Banks are no doubt, the go-to source for people to apply for both personal and business loans. The loans that banks offer often have lower interest rates and some tax breaks compared to non-bank banks. However, there are conditions in which you have to meet in order to be approved for the bank loan.
1. Multiple Loan Options
All banks advertise multiple types of business loans depending on the purpose of borrowing the money. For example, banks offer different schemes to those setting up a business and those already running a business.
Here are some of the various type of loans offered by the 4 best banks for small business loans in Singapore:
|Banks||Types of Loans|
|DBS||• SME Working Capital Loan
• Business Term loan
|UOB||• UOB Business Loan
• UOB BizMoney
• SME Micro Loan
• SME Working Capital Loan
|OCBC||• Business First Loan
• SME Working Capital Loan
• Business Revolving Short-Term Loan
• Business Term Loan
• Business Overdraft
• SME Venture Loan
|Standard Chartered Bank||• Business Instalment Loan
• Business Property Loan
• Business Working Capital
When comparing interest rates, bank loans are usually the cheapest option compared to credit cards. Last year, Bankrate stated that some bank loans on average charge interest rates ranging from 7.50% to 10% compared to credit cards with a fixed interest rate that has surged to 17.49%.
The table below will roughly show the fees charged by each bank:
|Bank Loan||Maximum Loan Amount||Interest Rate p.a.||Administrative/Processing Fee|
|DBS SME Working Capital Loan||S$300,000||From 7%||S$500 or 1% of approved amount, whichever is higher|
|UOB SME Micro Loan||S$100,000||6% to 8.75%||2% of approved loan amount|
|OCBC SME Working Capital Loan||S$300,000||5% to 10%||2% of approved loan amount|
|STANDARD CHARTERED BANK SME Working Capital Loan||S$300,000||Maximum 9%||2% of approved loan amount (minimum S$400)|
Lower interest rates of bank loans will definitely help your business save money. However, the interest rate is not the only fee that might be charged. It is also recommended to find out about the bank’s early/late repayment fee and process fee.
Banks don’t usually monitor how you use your loan. With bank loans, you only need to worry about making your regular installment payments on time. For that reason, you have full flexibility on however you want to invest.
|Bank||Maximum Loan Tenor|
|DBS SME Working Capital Loan||5 years|
|UOB SME Micro Loan||3 years|
|OCBC SME Working Capital Loan||5 years|
|STANDARD CHARTERED BANK SME Working Capital Loan||3 years|
4. Retained Profits
Banks are only interested in getting their principal and interest amount on a loan. Banks will not ask for the profits that you make. In contrast to loans from angel investors or VCs, there will be an agreed amount of shares that will be given to the lenders from the profit that you make.
Despite the advantages that bank loans offer, there are also some downsides when your small business takes a loan from banks.
Disadvantages of Bank loans:
1. Strict Requirements
Besides the better option for lower interest rates, banks are also known to have a long list of conditions and requirements that a business should fulfill before they can get the loan. It is sometimes hard or even not possible to meet all of them.
While most bank loans require some form of collateral, startups, SMEs and existing businesses without any assets may find it difficult to get the loan application approved. Most of the time, if the borrowers decided to go for unsecured loans, they will be given higher interest rates.
2. Repayment Burden
As mentioned before, there is no agreed amount to be shared from profits when your loan from banks. With banks, you only need to pay the agreed principal and interest amount of your loan. Hence, it is crucial to pay the bank with the right amount on time. Those who fall behind on paying back the money will face the prospect of having their assets seized.
Some banks have early/late repayment fees that might be charged every 1 day. Even if you manage to make late payments, your bank could still report you to credit bureaus. If that happens, it will make a negative impact on your credit score. With a lower credit score, obtaining loans in the future becomes more difficult.
3. Risk of Losing Collateral
As bank loans generally require some collateral. For small businesses, it is often the entrepreneur’s house and property. Hence, there is a risk of losing the collateral in the event of borrowers fail to pay the bank back.
Alternatives to a Bank Loan
1. Peer-to-Peer Landing
These days there are many online platforms that match small business owners seeking for loans with potential lenders. Basically, businesses post a profile with background information and what they need the money for.
2. Merchant Cash Advance Financing
For short, with a merchant cash advance, a financing company advances you cash in exchange for your future credit card sales, plus an additional fee. The benefits of a merchant cash advance compared to a bank loan is that there is no collateral required and you don’t need a perfect credit score.
3. Business Credit Line
It is similar to credit card, an easy way to fund operations, but of course, as long as you can commit to paying off the balance in 30 days. Business credit line provides you an amount up to a certain limit in which you can take and pay interest only on the portion of the money that you borrow.
At Aspire, we envision a world where business owners have fast and simple access to the funding they need to grow. That’s why we’re on a mission to re-invent banking for SMEs across Southeast Asia.
Our current product provides SME and startup owners in Singapore with financial flexibility through a line of credit of up to S$150k. Which, can also be used to make business payments to enjoy 60 days free credit terms.