New Business Loans And Grants – Small and medium enterprises (SMEs) face more challenges when applying for business loans than larger enterprises. In fact, a survey of MSMEs who have secured finance from digital lenders shows that 74% of them cannot get loans from traditional lenders. This created a fiscal gap of $270 billion…
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A Guide To Getting A Small Business Loan
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Influence and Inspiration Tell us about a leadership lesson you’ve learned that is unique to being a female leader? A former supervisor of mine once told me, ‘Wherever you go, leave a legacy’. This simple but powerful statement motivates me to work harder so that my contribution can have a sustainable impact… It is important to consider the costs of financing your business through loans. That said, it can be difficult to find and compare the various costs and fees associated with all the loans available to your SME. Here we summarize information available from major banks and alternative lenders (P2P / Crowdfunding platforms) to illustrate the differences between the costs associated with business loans in Singapore.
The average interest rate for a business loan ranges from 4% to 20% depending on the tenure and nature of the loan. Long-term and specific use loans generally charge lower interest rates than short-term and general business loans because they provide longer-term returns and lower risk, respectively. Fees associated with business loans range from 1 to 5% of the total loan amount.
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Banks are the largest source of business loans. They are very experienced in lending to small businesses. In general, banks offer business loans with long terms, low interest rates and low fees. However, they have slower cash disbursements, lower maximum loan amounts and stricter eligibility requirements compared to alternative lenders. Business loans from banks are best for well-established SMEs that meet eligibility requirements and prefer to avoid fees and high interest rate payments.
On average, banks charge around 4-10% interest on business loans. These are cheaper than alternative loans because banks are selective in their application process. Generally, businesses must have a minimum operating history of 2-3 years and a minimum revenue of S$500,000-S$1 million. Banks therefore lend to the most financially sound and least risky SMEs and therefore offer the lowest interest rates. Compared to banks, P2P / Crowdfunding typically charges higher interest rates (9-20%), because they do not lend exclusively to experienced and financially sound companies. SMEs that qualify for bank financing can save money on interest rate charges with a business loan from a bank compared to a P2P/crowdfunding platform.
Banks usually charge an application fee and, in some cases, an initial repayment fee for business loans. Application fees are usually S$500 – S$1,000 or 1 – 2% of the approved loan amount. The fees tend to be slightly lower than P2P/crowdfunding platforms (2 – 5%), although it is important to compare on a case-by-case basis as the ranges are not drastically different.
Banks tend to offer business loans ranging from S$300,000 – S$550,000 for 3 to 5 years. These loans have fixed repayment schedules and therefore offer less flexibility and customization than P2P/crowdfunding loans. SMEs requiring more than S$550,000 should consider applying for P2P/Crowdfunding business loans.
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P2P / Crowdfunding gives SMEs access to funds raised from a pool of individual investors. The process circumvents bank eligibility requirements and provides access to funding to SMEs that do not qualify for bank loans. Additionally, these loans pay out money much faster than banks (some in 1-3 business days). When considering a good source of financing, P2P/crowdfunding business loans are a good option for SMEs that need large, customizable loans or those who don’t qualify for bank loans.
P2P/crowdfunding platforms charge higher interest rates (9-20%) than banks (4-10%). Since P2P / Crowdfunding platforms have lower eligibility criteria, they are exposed to increased risk and therefore charge higher interest rates. For SMEs that do not qualify for bank loans, high interest rate costs are an unfortunate reality of financing their company through P2P/crowdfunding business loans.
P2P / Crowdfunding platforms charge a success fee, which is important to consider when applying for funding. Typically, these platforms charge a success fee ranging from 2 to 5% of the loan amount. Additionally, some platforms charge an application or initial refund fee. These charges are better than bank loan charges, but should be evaluated on a case-by-case basis because they do not differ.
P2P / Crowdfunding platforms offer higher maximum business loan amounts compared to banks. MoolahSense offers loans above 5 million dollars. However, these platforms generally offer shorter maximum loan tenure (1 – 3 years) than banks (3 – 5 years). SMEs that require significant loan amounts and can repay the large loans in 1-3 years are best suited for crowd-funded loans.
The Facts About Small Business Financing
Stephen Lee is a senior research analyst specializing in insurance. He holds a Bachelor of Arts degree in International Studies from the University of Washington and his previous work experience includes risk management and underwriting for professional liability and specialty insurance at Victor Insurance. Additionally, Steven is a former U.S. Army officer. it. Peace Corps Volunteer in Myanmar (serving between 2018-2020), where he continues to provide business development consulting services to HR companies in the Asia Pacific.
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