SME micro loans are designed for businesses which require smaller loans, ranging from S$10,000 to S$100,000. Learn how micro loans work, how they differ from conventional business loans, and where you can get one. 

There are several different types of business loans and funding options available to business owners and small and medium enterprises (SMEs), ranging from government-assisted loan schemes to green financing, vehicle and equipment loans, and even overseas venture debt arrangements. 

While these can be highly useful for companies that need them, the majority of business loans tend to overshoot the needs of startups or micro businesses. Such enterprises may only require a small loan to plug a gap in cashflow, launch new business products or ideas, or to secure the required inventory. 

In such situations, SME micro loans may be the answer. 

Table of contents:

• What are SME micro loans and what are they used for?
• How do SME micro loans work?
• Where can you apply for an SME micro loan in Singapore?
• Pros and cons of microlending
• SME micro loans vs other types of business loans
• Frequently Asked Questions (FAQs)

What are SME micro loans and what are they used for?

Like their name suggests, SME micro loans are financial loans that provide companies with the cash necessary to continue their operations or expand their business.

However, the unique feature of micro loans lies in their quantum – they offer a much lower loan amount than conventional business loans. Typically, micro loans allow you to borrow anywhere from S$10,000 to S$100,000 per company, although some lenders may offer a higher cap. 

This is to cater to the needs of entrepreneurs launching startups or owners of micro businesses. Such companies are unlikely to require the levels of funding offered by traditional business loans. 

They may also be unable to qualify for larger business loans, as their revenue or scale of business simply doesn’t fit the requirements and purpose of the loan. 

Thus, SME micro loans are designed to cater to the funding needs of soloprenuers or microenterprises, by providing loan amounts that are sized to their needs. Regardless, companies that happen to be larger may also qualify for a micro loan, if requirements are met. 

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How do SME micro loans work?

SME micro loans are typically structured as term loans with fixed monthly repayments. Interest is charged on the loan at a rate that is agreed upon beforehand between the lender and the borrower, along with other applicable terms such as fees and charges. 

The monthly repayments consist of interest charges and capital sum repayments, and each instalment is pegged at a fixed amount. This makes it easier for borrowers to manage their loan repayments. 

Once all loan instalments have been paid off – along with any outstanding charges such as late fees – the micro loan is considered repaid, and the borrower’s liabilities are completely discharged.  

In addition, micro loans are offered on an unsecured term – no collateral is required when applying for the loan. 

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Where can you apply for an SME micro loan in Singapore?

SME micro loans can be readily found at several local banks, including UOB and DBS. These lenders offer loan packages with quantums ranging from S$10,000 to S$100,000. Micro loans from banks may be offered in conjunction with Entreprise Singapore, and may come with government risk-sharing. 

Another source of SME micro loans are financial institutions such as Funding Societies. These providers cater to the needs of SMEs with flexible micro loans that do not require collateral, and can also provide large loan amounts. For instance, Funding Societies allow you to borrow up to S$150,000 per micro loan. 

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Pros and cons of microlending

For lenders

The main advantage of microlending for lenders is the opportunity to reap a return on their investment, which is generated from the interest paid on the loan. 

However, lenders also have to bear the risk of default. While lenders enjoy legal protection of their right to recover amounts owed, they may still encounter borrowers who are unable or unwilling to repay their loans in full. If debt recovery measures fail to turn up the amounts owed, the bad debts will have to be written off, causing the lender to take a financial loss. 

For borrowers

Microlending benefits borrowers who do not require or qualify for conventional business loans, providing a funding solution that is better suited to their needs. The unsecured nature of such loans also makes it easier and more convenient for business owners to apply for one. Micro loans can also be used flexibly at the borrower’s discretion. 

On the downside, micro loans can come with high interest rates, along with various fees and charges. These can all increase the cost of borrowing. As a risk reduction measure, some lenders also limit their micro loans to short loan tenures – this means higher monthly repayments which may be more difficult to manage. 

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SME micro loans vs other types of business loans

SME micro loans are functionally the same as other types of business loans, as they provide a convenient and affordable funding solution for business owners. However, they also differ from other types of business loans in the following ways: 

• Loan quantum. Micro loans are best suited for small loans under S$100,000. Meanwhile, other business loans are designed for much larger amounts.
• Collateral. Micro loans are offered on unsecured terms, with no collateral required for application. Some business loans, such as those for commercial vehicles or equipment, may stipulate pledging the fixed assets themselves as collateral. 
• Revolving terms. Micro loans do not operate on revolving credit terms; your obligations are paid down with each instalment, which is paid on a fixed schedule. This is different from credit lines, which allow businesses to borrow from a line of credit as required, and make repayments towards their debt at their discretion. 

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Frequently Asked Questions (FAQs)

A micro loan refers to a financial loan involving amounts that are much smaller than traditional business loans. Often a micro loan may involve anywhere from S$1,000 to S$10,000. 

Meanwhile business loans cater to those requiring S$100,000 or more, with some funding options even providing multi-million funding. 

Micro loans can be a viable option for those who do not qualify for, or require, larger bank loans. The relatively smaller loan amount makes it easier for the bank to grant the loan; borrowers likely also find a micro loan easier to repay. 

In general, you can borrow up to S$100,000 in a micro loan from a bank. However the maximum amount you can borrow can vary according to platform and lender.

Read these next:

Best Small Business and SME Loans in Singapore 2024

Best SME Grants in Singapore

5 Key Reasons Why Successful SMEs Take Business Loans

A Guide To Business Insurance For SMEs (And How Much They Cost)

What are the Different Types of Loans for Businesses?

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