What Is Term Loan And How It Can Boost Your Business?
September 19, 2023
Welcome to this comprehensive guide on term loans for Singaporean businesses.
Access to the right financing solutions is essential for fostering growth, innovation, and sustainability for companies of all sizes in Singapore’s dynamic business landscape.
A term loan is a crucial financial tool that can help your business realise its aspirations and navigate its ventures.
In this article, we will explore what is term loan and explain how it works, its benefits for businesses in Singapore, and the requirements to apply for one. By understanding these fundamentals of a term loan, you can make more informed decisions regarding your business financials.
Let’s get started!
What Is A Term Loan?
A term loan is a form of monetary loan where borrowers receive a lump sum upfront and commit to paying back the borrowed amount, plus interest, in consistent instalments throughout the loan’s term. Small businesses usually use these loans to purchase fixed assets such as equipment, real estate, or machinery.
Some key features of term loans are:
- It consists of a lump sum payment from the lender to the borrower and can be lent by banks or licensed money lenders in Singapore.
- It provides access to larger funds compared to most other forms of financing, making it ideal for long-term investments.
- It has low-interest rates and flexible repayment options, so you can tailor the loan to suit your needs. This could be either through a fixed interest rate or a floating interest rate.
How To Apply For A Term Loan?
To be eligible for a term loan in Singapore, you must have an annual income of at least $20,000. Additionally, some lenders may only provide loans to businesses with a yearly turnover of $300,000 or higher.
The application process is relatively straightforward and begins with submitting your loan application and the required documents to demonstrate your financial standing and creditworthiness. The following are some of the documents you may need:
- Business financial statements, such as balance sheets, income statements, cash flow projections, and bank statements.
- Personal documents that verify your identity, such as your identity card, passport, and proof of residence.
- Details of any existing loans or liabilities.
Once your application has been reviewed, you will enter into a discussion with the lender to negotiate the terms and conditions of the loan. Once both parties are in agreement, the lender will disburse the funds.
Understanding Term Loans In Singapore
Term loans can provide businesses with the financial resources to expand, refinance debt, invest in capital assets, and finance significant expenses such as restructuring or acquisitions. As such, it is essential for companies operating in Singapore to have a good understanding of the factors that will get their loan approved.
When applying for a term loan, lenders typically prefer your company to be at least one year old. Some even require companies to be three years old, as this provides a track record of the business that allows them to assess its creditworthiness.
In addition, good credit scores and a steady income are essential to show lenders you can repay the loan. Having too many existing loans can make approving a new term loan more challenging.
Businesses must also demonstrate that they have the necessary skillsets and expertise to qualify for a loan.
Besides this, some government-based lenders in Singapore require the company to be Singapore-registered and at least 30% owned by a permanent resident for the business to qualify for a loan.
Types Of Term Loans Available In Singapore
We’ll discuss three types of loans, which differ in loan duration.
Short-term loans: These are ideal for businesses with short-term needs, such as seasonal sales or inventory purchases. They usually last for a year. However, they can sometimes be extended up to two years. They provide an effective way to bridge the gap between regular cash flow and income.
Medium-term loans: Medium-term loans are a type of loan that typically lasts three to five years and usually comes with a fixed interest rate.
This type of loan has many benefits, such as low interest rates, manageable repayment periods, and the opportunity to borrow large amounts for extended periods. As such, this loan can be used by businesses when they need long-term capital for activities like purchasing equipment or growing their business.
Long-term loans: These can range from 5 to 25 years in duration. You’ll have to submit collateral for long-term loans.
The collateral requirements can be high, sometimes requiring a company’s assets. However, the collateral is only taken if the due date has passed, in which case, the lender may use the collateral to pay off what is owed.
Generally speaking, repayment for long-term loans consists of monthly payments, usually based on both interest and principal. This means that all money owed will be fully repaid by the end of the loan’s term.
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Example Of A Term Loan In Singapore
Singapore offers a variety of business loan schemes to support enterprises in their growth and development. These schemes, backed by government agencies like Enterprise Singapore, are designed to meet the diverse financial needs of businesses at different stages of their life cycle.
The government collaborates with various financial institutions to offer loans with flexible terms and low-interest rates.
Each loan scheme has its own maturity and repayment schedule. Generally, these loans have a maximum repayment period of 10 years; however, real estate loans can be extended up to 25 years.
The interest rate depends on various factors, such as the loan size, the type of loan, and whether it’s a secured or unsecured loan. Banks usually charge 3% to 11% interest rates for business loans.
However, it may be either fixed-rate or variable-rate interest, with the former resulting in stable payments over the life of the loan while the latter resulting in fluctuating payments depending on market variations.
Moreover, prepayment of business loans can also be an option for some businesses. This option is sometimes only available if the loan’s maturity is 15 years or longer. This can benefit companies by allowing them to pay off their obligations faster and save money on interest payments in the long run.
Why Do Singaporean Businesses Choose Term Loans?
There are numerous reasons why businesses in Singapore might opt for a term loan.
For example, equipment loans secured under a term loan can help businesses upgrade their technology and remain competitive.
Similarly, real estate loans allow companies to acquire the physical space necessary for operations, such as an office building or retail storefront. This option can be cost-effective in cities with high real estate prices, like Singapore.
The reasons for opting for a term loan do not end here. Singaporean businesses also use term loans to get the necessary funds for:
- Seizing lucrative opportunities such as buying in bulk to get a discount.
- Financing long-term research and development programs.
- Consolidating debts.
- Hiring and training new employees.
- Launching their products and services in new international markets.
Common Attributes Of Term Loans In Singapore
Several attributes are common to all the term loans in Singapore. Here’s a look at some of them:
- Interest Rates: Fixed vs. Variable
In Singapore, businesses can take out term loans with fixed or variable interest rates. Fixed-rate loans have a steady interest rate and monthly repayment throughout the loan term, providing stability for financial planning. Variable-rate loans, or floating-rate loans, have an interest rate that fluctuates over the loan term and is usually tied to a benchmark like SIBOR.
- Repayment Schedules And Maturity Dates
Repayment schedules for term loans in Singapore usually occur monthly, though some lenders may offer quarterly or annual payment options. Loan terms can range from one year (for short-term) to 25 years (for long-term), with the maturity date determining when the loan must be paid off.
- Collateral Requirements And Approval Processes
Most long-term loans in Singapore require collateral. The collateral is a form of security for the lender if the borrower defaults.
The approval process involves the lender assessing the borrower’s creditworthiness, business plan, and financial statements. Lenders also evaluate the value of the proposed collateral and may require an appraisal.
- Early Repayment Conditions
In Singapore, the conditions for early repayment of term loans vary from one financial institution to another. Some lenders allow early refunds without penalty, while others may charge a prepayment fee.
Businesses must understand these conditions before taking a loan, as early repayment could lead to significant cost savings in interest payments.
- Regulatory Compliance
Lastly, businesses in Singapore must know that all term loans are subject to regulation by the Monetary Authority of Singapore (MAS). The MAS requires lenders to provide borrowers with clear information on loan terms and conditions and their rights and obligations under the loan agreement.
This ensures borrowers know the implications of term loans and can make informed decisions about their financing needs.
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So, this was it – all about the term loan!
Remember that it can be a powerful tool for businesses seeking financial aid; however, you need to evaluate the options and their pros and cons before applying for a loan.