In the first article of this series ‘A Guide to Working Capital Loans for SMEs in Singapore’, we covered 5 Reasons why SMEs in Singapore need Working Capital Loans. In this segment, we look at the various types of Working Capital Loan. While each type caters to diversified business needs, they share a common objective of helping businesses manage cash flow. Here are the 5 most common types of Working Capital Loan:
1. Accounts Receivable Loan
A form of Working Capital Loan, an Accounts Receivable Loan is a loan taken out based on its accounts receivables. Examples of accounts receivable include invoices or cash owed by customers to the business. Taking into account factors such as the age of the receivables, a financial institution usually loans out a sum that matches or is less than the receivables’ value. An Accounts Receivable Loan alleviates the problem of cash flow trapped in unpaid debts, improving cash flow.
2. Merchant Cash Advance Loan
Similar to an Accounts Receivable Loan, a Merchant Cash Advance Loan works by exchanging future assets for immediate cash. The difference between the two lies in the asset being traded in. For Merchant Cash Advance Loan, the asset is future credit card sales. When a business takes up this Working Capital Loan option, it receives upfront working capital. The loan will then be paid off through daily deduction of a certain percentage. For example, a merchant deducts 15% of your daily credit card sales until he has fully recovered the advance. This type of loan is only applicable to businesses that accept credit card payments.
3. Trade Credit Loan
A Trade Credit Loan allows a business to delay the payment for goods and services. Under this Working Capital Loan arrangement, the bank or financial institution pays the supplier upfront. While the bank receives the title of ownership, it allows the business to take possession of the merchandise for manufacturing or sales purposes. This is certainly useful for businesses which are only able to make payment after cash inflow from sale of inventories. If your business faces difficulties repaying the full amount on the loan due date, some banks or financial institutions offer the option of converting to Trust Receipt. Trust receipt allows for repayment on an installment basis.
4. Line of Credit/ Overdraft Loan
A bank overdraft is a flexible borrowing facility granted by a lender on a bank current account. It allows borrowers to tap on a cash supply within a limit granted by lenders for working capital needs. The key benefit of an overdraft is the flexibility to make repayments at any point in time without incurring early repayment penalty. The risk lies in the overdraft being subject to the annual review of the financial institution. In this case, a business must return the difference in amount after review to the financial institution immediately to prevent an adverse impact on your credit record.
5. Business Term Loan
The most straightforward type of Working Capital Loan, a Business Term Loan is repaid in a structured way. It is disbursed with a fixed repayment period which spans 1 to 5 years. The interest rate can be fixed or variable, depending on the financial institution you are borrowing from.
In partnership with Spring Singapore, ETHOZ is committed to growing promising SMEs in Singapore. Under the Local Enterprise Finance Scheme (LEFS), we provide SME Micro Loans or Business Term Loans. These loans support local SMEs with amounts up to $100,000 and $300,000 respectively.
Contact us for a non obligatory discussion!To find out more on how ETHOZ can assist your business with Working Capital Loans, you may reach our friendly Relationship Managers at 6654 7799 or drop us a message here.