The 2016 Guide To Business Financing

For Singapore SMEs And Entrepreneurs

Business Financing was never on my mind.

Plant growing from a bunch of coins symbolizing financing

But when the Global Financial Crisis hit us, I was scrambling like mad to find funding to keep the ship afloat.

Fortunately for us, we had a clean slate on our credit ratings.

That easily allow us to secure the Micro Loan that the government was supporting.

In turbulent economic times, business financing will become an an even more pertinent issue to Small-and-Medium Enterprises (SMEs).

There are currently so many more options to consider from.

Entrepreneurs looking to raise their working capital can check out the following funding options:

1. Bootstrapping

Entrepreneurs improve business cash flow through careful management of their financial resources. Borrowing is kept to a minimal to reduce the interest costs. Some of the ways to bootstrap a business are trade credit and leasing.

Trade credit is the short-term credit extended to the business by suppliers, who allow ‘buy now and pay later’.

Typically, this can be in the form of 30, 60 or 90-day credit term, without charging interest.

Terms vary by business and industry.

An industrial manufacturer has a longer credit term as compared to an online supplier, which requires payment on delivery.

Leasing allows businesses to share the cost of equipment with others.

Instead of financing the entire purchase amount, they only pay a portion used.

For instance, one could rent tablets for a few hundred dollars per month rather than paying the full amount of several thousand dollars.

Leasing also factors in the equipment maintenance cost too.

  • Entails lower operational risks since it is financing growth through reinvestment of business revenues and cash reserves
  • Entrepreneur gains the most from the business’ success since it is holding onto the largest capital share in the venture.
  • Risk of slower growth as the business is restricted by the abilities of the entrepreneur to implement the plan
  • Trade credit may not be readily granted by suppliers.

 

2. Inner Circle

Entrepreneurs could also raise money from their friends and family. Usually, they borrow just enough capital to fund the basic company operations.

  • One of the fastest ways to finance the business, often taking less than two months from the start to the end of fundraising
  • Flexible repayment schedules, as entrepreneurs, could negotiate for better terms
  • Awkward relationship with loved ones if business collapses or loans are not repaid on time

 

3. Credit Cards

Credit card financing is only suitable for certain types of purchase.

It can be used in short-term financial expense where it is expected to be recovered quickly.

In contrast, big-ticket items will cause one to exceed the available credit quickly.

  • An easy way to finance business without putting up any collaterals or handling numerous paperwork
  • Interest rates are typically higher than traditional business loans.
  • Poor credit record will jeopardise the chances of the business from receiving additional financing in the future.

 

4. Government Grants

Perhaps, the first source of funds that entrepreneurs should turn to are the generous grants disbursed and administered by the Singapore government.

There are schemes to cater to the different needs of SMEs.

In fact, there are more than 100 grants offered by various government agencies such as The Standards, Productivity and Innovation Board (SPRING), Infocomm Development Authority of Singapore (IDA), Media Development Authority (MDA) and more.

Besides equity financing and cash grants, tax-incentive schemes such as Enhanced Productivity and Innovation Credit (PIC) are also available.

  • Low cost of capital is involved. Some grants also come with tax breaks.
  • Besides financial support, grants may be accompanied by free technical assistance or networking opportunities.
  • Most grants are either disbursed on a reimbursement basis or require the business to fulfil certain milestones before the tranche is paid out.
  • Funding involves long and tedious paperwork and record-keeping, which takes up time and energy from the company.

 

5. Bank Loans

In Singapore, most major banks such as DBS, OCBC and UOB provide loans for SMEs.

There are two different types of loan offered by the banks – secured and unsecured loans. Loans are ‘secured’ when a borrower is asked to pledge assets to the lenders as collaterals.

On the other hand, loans are ‘unsecured’ when the borrower does not have to provide any collateral for the loan.

Secured loans are cheaper compared to unsecured loans.

Entrepreneurs could also choose between fixed or floating rate interest.

  • Multiple loan options are available, such as overdraft facility, term loan and revolving loan.
  • Entrepreneurs retain full ownership of the business.
  • Lengthy application process as banks has to verify all credentials and details of the business before approving the loan.
  • Full financing is not always possible. They may only grant 70 to 80% of the sum applied for. Hence, business owners have to seek for an alternative source of financing for the remaining balance.

 

6. Specialty Lender

Specialty lenders are mainly operated by established companies.

They tend to focus on extending credit to a particular group of businesses.

Every specialty lender has different financing program and application requirement.

Entrepreneurs are advised to conduct detailed research before narrowing down its options.

Financing solutions range from commercial loans to equipment financing.

  • Tap onto the lender’s broad industry-wide knowledge to help your business in crafting and executing strategies.
  • Higher interest rates than bank loans due to greater lending risks involved.

 

7. Alternative Lender

In this context, alternative lenders refer to non-bank money lenders.

They specialize in assessing overlooked sources of collateral such as real estate or even outstanding invoices to grant the loan.

This option is most commonly used when entrepreneurs could not obtain loans from other channels due to various reasons.

  • Flexible loan options, regarding repayment schedule and loan approval.
  • Loans are more costly as higher interest rates are charged.

 

8. Crowdfunding (Debt-based)

Crowdfunding works by pooling money from a group of people to invest in a venture.

This is largely done through online platform using traditional and social media.

There are three forms of crowdfunding – reward/donation-based, equity-based and debt-based.

Specifically, this article will touch on the increasingly popular financing channel, which is debt-based crowdfunding.

In this model, the crowd lends money directly to business owners and expects repayment over time with a fixed rate of interest.

The target businesses of most lending platforms are different from other crowdfunding models.

The businesses should have proven cash flow for at least one year.

Locally, there are a few companies who offer such debt-based crowdfunding service. MoolahSense is the pioneer in the industry.

  • Obtain full external financing while still retaining complete control of the business
  • Bypass time-consuming application process for a bank loan or disbursement of government grants
  • Able to manage the cost of funding, as business owners decide on the interest rate and the amount of money they need to raise
  • No collateral required
  • Not suitable for newly established companies/startups

 

Conclusion

Ultimately, entrepreneurs could choose to make use of all the options presented above to fund their business.

Given the various benefits and limitations of each option, the real challenge lies in knowing which financing channel fits best for SMEs to get the best possible result of funding.

Question: Are there other funding options that isn’t on my list? You can leave a comment by clicking here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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