If you run a business, you know that there’s never a shortage of circumstances where extra cash would be a big help. From expanding your company, to repairing your equipment, many things require some capital, especially for a small business or a new business.
This is where business financing comes in. An important factor (or perhaps the most important one) is the interest rate on a business loan, because it determines how much it will cost you to borrow, and greatly affects your regular cash flow and operations.
In this article, dive deep into the interest rates of business loans in Singapore and understand the three ‘Hows’. Learn how interest rates are determined, how they compare against each other and how you should evaluate them in a broader context of other loan conditions.
Types of Business Loans
There are many types of business loans. Interest rates, similarly, will differ with each type. Different loans will commonly have different uses and structures, and will nominatively be locked into business use (unlike personal loans.)
In Singapore, you have multiple SME financing options for business, and they will come in two main sources: the Singapore government, or financial institutions like banks and licensed money lenders.
The advent of Covid-19 brought many businesses to heel, with some full-on closing down, while others shutting their storefronts in favour of an online platform.
This of course dealt a great blow to the economy, and in response the government-assisted large financing projects to provide much-needed funding to the Singapore business owner with Enterprise Singapore, providing risk share for small-to-medium enterprise loans.
These loans tend to have more lenient credit risk analysis and lower interest rates, because of government risk sharing with participating financial institutions. This reduces the risk exposure of lenders, which enables them to price the loan at lower rates.
Because of this, government loans are some of the best SME loans to consider. Here are two of the big ones:
1. SME Working Capital Loan
Formerly providing a maximum loan amount of S$1 million and 90% government risk share for assisting SME daily operations, these SME loans have now been toned down to S$300,000 with 50% risk-sharing with rates depending on participating institutions’ risk assessment of the applicant company.
To be eligible, a company must have a group annual turnover less than S$100m or a group employment size of less than 200, with local shareholdings of 30%.
2. Temporary Bridging Loan (TBL)
Extended up until March 2022, the TBL seeks to provide working capital for all business needs, providing up to S$3 million with total interest amounting to a maximum of 5% and 70% risk share.
Both loan options have a maximum repayment period of 5 years.
Standard Commercial Loans
These loans are those offered by banks and moneylenders. They will typically have a flat interest rate, but revolving facilities like overdrafts and trade financing may change on an annual basis.
SME business loans from these lenders are more short-term obligations than their government counterparts, so while the effective interest rate might be higher, the overall cost could be cheaper. Some include:
- Working Capital Loans
- Unsecured Business Term Loan
- SME Micro Loans
- Trade Financing Facility (e.g., Purchase Order Financing & Invoice Financing)
- Commercial Property Loan
- Equipment Financing (Hire Purchase or Lease)
The likely port of call for a SME business, banks provide a fair variation of loans (with some participating in government schemes). Credit assessment varies between each.
Regulated by the Ministry of Law, money lenders are the other main option for SME loans, with the benefit of having more lenient requirements and zero admin fee.
Interest Rates on Business Loans (Singapore)
Business loan offers vary for each lender. As is the case with any loan, unsecured loans will have higher rates. There is an indicative range for each type, as shown here:
|Effective Interest Rate
|Temporary Bridging Loan
|Up to 5% p.a.
|SME Working Capital Loan
|Up to 7.5 p.a
|Unsecured Business Term Loan
|9% – 12% p.a.
|Trade Financing Line
|6% – 8% p.a.
|6% – 8% p.a.
|10% – 13% p.a.
|3% – 7% p.a.
|Commercial/Industrial Property Loan
|2% – 3% p.a.
|1% – 5% /month
|Moneylender Business Loan
|Starting at 5% /month
Calculating the Effective Interest Rate
The Effective Interest Rate determines the cost of compounding rates when you pay interest over a given period, in contrast to the nominal interest rate which doesn’t factor compounding.
The Effective Interest Rate Formula is:
1 + (simple interest rate / number of compounding periods) ^ (number of compounding periods) – 1
Which bank/lender gives the lowest interest rate on SME business loans in Singapore?
The best SME business loan from a bank and financial institution is difficult to pin down because banks vary their interest rates based on risk assessment.
Most banks offer the government-guaranteed SME Working Capital Loans and Temporary Bridging Loans, which are the best choices in Singapore.
However, the best bank offer is OCBC Business First Loan, which offers a loan tenure of 4 years with rates starting at 7.5%, lower than other lenders.
To qualify for this small loan, your business just needs to be registered and operating in the country between 6 months and two years, is at least 30% owned by a citizen or PR, with no more than 10 employees OR with a minimum annual turnover of S$1 million.
Factors that Affect Business Loan Interest Rate (Singapore)
The rule of thumb is the better your company’s credit rating and cash flow financials, the lower your interest rate might be.
However, your eligible interest rate may also be affected by a number of other factors. These factors include the loan tenure, number of years the business has been registered (3 years or more is preferred by banks, save for SME loans), the director’s personal credit profile, and the nature of the business.
You also have to consider other terms in the whole of the business loan, and these include:
1. Processing fees (not applicable to moneylenders)
For loan origination and administration, most banks charge a processing fee. It should be included in financing costs.
Even if one bank has a slightly lower interest rate than another, if it has a high processing fee, then the overall cost of your loan may even be higher than with a loan with a higher rate.
2. Annual fees (not applicable to moneylenders)
Working with a bank means that you may be subject to a yearly payment as their customer. This is not applicable to licensed money lenders.
3. Collateral requirements (not applicable to moneylenders)
One thing to consider is whether or not the loan you are applying for requires collateral. Unsecured loans typically will not require any, but collateral can make interest rates lower.
Given the same business loan interest rate and other conditions, you should always choose a loan facility that does not require collateral from your business.
The most common collateral requested by banks is earmarked fixed deposits, receivables, or properties.
4. Penalties for early redemption
When applying for a loan, you should check whether it includes a waiver of early redemption penalties and, if so, how long the redemption period is.
Borrowers can use such clauses to exit a loan commitment and reduce their interest costs. If you are considering your loan options, you need to consider the lock-in period and redemption penalties of some lenders.
5. Late fees
Just as there are fees for early repayments, late payment charges are also typical in a loan to encourage on-time repayment.
These amounts will typically be a percentage of the balance, with a minimum amount for the fee.
Alternative Financing Options
If traditional business lending is out of the question for you, there are other options you can consider to come up with much-needed funding.
Invoice factoring is a type of invoice financing where you “sell” some or all of your company’s outstanding invoices to a third party as a way of improving your cash flow and revenue stability.
A factoring company will pay you most of the invoiced amount immediately, then collect payment directly from your customers. There are benefits and disadvantages to invoice factoring, which we’ll cover in this article. Invoice factoring is also referred to as accounts receivable factoring or debt factoring.
Personal loans can be used for any expense at the discretion of the applicant, and can therefore be used for additional business funds.
Business Line of Credit
Opening a credit line is another useful way to help with smaller, incremental expenses. You can’t use it for large amounts due to being given a limited amount per given time.
Crowdfunding platforms allow businesses to present their ideas on the internet to solicit support from people to help fund projects.
Many smaller companies have had significant success on Kickstarter, the biggest crowdfunding platform, and it is a great way to build an online presence outside of funding.
There’s always going to be a need for extra funding when you’re running a business, so financing should always be something in your mind, especially in tough economic climates. Make sure your finances are solid to ensure that you can get the financing you need.
- Government-backed business loans are generally the best option for lower rates and risk sharing with Enterprise Singapore.
- Don’t just look at the interest rates on a loan when choosing a loan facility. Consider other factors of the loan, such as the repayment period, fees, and more.
- Always shop around for your options. The best loan is the one that perfectly suits your specific financial situation.
If you’re looking for a loan, consider the services of 365 Credit Solutions. It is a trusted, licensed moneylender in Singapore offering tailored loans to address your financial needs!