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Written by: Christopher Chitty

There are several ways to obtain a loan in Singapore but in this article, we are going to focus on acquiring loans through banks and finance companies.

This type of financing is called debt financing. This allows entrepreneurs to retain full control of their company unlike equity financing which largely opens up the company to control from investors. The negative part of this is regardless of the success of your venture, you will have to pay the money back.

It is less expensive if your venture succeeds but runs the risk of being very costly if it fails.

Most banks and financial companies in Singapore provide small business loans to start-up companies. Some of the most common types of loans offered are;

1. Working Capital Loans: This is a short-term loan meant to finance the day to day operations of the company in order to keep it financially afloat until it is capable of generating revenue.

2. Factoring Loans: The bank will loan you an advance of the account receivables and the customer will directly settle the transaction with the bank. The bank typically loans up to 90% of the account receivables or billed invoices. There is zero collateral involved and you have immediate access to cash as soon as you issue an invoice. The bank will charge an annual interest of 5-8% to maintain this loan. The good thing is you do not have to follow up with customers for payment but you will not get 100% of the invoice value back from the bank.

3. Short-term loans: This type of loan lasts for a period of one year or less and some banks may require some form of collateral against the loan. This type of loan is usually used for buying inventory, paying bills, settling payrolls and so on so forth. In order to be eligible for this, the start-up will have to provide projected financial statements and a legal guarantee to the bank that they will be able to pay up the loans on the due date.

4. Overdraft: This type of loan provides the start-up with the ability to overdraw their current account. The maximum amount is one which is preliminarily agreed with the bank. Interest is paid on what is overdrawn and this is set at 1-2% above the bank's usual prime rate. This is great for businesses which require short-term financing and instant access to cash for activities such as a stock turnover. Overdrafts can be secured against collateral or unsecured with no collateral.

5. Hire Purchase Loans: This is a loan taken in order to purchase big ticket goods via instalments over a fixed period of time. This is effectively an arrangement where the bank finances the purchase of equipment for commercial business purposes. The bank will retain all legal titles/ownership to the financed asset until the last instalment is paid up in full. The financing period is around 4-8 years depending on whether the equipment purchased is new or used. The loan amount is usually around 80-90% of the purchase or market value, whichever is lower with a flat interest rate.

All major banks are available in Singapore and they are HSBC, UOB, DBS, Citibank, OCB and Standard Chartered.

Financial companies which provide these loans are; Orix Leasing, IFS Capital, Hong Leong Finance and Sing Investments & Finance.

Most of these banks/financial companies provides all loan types with some exceptions.

HSBC provides Hire Purchase Loans only if it is a commercial auto loan while Citibank does not provide Hire Purchase Loans at all regardless what it is for.

The financial companies mentioned above collectively provide all types of loans except for Overdrafts.

Before you take up any form of debt financings, you need to understand that most of the time; commercial banks may require you to put up your own personal assets as collateral before they will give you a loan. Defaulting on payments to the banks or credit card companies will reflect poorly on your credit score and this in turn will affect your chances of taking more loans in the future.

As start-ups are a high risk venture, the banks will take steps to minimize their financial risk. If your business succeeds, you can pay off your debts and start generating profits. If your business fails, you may lose your personal assets and run the risk of bankruptcy.

As a result, the more debt financing you have, the higher your risk of bankruptcy.

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