned by the business.
• Captall, a business loan provider that offers business credit lines, working capital loans, expansion financing, and auto financing. This platform is suited to micro-enterprises and startups, as companies with annual revenue at least S$100,000 are eligible for loans.
• Validus, a digital financing platform for small businesses and SMEs that specialises in small business working capital loans of up to S$150,000, as well as invoice financing of up to S$1 million.  

Things to note when applying for a business loan in Singapore

Interest rates

Business loans often only display their nominal or advertised interest rate. However, to know the true cost of your loan, you will need to look at the Effective Interest Rate (EIR). This rate accounts for other related business loan expenses such as processing fees, annual fees or more. 

Fees and charges

It is common for lenders to levy additional fees and charges on a business term loan. Some of the typical ones include: 

• Processing fee. This is a one-time charge that is levied to process the business loan. It may be a percentage of the principal amount or a fixed fee. 
• Annual fee. Some lenders may also include an annual fee, which is levied throughout the duration of the business loan. 
• Late payment fees. This is charged every time a payment is late or made after the due date. 
• Late interest charges. Overdue loan amounts may be subject to additional interest, which may be compounded daily until paid up. 
• Early repayment fee. This is a fee charged should you repay your business loan early. Typically, early repayment fees are calculated on the outstanding balance repaid early, plus a fixed amount. 

Alternative options to business loans

Line of credit 

A line of credit puts a certain amount of funds at your disposal, which you can draw down as required. Along with a monthly or annual fee, you only pay interest on the amount you have drawn down and can repay your debt at any time and in any amount. 

This makes lines of credit more versatile than a business loan. You do not have to saddle your company finances with an entire sum of debt, and sparing use will result in less interest charges in total.

Invoice factoring

Invoice factoring lets you “borrow” against the value of invoices issued but not yet paid. This lets you unlock cash flow to meet urgent needs instead of being stuck waiting for payment from clients, some of whom can have long payment cycles. 

In exchange for getting paid early, businesses pay a factoring fee, which is typically between 1% to 5% of the invoice's total value. 

Personal loan

If all else fails, you can try getting a personal loan to tide your business over for the short term. Do be aware that personal loans may not be able to furnish as much as you need due to regulatory caps on how much you can borrow. 

Also, take care not to miss your personal loan payments and damage your credit score. Should this happen, you may face heightened difficulty applying for further business loans; lenders may not look kindly upon the fact that the owner of the business is unable to manage their personal loan obligations. 

Frequently Asked Questions (FAQs)

Which loan is best for business?

The SME Working Capital Loan offers 50% to 70% risk-sharing by the government of Singapore, making it among the easiest business loans to qualify for. Hence, small businesses should place this loan among their top choices when seeking business financing. 

Also read: Best SME Grants in Singapore

What is the most common type of business loan?

The most common type of business loans are likely to be business terms loans. These are unsecured loans with a fixed monthly payment structure, making it easy for SMEs to manage their cashflow and loan repayments.

What is the best loan to start a business?

If you’re looking to start a small business without high overhead costs or large-scale operations, a micro-loan or a startup loan may be suitable. These loans grant small amounts from S$10,000 to S$100,000, so you can borrow only what you need instead of taking on excessive borrowings as you would with larger business loans.