How to acquire loans for your commercial property

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Written by: Christopher Chitty 

The commercial property market is rapidly catching up with the residential market in terms of costs and interest from wealthy foreign investors. This is a side effect of the additional buyer's stamp duty (ABSD) imposed on the private residential market for foreigners.

The unattractive pricing of private residential units after being super-inflated by ABSD is driving demand into the rental and commercial markets, thus causing prices to rise exponentially and quickly.

In a country with limited physical growth potential, the market is ripe for the picking and the surge of prices is indicative of this intense investing.

It is relatively easy to invest in commercial property in Singapore as it lacks many of the restrictions of its residential counterpart.

That is not to say that there are no risks involved. A budding entrepreneur or investor will do well to pay attention to a few things.

1. The very first thing you will have to do before approaching the bank or financial company is establish, in very precise detail, your entire business plan. This is to include your financial projections (including projected net profits), estimated costs, financial histories, statements and property valuation.

The banks or financial companies may want to do their own property valuation regardless and some even offer it as a free benefit for entering into a deal with them. However, if you invested your own time and money in a valuation, it will go a long way in showing to the financial institution that you are serious about your venture.

2. SMEs (Small Medium Enterprises) and start-ups run the risk of being typecast as financial risks due to their small paid-up capital. If you are able to shore up a higher and realistic paid-up capital in comparison to the loan you are applying for, you stand a better chance of acquiring the loan as this shows the bank your commitment to the business. The loan ideally, should be a fraction of your capital.

Having surplus personal cash will also aid you in running the day to day operations of your business such as building management, payrolls and so on. Having more cash on hand will prove to the financial institution that you are not a high-risk client looking for a hand-out. This will also eliminate the number of loans you have to pay back while you struggle to make profits.

3. If you intend to sell a product, you need to ensure that upon presenting your business plan that you not only have a working prototype of your product but possess in your business inventory, a small number of finished goods that are ready to be sold in the preliminary markets.

This is important because it proves to the bank that should the loan be provided, you are ready to make money instead of spending time to complete an unfinished product. The important thing here is to be generating your own profits as soon as you can so having products ready to sell with a client base that is ready to buy will make your proposition more attractive. This will also shorten your pay-back period if you are able to be cash positive quickly.

4. Despite being ranked 4th on this list, owner's credibility is not any less important. Your credibility is tied directly to your credit score and banks will absolutely use this as a risk management tool to evaluate how much of a financial risk you are to them. Ensure your credit rating is good by paying your bills on time. Do not default on any loans and avoid bankruptcy.

If you look good on your credit score, you look good financially to the institution.

5. Collateral is a double edged sword. On one hand, it provides the financial institute with the means to attach your venture to a tangible object to be able to grant you a loan. Think of it as pegging money to gold. Money now has no intrinsic value because it is no longer attached to something tangible (gold) which is why when too much is printed, the market crashes. If your business has nothing to offer up as collateral, the banks will not want to take a chance on you because your venture will have no value to them. Banks basically want to ensure that if your venture fails, they are still able to gain restitution from you through something like liquid cash or  property.

6. The economic weather of the chosen industry is extremely important. If, for example, the IT industry is suffering due to unforeseen circumstances and you are intending to venture into that industry, you may not get the loan due its current tumultuous nature.

7. The loan application is a document in the loan process and it is very important. This can be considered to be a comprehensive and mandatory compendium to your business plan and must include business details such as who comprises your management team, your business activities, marketing strategy, financial projections, loan quantum and purpose of loan. You should also include pertinent information such as how you intend to repay the loan and the forecasted date as to when this loan will be paid back in full.

The best way to ensure that you do not make mistakes is to hire a reputable property lawyer to assist you. He will be able to advise you on processes and aid in the negotiation. You will need someone who understands the business intimately to go over everything. This is especially true if you are a foreign investor.

Even though Singapore is an investors' paradise, it is not without its pitfalls.

In Singapore, banks and financial companies provide generally two types of loans; Singapore Interbank Offered Rate (SIBOR) and Singapore Swap Offered Rate (SOR). SIBOR is used mostly for residential investments while SOR primarily for commercial.

If banks are not your thing, there are at least four well known financial companies which provide loans for the budding entrepreneur; Orix Leasing, IFS Capital, Hong Leong Finance and Sing Investments & Finance.

Most banks and financial companies provides SOR loans with different packages and benefits so you will need to do your research and with the help of your property lawyer, decide what type of loan is best for you and your venture.

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