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Guide to Start-Up Business Loans in Singapore 2023 Edition

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Smart Towkay & OCBC Bank

May 04, 2023

Guide to Start Up Business Loans in Singapore

Disclaimer: The insights shared in this article are the result of a collaboration between OCBC and Smart-Towkay.com. It's essential to note that all views expressed in the article are the independent opinion of Smart-Towkay.com, which is based on our thorough research and industry expertise.

Smart-Towkay.com cannot be held responsible for any financial losses that may occur as a result of any transactions, and we strongly encourage readers to conduct their own research before making any financial decisions.

Starting a business can be a daunting task for entrepreneurs as there are often limited options available when it comes to financing. Most new entrepreneurs find themselves in a difficult situation where they do not have enough capital to get their business off the ground.

One of the most common options for new entrepreneurs is to utilise government grants such as Start-up SG Founder grants that offer mentorship and start-up capital of S$50,000 for first time business owners with inventive concepts. However, this requires a commitment from the Startup in the form of a co-matching fund worth S$10,000.

Crowdfunding and seeking investments from friends and family are other popular options that many entrepreneurs opt for when they cannot get financing from traditional sources such as banks or investors.

Some may even resort to personal loans, but it's important to note that the traditional banking credit models used by retail banks for assessing individuals' credit cards and personal loans are too basic to be applied on small businesses lending operations at scale resulting in insignificant amounts that can be used as start-up capital.

However, these methods may not always be successful and may not provide enough capital to launch a business.

Is It Difficult To Get A Business Loan In Singapore For A New Company/Start-Up?

A major hurdle that new or start-up businesses in Singapore confront is accessing bank loans. 70% of these companies are not eligible for such financing due to their absence of an operating history and healthy cash flow. This makes perfect sense since, as a novel venture, there isn't sufficient data available on the business for banks to examine creditworthiness and exercise appropriate diligence.

The lack of access to business loans has become a significant obstacle that is obstructing the growth and development of SMEs, particularly when they are competing with larger companies.

To make matters worse, many banks require at least two years' worth of operating history in order to evaluate creditworthiness and impose minimum turnover criteria. This only further complicates the plight of small businesses who seek financing from traditional sources such as banks.

Are we stuck between a rock and a hard place when it comes to start-up capital? Without financial backing from banks, how can one generate enough cash flow and make it through the two-year mark, which is critical for mainstream banks in evaluating loan eligibility.

So, What Are The Options Available For A New Company/Start-Up Then?

Fortunately, there are several other alternatives available for aspiring entrepreneurs to explore. These alternative financing methods have become popular among startup businesses especially since they require minimal paperwork and often provide a quicker turnaround time when compared to traditional banking loans.

These options include peer-to-peer lending platforms such as Funding Societies and Validus Capital SG. In addition to peer-to-peer lending platforms, budding entrepreneurs might explore OCBC Business First Loan as an additional funding option. (More on this later)

Typically, these Peer to Peer (P2P) platforms offer funding to businesses at least six months old with only their latest six months of bank statements, last two years' key person notice of assessment and a credit bureau report for credit assessment.

It is important to remember that although they specialize in providing loans for relatively young companies, the interest rates can be significantly higher than those offered by established banks and typically have an incredibly short repayment period between 6-12 months. Interest charges range anywhere from 24% - 48% effective interest rate (E.I.R) per year.
Fuel Your Business Ambitions Now! Apply for Your Business Loan Today with Smart-Towkay

Looking For A Cheaper Alternative? Introducing OCBC Business First Loan

As the name implies, OCBC Business First Loan is a financing solution designed specifically for young and start-up companies.

This loan is designed to provide young SMEs with the funding they need to grow and expand their business operations with easy-to-qualify criteria and lesser paperwork requirements through a simple online application.

Eligibility for OCBC Business First Loan

Business is registered and operating in Singapore between 6 months and 2 years
At least 30% owned by Singaporean or Singapore PR
No more than 10 employees or annual turnover not exceeding S$1 million

Key Features

Repayment terms up to 4 years
Personal Guarantee from key person required
Max Loan Amount: $100,000
Instant Approval Status via online submission
Interest: 11.75% Effective Interest Rate* per annum

Read more on the difference between Effective Interest Rate (E.I.R) and Simple Interest here.

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OCBC Business First Loan is a great option for business owners who don't have access to traditional bank loans or deemed peer-to-peer (P2P) loans too expensive.

OCBC Business First Loan Vs Peer to Peer Loan (P2P)

Both offer different features and benefits that can help businesses with their financial needs. However, it's important to understand the differences between them in order to make an informed decision on which one is best suited for your business.

The key differences between the two loan options include their interest rates, what they provide for borrowers, their eligibility requirements, repayment period and application process.

	OCBC Business First Loan	Peer To Peer Loan (P2P)
Min Incorporation Criteria	Companies ≥ 6 months, < 2 years	Companies ≥ 6 months
Interest Rate	11.75% effective interest rate per year for 4 years tenor)	24% - 48% effective interest rate per year.
Repayment Terms	Up to 48 months (4 years)	From 1 - 12 months
Approval Turnaround Time	Fast, Online submission via Singpass	Fast
Processing Fees	2%	2-5%
Prepayment Fees	1.5%	Between 1.5 - 3%

*Interest rates and the above terms and conditions are subject to change and may vary based on creditworthiness, loan amount, and other factors. The above illustration provided is for informational purposes only and should not be considered a guarantee or commitment to lend. Actual interest rates and loan terms may differ from those illustrated.

Doing An Apple To Apple Comparison

Example: ABC Pte. Ltd. took a $100,000 Business Loan with OCBC Vs Peer To Peer Loan (P2P)

OCBC Business First Loan – $100,000 for 12 months at 11.75% effective interest rate per annum

Total Interest Payable: S$6,478.25

Processing Fees: S$2,000

Total Cost of Financing: S$8,478.25

Peer To Peer Loan – $100,000 for 12 months at 21.5% effective interest rate per annum interest per month

Total Interest Payable: S$12,024.69

Processing Fees: S$ S$2,000- S$5,000

Total Cost of Financing: S$14,024.69 – S$17,024.69

OCBC Business First Loan Vs Other Bank’s Business Term Loans

When it comes to business financing, Business Term Loans from banks are a popular option for business owners. Here we will compare OCBC Business First Loan to other bank's business term loans, to help business owners make an informed decision about the best financing option for their business needs.

	OCBC Business First Loan	Other Bank’s Business Term Loan
Min Incorporation Criteria	Companies ≥ 6 months < 24 months	Companies ≥ 2 years
Min Turnover Criteria	Nil	> S$350,000 - S$750,000
Loan Amount	Up to S$100,000	Up to S$1,000,000
Interest Rate	11.75% effective interest rate per year	10.88% effective interest rate per year
Repayment Terms	Up to 4 years	Up to 5 years
Approval Turnaround Time	Fast, Online submission	May take longer, more documents required
Processing Fees	2%	1.5-2%
Prepayment Fees	1.5%	Between 1.5 - 2%

** Information about above rates and terms and conditions is based on available data as of 2021 and may be subject to change.

As shown in the above table, OCBC Business First Loan is more suited for new start-up or young companies with less than 2 years of operation. However, the interest rate is slightly higher compared to traditional bank loans.

On the other hand, established bank loans are more suited for established businesses with more than two years of operation. Their interest rate is typically lower and their loan amount is usually higher. Due to the additional documentation needed for evaluation, they might take longer and be more difficult to approve.

Fuel Your Business Ambitions Now! Apply for Your Business Loan Today with Smart-Towkay

Conclusion

Ultimately, start-up companies in Singapore have a variety of options to access working capital, from bank loans and peer-to-peer lending platforms. Utilizing these reliable sources can help your business stay afloat while giving you the financial freedom to grow and expand without delay.

OCBC Business First Loan presents a unique opportunity for budding businesses to secure reliable financing. Not only does this loan offer a longer repayment period than other viable options, but it also facilitates the approval process with minimal paperwork requirements. In essence, this is an incredibly convenient and accessible solution that provides start-ups the chance to get ahead of their competition.

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Frequently Asked Questions

Why do banks need Personal Guarantees (PG) for Unsecured Business Term Loans?

An unsecured business term loan is a loan that is not backed by any collateral. This type of loan is typically only available to businesses that have a strong credit history and good financial standing. Businesses that are new or have a poor credit history are typically not eligible for unsecured loans.

When a business applies for a loan, the bank will typically require some form of collateral to reduce their risk. If the business is unable to repay the loan, the bank can seize the collateral to cover the debt.

However, not all businesses have assets that can be used as collateral. In these cases, the bank may require a personal guarantee from the owner or shareholders of the business. A personal guarantee is a promise by the business owner to repay the loan if the business fails. This guarantees the bank that they will be able to recover at least some of their losses even if the business goes bankrupt.

What are the likely reasons for rejection?

Applications may possibly be rejected due to the following reasons:

Poor credit bureau standing of the guarantor of the application
Loss making company
Negative net-worth company
Poor repayment conduct of existing personal or business loan facility with the applicant lender
Poor mid/end month balance sighted

Will taking up a Business Term Loan affect my personal Residential Purchase in the future?

All business term loans will require the company’s director and shareholder to be the personal guarantor. As a guarantor, a percentage of the monthly repayment instalment for the relevant credit facility will be factored into the TDSR calculation when the Bank assesses the borrower’s eligibility for property loans.

Read also: What You Need To Know Before Applying For A Business Term Loan
Read also: Who Acts As A Guarantor In A Business Loan? A Detailed Legal Advice Before You Become a Loan Guarantor!
Read also: Understanding Your Credit Report from Credit Bureau Singapore - Business Owner Edition
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