What to prepare when applying for a Corporate Loan

There comes a time when every company is faced with the need for additional financing that is beyond what the business is able to generate through its operations, within the timeframe it is required. The reasons why additional funds are necessary can vary widely; capital financing, working capital shortfalls, capitalising on investments, ramping up production or making acquisitions, just to name a few possibilities. Having spare cash at these crucial times enables a company to ride out lean times, take advantage of current business opportunities or to ramp up capacity and capabilities for future prospects.

The most common scenario for a company seeking a corporate loan is to bridge the gap in cash flow. Cash inflows due from sales or divestments may be late whereas payments due to suppliers cannot be delayed. To have enough cash to fulfill the company’s obligations while waiting for invoices to be paid by clients, a corporate loan may have to be availed. Similarly, paying salaries on time in order to retain staff and to keep the company going is also an equally pressing reason. Another significant basis for taking advantage of loans is for making capital investments that allow a company to expand or extend its operations, thereby growing its existing business by being able to supply its clients at a greater quantity or even diversifying its scope of activities by producing complementary services and products. To serve these markets, financing companies such as ETHOZ have a great portfolio of facilities to offer.

Corporate Term Loans as the name suggests involves specific lending terms in exchange for an offer of a lump sum of money. This is a one-time disbursement and typically for a large amount. As such, it is suitable for investments that are front-loaded in nature or require a substantial deposit such as purchasing equipment, real estate or to realise expansion plans.

Equipment Leasing is one way of a quick procurement of machinery and equipment necessary to maintain or boost production. The benefit of equipment leasing is that no initial large payment is required and the burden on cash flow is alleviated by many periodic payments over the length of the contract.

Hire Purchase on the other hand, ends with transfer in ownership of the asset. Car ownership in Singapore often follows this model of financing. Upon completion of the contract, the Hirer is given an option to pay an ownership fee to take possession of the asset.

Enterprise Singapore Loans are exclusive to 15 financial institutions which work in partnership with the government’s Enterprise Scheme (EFS)1 to provide government aided loans to foster the growth of locally owned enterprises. The hurdles to clear in order to secure this form of financing are relatively high, with stringent vetting and usage of funds tightly controlled.

With such high stakes riding on applying for and successfully obtaining a loan, the process can seem rather daunting, if not downright intimidating. However, being familiar with financial institutions when grating such facilities can help smoothen the whole exercise. The objective of a financial institution needing to peruse a company’s financial and organisational information is to assess the company’s credit worthiness, business viability, risk of default, in order to price the financial products offered in line with the exposure it opens itself to.

 

Minimum Documents required:

  1. Latest 2 years financial report of company
  2. Latest 6 months bank statement of company
  3. Latest debtor aging list
  4. Letter of awards/project listing (if any)
  5. Table of banking facilities
  6. NRIC of Personal Guarantors
  7. Latest 2 years Notice of Assessment of Personal Guarantors

 

The list of documents requested by financial institutions when appraising a loan request normally includes the items noted above. Past years’ financial reports give a good sense of how well the business has performed in the past and gives an insight into business cycles, trends and pattern of expenses such as repayments on other loans. A growing top and bottom line would be a good indicator of stability and thus the ability to repay its loan obligations. Likewise, a shrinking profit before tax amount might have to be explained or it would be seen as a potential risk, thereby potentially affecting the loan offer.

A historical record of bank statement is also important to quickly showcase the real net cash flow of the company. This signal of liquidity tells an accessor how much cash is normally available on a short notice period and can be used for the loan repayment.

Debtor aging essentially shows how long a company takes to collect its account receivables. A quick turn-around means that a company has less or low risk that it cannot collect payments from its clients. On the other hand, if the aging reports show many accounts that are overdue, bad debts might be possible. This is a red flag that threatens the sustainability of a business.

Letters of award and project listings delves into the future outlook of the company. It shows the pipeline of work that the company will embark on. Letters of award are binding contracts. These, together with a project listing then gives some certainty of future cash flow.

A financial institution is also interested to know how many creditors a potential client already has. This might prejudice its claim in case of default or insolvency. If there are no other creditors, it also means that there is no hierarchy of claimants, making any recovery process easier.

Lastly, guarantors reduce the risk that creditors have to bear because the individuals are personally liable for the loan. Further checks into their creditworthiness and assets will also be conducted.

Taking loans is often a vital step in a company’s journey, especially if it puts the business in a better stead to tackle the challenges of the future. With this fair bit of insight, the process is actually quite straightforward and with the right partner, it can also be a very friendly and pleasant experience.


Reference:

https://www.enterprisesg.gov.sg/financial-assistance/loans-and-insurance/loans-and-insurance/enterprise-financing-scheme/overview

https://corporatefinanceinstitute.com/resources/commercial-lending/credit-risk-analysis/

Dentist’s Loan Program

Dental services are common and essential in Singapore. It is important for dentist like you to upgrade your medical infrastructure to keep abreast of technological advancements. ETHOZ Dentist’s Loan offers you fast and hassle free loan application, customisable to your business expansion needs!

Speak to us today to find out more!

Doctor’s Loan Program

Need to upgrade your medical equipment and expand your premises? Doctor’s Loan Program is here to help!

We are dedicated to helping the growth of your business through providing you easy access to more funding for your daily operations, anytime you need.

Contact us to find out more!

How Working Capital Management Can Improve Profitability

What is Working Capital?

The lifeblood of a company is cash. To be more exact, liquidity. Working Capital or Net Working Capital, simply put, is a financial metric which tells us whether a business has enough funds to meet its short-term expenses and financial obligations. It is these funds that enable a business to stay IN business, as it allows the owner to pay of its suppliers, to pay rent, utilities, without which there would be no premises to work from, no raw materials to produce products and no place to provide services.

Aside from commercial ventures, all other kinds of organisations ranging from kindergartens to government bodies and even charity are rightfully concerned about managing their working capital needs. A clear illustration of working capital these days is countries needing to borrow money, downsize its operations or collapsing totally if it cannot find a lender. If a country or company cannot pay its bills, they take a loan. This can be from the International Monetary Fund (IMF), from individuals through bond issuance or even from sovereign funds. As witnessed in the recent US debt-ceiling crisis of 2011, the inability to cover its short term liabilities results in necessary spending cuts or downsizing. Prolonged negative working capital where there is insufficient money to pay its current liabilities can lead to insolvency as we have seen during the bankruptcy of Iceland during the 2008 financial crisis when bank lending halted. We have also seen this lately with countries in the region. On a different scale, businesses face the same prospects with bad working capital management and good capital management is just as important to companies as they are to countries.

 

 

The Importance of Working Capital

Working capital is important because it determines an enterprise’s going concern. It affects many aspects of a business from being able to keep the lights on to paying out salaries. Most importantly, it also determines a company’s long-term sustainable and healthy growth. Improper working capital management can lead to insolvency, which may result in loss of control if taken into receivership. Insolvency can also lead to personal liability on obligations such as loan payments. A court could order garnishment of personal property, and future loans (whether personal or corporate) could be difficult to obtain due to a diminished credit rating. The consequences could potenially be far-reaching.

As a metric, working capital provides a broad look at the direction in which the company is heading over time, usually a period of 1 year. It tells the entrepreneur if the business has been successful or not. It also signals if any rectification is needed, or if there are better ways of utilising the company’s liquidity. As a flow variable, as opposed to stock, working capital is more closely related to the balance sheet and information from it can be used to determine if a business can continue operations or is facing insolvency. However, it is only a broad indicator and further investigation into its components would tell a deeper story. For example, if current assets consist of financed capital such as loans, then a business owner has to consider if the borrowed money is efficiently and effectively deployed or if it is just sitting idle. In such a scenario, there is an impact on the company’s Profit and Loss through interest expense incurred on the loan. The prudent businessman would have to evaluate if the loan generates a level of operating income to justify the interest paid. This is where active working capital management comes in. Now that the importance of working capital is established, let’s look at how it is calculated and what it can tell a business owner about the health of his company and how he should act.

 

 

How to calculate Working Capital?

Working capital, or specifically net working capital is calculated as: Working capital = Current Assets – Current Liabilities. Current Assets are a total of the accumulation of the liquid and near-liquid assets of an organisation. It represents all the assets that can be encashed rapidly: cash, accounts receivable, prepaid liabilities, inventory, marketable securities and short-term investments such as fixed deposits and certificates of deposit (CDs). Current liabilities, on the other hand, are obligations that have to be paid in cash within the fiscal year.

Determining which items are to be included in the list of current assets and current liabilities depends on the size of the company, which industry it is in, and how conservative the finance wants to be. In essence, this decision sets up the bench mark at which the company operates.

 

 

Permanent Working Capital

This takes into account the absolute minimum amount of cash required to run a business. They are funds that are constantly tied up in current asset items like inventory and the daily cash needs, without which, the business would not even be able to start up at all. This amount of working capital would not be freed up under normal circumstances unless there are any divestments or the company is being wound down.

 

 

Regular Working Capital

Regular working capital further considers what the business needs for its daily operations. For example, this could be the inventory that a shop needs or the cash to pay for staff, inventory, utilities, rent and to keep in the cash register for giving change. If this measurement falls negative after deducting all these expenses from revenue, it means that the enterprise is bleeding cash and cannot maintain its obligations in the long run. Its survival would be called into question.

 

 

Reserve Margin Working Capital

Business cycles often deal shocks that some companies do not emerge from. In addition to day-to-day activities, businesses need to cater for unforeseen circumstances. Reserve margin working capital is essentially a fund kept aside for rainy days such as the recent Covid pandemic.

 

 

Variable Working Capital

When opportunities come knocking, it pays to be able to react quickly to grab them. During this period there would be temporary costs and to absorb these costs, current assets need to be increased through available sources such as loans.

 

 

Seasonal Variable Working Capital

Certain industries are inherently cyclical in nature such as retail where festive occasions usually bring in more sales. These periods may require extra working capital to meet increased demand, especially if the business needs to ramp up production or its sales inventory.

 

 

Special Variable Working Capital

Similarly, supplementary working capital is funds needed to capitalise on exceptional or unforeseen opportunities. These could be one off situations like promotions, fire-sales, or even calamities like floods or fires.

When the components have been established, analysts would like to know whether the net working capital figure is negative, positive or nets out to zero. A negative figure means that the company is not able to cover all the payments it needs to make in the short term. This suggests that it is over spending, or that an investment made is not generating a good return. A result of zero is slightly less pressing but it still suggests that the business is barely breaking even. There is no leeway to take on additional burdens, even though these immediate investments may bear fruit in the future. A positive figure may not generate panic but the question of whether the excess funds can be made more productive has to be thought through.

Looking at a single is not enough. The same components can be expressed as the “current ratio”, which takes current assets and divides it by current liabilities. Other measures of liquidity like the quick ratio and net cash flow should also be viewed in conjunction with working capital. To serve as a benchmark in determining whether the magnitude of the calculated is a good or bad result, it has to be compared with the average for that particular industry.

Day sales outstanding which refers to the average number of days it takes a company to collect payment after it makes a sale, the collection ratio which is the average amount of time that a company would be able to collect its trade accounts receivables and the inventory turnover all provide further insights to the net working capital calculation. These metrics come as a set and provide an answer on what went wrong and how bad it is.

 

 

Reasons Why Businesses Require Additional Working Capital Grants

Businesses first want to survive and then to grow. There are several reasons associated with these objectives that require additional working capital. Often, working capital loans are taken to fund the day-to-day operations of a business. This can range from covering the month’s wages to settling accounts payable. Some businesses are cyclical and go through periods of lower operational cash flow, so sometimes the need for capital to keep the operations going may arise. To survive, a business also needs to be able to weather accidents, financial downturns or natural disasters and might need additional working capital. To expand, additional working capital might be needed to acquire larger premises, rent equipment, to hire additional staff or purchase machinery to improve efficiency.

In such cases, a company needs a cash boost fast. Working capital loans can provide this quick cash top up. Typically, these are unsecured and one does not need to put any assets on the line, it can help improve cash flow, there is no risk to company equity and best of all, there is freedom to decide how the money is used. Aside from banks, other private financing companies such as ETHOZ also offer business solutions such as these. The facilities provided are often much more competitive than traditional lending sources. New businesses that have little or no financial records can avail themselves of much needed funds, often with more flexible terms.

 

 

How to Boost Working Capital?

Boosting working capital is as simple as taking a loan. These cash injections immediately increase net working capital. Secured and Unsecured term loan, hire purchase, and equipment leasing could be used to obtain equipment necessary to expand operations. Corporate financing is available at ETHOZ for expensive office equipment like laptops and printers, where the monthly payments are a lot more manageable than a heavy cash outlay to make purchases. The Biz-Growth Loan offered by ETHOZ is a type of Unsecured Term Loan which can be used for such purposes. The benefit is that such unsecured loans are more flexible as they do not require any kind of collateral.

Likewise, property loans and renovation loans inject liquidity into the companies’ books and at the same time frees the owner from making large front-loaded payments.

In Singapore there is a wide variety of financing options available to suit the needs of businesses. Some of these include:

 

 

a. Unsecured Loan

Such loans do not require collateral and rely on a borrower’s credit worthiness. If a borrower defaults on payment, the lender cannot claim any property. However, it can employ the services of a collection agency or seek court action. As a result, unsecured loans usually require a higher credit worthiness score or have higher interest rates. In some cases, a guarantor or cosigner might be required. The difficulty is finding someone who will fulfill this role, as the guarantor is fully liable for repaying the loan in the event of a default.

 

 

b. Secured Loan

In contrast, borrowers taking out a secured loan can pledge high value assets such as property, vehicles, bank savings, investment accounts or even account receivables.

The benefits are that the borrower can have access to more funds, often at a better interest rate and terms as compared to unsecured loans. Collateral also makes it possible for those with lower credit scores to get a loan.

 

 

c. Hire Purchase

Hire purchase refers to assets such as machinery and vehicles where there is the option for the legal transfer of ownership to the borrower. The advantages of such a loan are that the asset serves as a form of collateral and interest rates are generally lower than with unsecured loans. There is also the opportunity to refinance the loan or to negotiate a reduction in the interest rate or an extension of the loan tenure to make repayments more manageable if the need arises.

The downside is that the asset can be repossessed if there is a default and no agreement can be reached.

 

 

How Working Capital Relates to Profitability

At the end of the day, every business’s primary concern is profitability. Effective working capital management ultimately leads to profitability. It provides the tools to monitor solvency and liquidity ensuring that daily operations are profitable and that future operations continue to be profitable through the ability to plan for business expansions.

 

 

 

 

 

Business Equipment Singapore: Leasing Vs Buying

The four factors of production that drive an economy and keep businesses chugging along day after day, year after year are land, labour, entrepreneurship and capital. Of these, capital which comprises factory equipment, tools and other similar manufacturing agents is one of the easiest to obtain and scale according to output. It is the only factor that is man-made. It is the most conspicuous physical representation of any commercial venture. From a hand saw used to make bespoke furniture to computers or the large factory line machines churning out an endless stream of products, these are the long term physical assets that are the backbone of a company.

 

 

Business Equipment Financing

Acquiring the requisite business equipment is clearly essential if it intends to get off the ground and also as a going concern thereafter. These assets are also classified as Plant, Property & Equipment on a company’s balance sheet and make up a portion of a company’s net worth. It is vital to quickly and economically obtain, upgrade or replace the equipment needed to sustain business operations but purchasing equipment outright can substantially strain a company’s cash flow. Business equipment financing can be a good solution to keep a business functioning optimally or meet increasing customer demand.

 

 

Paying in cash

Paying for equipment in full with cash has both advantages and disadvantages. Capital allowances are permitted in investments on fixed assets. It reduces the taxable income at the end of an assessment year, reducing the tax burden. This can be claimed over 2 – 3 years or over the useful life of the asset as prescribed by the authorities for a given asset class. As the owner of the asset, one can also exercise the decision to modify, sell or dispose of the asset. This is usually not possible in a leasing arrangement where terms of the contract have to be abided by. This can be beneficial as one can then service, improve or customise the equipment without seeking the approval of the lessor who is the legal owner of the property.

If the business owner has full ownership of the machinery, it can be seen as a more liquid asset where it can be sold or further rented out to generate cash flow to fund other more essential parts of the business.

However, this may be a prudent avenue if the return on investment exceeds the loan interest rates. In such a case, taking the loan generates more returns than it costs and can be considered a smart use of leverage.

 

 

Taking a business loan

Approaching a bank for a loan is taking a step towards maximising the benefits of leverage. In such a strategy, a business owner buys equipment on credit by obtaining a sum of money from a bank and repaying over the life of the loan with interest. Like making capital investments with one’s or a company’s funds, the advantages of full ownership, as mentioned above, can be enjoyed.

These loans, however, may come with conditions of their own, especially if the item itself forms the collateral. In this case, maintenance, sale or modifications may be restricted. The item could also be repossessed and sold off if the borrower falls behind on loan repayments.

 

 

Government grants

Aiming to spur innovation, government grants or start-up schemes are also widely available to bring financial aid to the aspiring business owner. Several government agencies such as Enterprise Singapore, Ministry of Trade and Investment amongst others have made funding available to small and medium enterprises (SMEs) such as the often mentioned PSG (Productivity Solutions Grant) and EDG (Enterprise Development Grant). These defray the costs of capital investments but have to meet the requirements set forth, such as increasing employee headcount or achieving a certain level of revenue.  The upside is that these are the “cheapest” form of financing but could be restricted by the need to meet predefined milestones or losing some autonomy in business decisions.

 

 

Venture Capital/ Angel Investors

Both are similar in the sense that funds come from private sources. The difference is that venture capital pools money from multiple sources such as investment companies, a diverse set of individuals, pension funds or even other corporations while angel investors are described as investors using their own money.

These private investors are primarily concerned with a return on their investment and may set conditions and benchmarks to attain within a timeframe. Additionally, it is common for a percentage of equity in the company as part of the remuneration. This essentially gives away part ownership in one’s company.

 

 

Crowdfunding

Capitalising on the connectivity of the internet, crowdfunding brings together a disparate group of people to fund a project. This works best if the company is started to build a product that it can deliver to its backers. The upside is that there is no cost to the company, except in marketing the project to build interest and there is no obligation to release the product at all – the backers bear a large share of the risk. The transaction is facilitated by online platforms such as Kickstarter, GoFundme and Indigogo.

 

 

Leasing

Returning to more conventional territory, capital leases are one of the most popular methods of funding capital purchases.

With the availability of customisation and choices to choose from with regard to repayment, front load deposit or open-end payments, those looking for a lease are spoilt for choice.

In addition to traditional financial institutions that most borrowers are used to, there are also alternative lenders that can provide the right leasing facility. These equipment leases can also be catered for a transfer in ownership at the end of the contract period or the items can be returned to the lessor. Those taking up such arrangements can find the benefit of enjoying the long term use of vital equipment while freeing up liquidity or providing better control of cash flow management.

 

 

Equipment funding for small business

Small businesses and start ups face many challenges in establishing themselves in the industry. Choosing the right method to finance that all important investment in crucial equipment like factory hardware or even commercial vehicles to bring the goods to market is a long-term commitment that would make an impact on every business owner.

 

 

Loan Secured by Property: What are the best assets to pledge?

Loans can sound like a taboo word and it can well be if taken hastily or for the wrong reasons – much like how self-medicating, even with the best of intentions, can be harmful. However, there are many prudent, intelligent reasons that justify borrowing. 

 

The advantages of a loan secured by property or other collateral 

Secured lending comes with lower interest rates or better terms compared to unsecured lending. The logic is simple, if the mechanics are anything but. Evaluating risk is at the heart of what a banker does, regardless of whether he is providing financing advice or extending facilities to customers. Accurately assessing the risk profile of its clients and astutely managing that risk is what the banking industry is built on.

An unsecured loan is riskier because a banker or financial institution can only depend on a borrower’s creditworthiness to evaluate whether a loan would be paid back on time, in accordance with the contracted terms. In case of a failure to satisfy one’s repayment obligations, the bank has fewer options available for recourse. The bank does not automatically have a right over any of the borrower’s property and instead has to first commence legal proceedings in order to obtain a writ of seizure, that would allow a bailiff to make lawful claims on personal property of any value. This would then be liquidated and go towards restitution of the defaulted loans. In the worst case scenario, non performing loans would be declared bad debts and written off, after the proper accounting rules have been followed. Although banks would prefer any and all loans to be guaranteed by an asset, the relatively smaller amounts usually do not warrant it or in the case of student loans, the lender might have few assets worth pledging.

In contrast, secured loans are much less risky because the lender has a lien on specific assets linked contractually to the loan. This gives the lender a legal right to seize the pledged property in lieu of payments. With this privilege, banks are able to extend better loan terms. Apart from lower interest rates, late penalties might also be more forgiving where there could be longer grace periods and smaller late fees. Typically, secured loans are also easier to obtain, and could be approved for larger principle sums.

 

 Common Types of Secured Loans

 Secured loans are commonplace, to the point that it is often unnoticed. Often, the most significant ones encountered by most of us are the auto loan and property mortgage. This means that the bank can repossess the vehicle or foreclose on the property when sufficient time has lapsed and a certain predetermined number of payments have been missed. For businesses, instruments such as letters of credit, standby letters of credit facilitate act as form of surety between merchants and suppliers, and thereby providing a form of short term loan. On a smaller scale individuals might be familiar with pawnshop loans and payday loans. With the former, personal property such as jewellery or other expensive effects are kept with the pawnbroker and returned only when the loan is repaid. Payday loans, as the name suggests, pledges an individual’s future income in return for a loan upfront. These are offered here by licensed money lenders and the process could be as simple as writing a post dated cheque. To investors, margin trading is yet another example of the many forms of secured lending in everyday life. In this case, an investor sets up a trading account with a brokerage firm and uses leverage to multiply an investment. However, if the markets turn on the investor, the brokerage can liquidate the account to recover the loan amount.

 

 Quality of Collateral

 Just as there seems to be a hierarchy in the type and assortment of loans, so too collateral varies in preference. When valuing an asset to be pledged, four factors are considered: condition, liquidation value, ease of liquidation, and nature of the asset. The first condition takes into account depreciation of physical assets and its remaining value. The next two consider its market value, cost of liquidation and efforts needed to dispose of the asset. The final point takes note of the type of asset and its scale.

With these guidelines, two methods for valuing collateral are employed. One of them is to compare it to similar assets with established monetary values as a proxy. The other is to consult with a qualified assessor with strong knowledge of the asset type.

Through these studies over time, a correlation between quality of collateral and quality of borrower had been determined. It was found that individuals and companies that could provide strong collateral were also more likely to honour repayment terms and had a lower probability of defaulting. Additionally, a link was also found between those with high quality assets to pledge and a higher degree of prudence in the use of loan funds. All these factors point toward a lower risk profile.

In short, high quality assets mitigate are of suitable value relative to the loan amount and are easily liquidated – all of which reduces the risk to the lender. Cash, as always, is king. Cash in bank accounts make the best collateral. Of equal quality are near-cash assets  such as certificates of deposit, foreign currency, securities, bonds and other similar instruments. Next in line are high value tangible assets like property, vehicles, precious metals and jewels. At the other end of the spectrum, increasing willingness to expand the pool of clientele has prompted institutions to accept less conventional forms as collateral. These can range from expensive equipment like golf clubs and electronics to exotic items such as art and wine collections or medical instruments.

Just like the lenders that assess risk before extending a loan offer, the borrower also has to evaluate risks involved in accepting. However, if it is managed properly both parties can reach a win-win situation.

 

 

 

5 Alternative Ways to Finance Businesses

Businesses count on cash as the sustenance it needs to operate and similarly, even your very own future cash cow will need to consume a lot of the green stuff before you have the opportunity to milk it. Some of these funds will go towards investments in assets that are vital to start up the company, while some of it will go towards fixed costs such as salaries, software licenses, website subscriptions or rent. Aside from these overheads, there are also variable costs such as certain utilities or transportation to cover. All this clamour for cash has to be attended to. There are various ways this can be accomplished, with external business financing being a potentially beneficial way to bridge these needs.

 

Just over 10 years ago, business financing in Singapore primarily originated from traditional sources like banks and credit unions. This typically involved a credit evaluation and resulted in a plain vanilla loan, with a choice to pledge collateral or not. Factoring or invoice financing, which was already commonplace since the 1960s1 where a company would sell its receivables to  a third party for upfront funds was as far as financing options would deviate. Then came the subprime mortgage crisis that precipitated the largest2 global financial crisis since The Great Depression of the 1930s. In its wake, reforms were instituted to curb the risky lending practices that was the cause. More oversight was established, such as increased capital requirements3 as required by the Dodd-Frank act in the USA.

 

Evolving to meet the demand for business financing

Tightening of credit has proven to be a challenge for smaller companies. This difficulty in securing financing can result in missed business opportunities, negative cash flow, negative working capital. In the subprime recession years from 2007 – 2009, there was a sharp contraction of Small & Medium Enterprises (SME) loans granted globally. With new SME loan growth rates hitting the bottom in 2011, the following years up to 2019 continued to see little growth4. As SMEs were considered riskier propositions by financial institutions, access to financing had become more difficult since then5. However, with the need for finance to fuel business growth still a pressing need, other players stepped in to fill that gap, giving rise to the innovation and inventiveness that is alternative financing.

 

 

Crowdfunding

Crowdfunding is a method of financing that bridges the gap between companies and members of the public looking for a profitable investment. It draws together small amounts of capital from a large number of people to fund a commercial enterprise. This is done through an online platform, with examples  like Kickstarter, Indiegogo and Gofundme.

 

Far from being a one-trick pony7, crowdfunding comes in several varieties.

 

 

Peer-to-peer lending

A technology based platform links multiple lenders of small unsecured amounts to pool together larger amounts. The administrator of the platform determines the interest rate and also evaluates the riskiness of the borrower.

 

 

Equity crowdfunding

Similar to buying shares through a stock exchange, equity crowdfunding involves sale of a stake in a business to a large number of investors.

 

 

Rewards-based crowdfunding

Commonly used as seed money to finance a product, investors make specific contributions in exchange for rewards, or delivery of the product itself at the end of the campaign.

 

 

Donation-based crowdfunding

As the name suggests, no compensation is expected or given but the financial aims are met by the contributions of multiple individuals.

 

 

Profit-sharing / revenue-sharing

Future profits or revenues of the business are shared with the crowd in return for providing funds now.

 

 

Debt-securities crowdfunding

Individuals invest in a debt security issued by the company, such as bonds or debentures.

 

 

Hybrid models

Investors are compensated by several of the above ways for providing money upfront.

 

One type of crowdfunding is not necessarily better than another. However, it is the motivation behind each type of crowdfunding that matters because it has to appeal to potential investors and their motivations. Crowdfunding can be a risky investment to those that contribute to the fund as they may come up empty handed if the project fails. Conversely, to the business seeking funds, the benefit is that there is no obligation to make good on its promises if the project fails.

 

 

Fintech Financing

Companies like Paypal, Amazon, Alibaba Tencent and even Grab all have a strong client base, a popular platform to access its clients and cash to spare. These companies are no stranger to industry disruption and have taken on traditional financial institutions to provide loans to those typically overlooked by banks and lending institutions and also to take a bite of their pie.

 

Fintech loans are able to leverage on its technology to assess risk more accurately and cheaply. It also typically has lower operational costs due to innovations in technology which it can pass on to clients as savings. It is also able to process loans quicker, even able to turnaround approval of loans on the same day7.

 

 

(Alternative Business Financing Singapore – fintech)

 

 

Government Assisted Funding

There are many initiatives to encourage innovation and to sustain promising startups in the critical initial stages. Government agencies such as Spring Singapore, Economic Development Board and Enterprise Singapore have various schemes to assist SMEs financially8.

 

These can come in the form of loans at attractive interest rates or outright financial assistance in areas such as productivity, technological upgrading or research & development.

 

 

Venture Capital Financing

This kind of funding involves a group of investors, institutions or investment banks like Goldman Sachs and Morgan Stanley that identify and nurture startups that they believe have long-term potential. In exchange, these investors hold private equity stakes in the company. In addition to relinquishing some ownership in the company, the founders often have to satisfy other conditions that pertain to its operations.

 

 

Initial Coin Offerings (ICOs)

An initial coin offering is similar to an Initial Public Offering (IPO), except that instead of receiving company shares for their investment, investors receive a cryptocurrency token. These tokens are often purchased in other more established cryptocurrency tokens such as Bitcoin or Ethereum.

 

If an ICO is successful and passes the ICO stage its price would already have risen. If it gets listed on an exchange, it can be traded like shares. In addition to this, investors would also be entitled to product, service or bonus tokens as indicated by the white paper.

 

The benefits of an ICO to companies is the ease at which one can be launched, especially in Singapore which is amongst the most receptive in the world to the launch, and exchange of digital currencies. There are few regulations required by the Monetary Authority of Singapore (MAS) and no license is needed. The company has to be a private company in Singapore, and publish a prospectus under certain conditions.

 

 

Alternative Business Financing in Singapore Funding the Underserved

SMEs make up 99% of companies in Singapore12 and contribute about 43% to GDP13. Despite the significant contributions to the economy, this group is often underserved by traditional financial institutions. It is an unsustainable status quo as they seek funding to grow. As necessity is the mother of invention, alternative business financing in Singapore is sure to keep growing.

 

 

Advantages and Disadvantages of Hire Purchase

If you have ever been in the market for big ticket items or planned for substantial capital investments, chances are that you would have considered hire-purchasing as a potential financing option. From as far back as nineteenth century England, which saw the emergence of these contracts and its rapid adoption through the crown colonies, until today’s car market, hire purchasing has been a popular option with customers considering an expensive purchase.

Considering just how commonplace these contracts have become, it can come in a number of guises (for example it is known as an installment plan in the USA or simply a car loan in Malaysia) and flavors but all adhere to the same basic principles. At the heart of it, hire purchase contracts involve an exchange of goods between buyer and seller after an initial payment or set-up fee, with the outstanding balance being paid with interest over a period of time. However, the defining aspect comes with ownership of the asset. Throughout the tenure of the contract, ownership of the goods remains with the seller or financial institution drafting the contract. It is only upon conclusion of the agreement, that the buyer has an option to go ahead with the purchase for a charge called an option-to-purchase fee. After which, ownership then transfers to the buyer. Such an arrangement presents several advantages and a few disadvantages to an individual or enterprise.

 

Advantages of Hire Purchase

1. Ready to Use

The most immediately apparent advantage of hire purchasing is that the asset or good can be immediately utilised and put into service with much less initial outlay than would otherwise be required. This typically ranges from a deposit or set-up fee of 10% for most assets, to 30% for new vehicles. A business that needs to make capital investments to kick-start its operations could find this the most expedient choice.

 

2. Easing the Financial Burden

Similarly, the financial burden is also reduced since payments are periodic and spread over a length of time. Start up costs can be significant but absolutely essential and so breaking up this commitment into smaller pieces can dramatically alleviate the financial strain.

 

3. Lower Interest with Secured Lending

Hire purchasing can also be a cheaper form of financing. The nature of these contracts makes it similar to collateralised loans, since the asset ownership only legally transfers to the buyer at the end of the agreement. As such, interest rates are generally lower than other forms of business financing like unsecured term loans. Assuming that the buyer does not terminate the agreement or repay early, the EIR (Effective Interest Rate) of hire purchase agreements can vary at about 5-6% as compared with unsecured loans that may be as high as 9%.

 

4. Flat Interest Rate

Another advantage is that hire purchase contracts have a flat interest rate. This means that the interest rate remains the same across the life of the contract without fluctuating. This may or may not be beneficial depending on the prevailing interest rates but it keeps payments predictable and thus makes budgeting, as well as cash flow management easier.

 

5. Accounting for Hire Purchase Contracts

For those keeping close tabs on their finances, there are also some tax and regulatory upsides to using hire purchase contracts to finance asset purchases. The first is that GST (Goods and Services Tax) is not charged on the interest portion of the contract so there are no additional financial obligations owed to the government in this area. Next, is that a tax relief can be claimed on qualifying fixed assets under the Hire Purchase Act in Singapore. Referred to an asset allowance, 100% of the price of goods can be written off over 1, 2 or 3 years, allowing the buyer to manage the amount of tax payable. Lastly, even the interest portion is listed as a qualifying allowable business expense which can be used to reduce the amount of tax payable.

With regard to accounting, the treatment of hire purchases on the books can have several benefits. This is because equipment obtained this way is not counted as part of the company’s assets, at least until ownership has been transferred through the exercise of the option to purchase at the end of the contract. One prime example is the analysis of metrics such as fixed assets turnover, that investors and other stakeholders might be interested in. Since the fixed assets turnover is expressed as a fraction of turnover against the value of fixed assets, a company could reap the benefits of larger turnover as generated by new equipment and machinery, without having the value of the same assets on the books. The same case can be made for other measures of operational efficiency like return on gross fixed assets or return on net assets.

*Note: The above information on Tax & Accounting treatment is strictly for reference only, business owners should seek professional advice from your own tax consultant or auditor.

 

Disadvantages of Hire Purchase

1. Overspending

Just as there are many good reasons to opt for this method of asset financing, there are several drawbacks too. The advantage of perceived affordability is a double-edged sword. With financing available, an entity may be proverbially biting off more than it can chew and proceed with a purchase under a hire purchase contract when it would be more prudent to put it off. There could also be the temptation to choose more expensive or technologically advanced options that now become within reach. As a contract between buyer and seller, terms can be priced, negotiated and included or omitted while it is being drawn up. Zero downpayment, for instance, allows the buyer to take home the goods with nothing out of pocket. However, this would surely increase all or any of the other terms like duration and interest.

 

2. Inflexible Contracts

In the event that a company over extends itself and defaults on payments, the item can legally be repossessed. On the other hand, if a company subsequently finds itself in a position to make full payment, it may not always be possible to repay early or there could be additional fees involved to do so. With a payment default, it doesn’t just end in the seller regaining possession of the asset either. It will go on record and have a negative impact on the buyer’s credit profile, affecting the ability to apply for financing in the future. This also includes any future decisions to enter other hire purchase contracts, as the terms are dependent on the applicant’s credit history, and a better credit score usually results in better terms.

With the introduction of Total Debt Servicing Ratio (TDSR) in Singapore to calculate an individual’s capacity to obtain financing, especially for home ownership, the number and value of hire purchase contracts one holds comes into consideration. The contract to take home the latest electronics or speed home in a sports car will have an impact on getting a home loan.

 

3. Asset Obsolescence

Finally, the length of the contract might be a substantial amount of time, stretching into years. By that time, the asset could have depreciated so much that it has no value at the end of the contract. In such a scenario, it might be better to take on a finance lease which could potentially be more cost effective.

 

Who benefits from Hire Purchase?

As we have seen, with its unique set of pros and cons, hire purchasing may not be the most suitable alternative for every individual or business but it still plays a vital role in the litany of financing options available. Small scale businesses and entrepreneurs can benefit most from hire purchase. High value, crucial and strategic assets can be hired and later owned. This ensures that they can start using the asset right away from the very first day and use the money generated to acquire the very same assets later.

 

 

A Straightforward Guide to Choosing Business Loans in Singapore

When doing business in Singapore, oftentimes you will find the need for loans, to bridge the gap between what you have and what you want to achieve. Borrowing is a normal and common way to obtain additional financing, whether you are a startup, SME, or a large corporation.

However, the finance market is a very wide area, with numerous lenders offering a sometimes bewildering array of loans and packages. With Singapore’s reputation as a financial hub, any businessman would be spoilt for choice. So how do you pick the right business loan for your business? We present a simple, straightforward guide to help you identify your needs and narrow down your criteria.

 

1)  Know Your Loan Purpose

When you take out a loan, one of the questions you can ask to narrow down the loan you should pick is what purpose the money is meant to be used for. There are many business situations where money may be needed. Some are concentrated in one area, such as the need to purchase a specific asset or expand the business somewhere. Others are more general, such as day-to-day cash flow issues.

Depending on the purpose and how general it is, there are different kinds of loan available for you, and picking the business loan most suitable for your purposes can help save you a considerable amount of money. For example, a term loan is a general loan of money that can be used for any purpose, but it may also come with a higher interest rate than loans for specific purposes.

If you know exactly what you want to use the money for, then it is best to find a loan that suits the specific need you have (such as a working capital loan if you need to use the money to defray day-to-day operating costs) rather than take out a general loan. Of course, if you don’t know, or prefer to keep your options open, then it is better to take a term loan, though you may have to accept paying a little more in interest on average.

 

2)  Know Your Loan Cost

To any businessman, cost is at the top of their minds, because costs can make or break a business. Of course, when borrowing, the same applies. One of the major factors you should use to select a good business loan is the cost of the entire loan package. This consists not just of your loan principal, but also the interest, and also the fees that are added onto the main sums.

When comparing interest rates, different business loan packages offer a wide array of different rates, calculated in a variety of ways. It’s important to note that you should know how they charge and calculate your interest rate, and calculate which rate actually gives you better savings. For example, the lowest interest rate number may not actually be the cheapest interest cost, most commonly because the rate fluctuates, or because the loan period makes you pay interest for longer. One thing to note is that the interest rate is also affected by your personal and business credit rating. Choose the interest rate and lender that best keeps your costs low over the whole loan period.

If you have two packages with very similar rates and you can’t choose between them, then perhaps the additional costs will be the deciding factor. All loan packages come with fees and charges, and these can amount to a significant sum. Again, choose the loan that keeps your costs low over the whole loan period, so make sure you don’t just look at interest rates, but also look at fees to make sure they don’t erase what you managed to save from a better interest rate.

3)  Know Your Lender

One small factor, but a potentially significant one, is whether a lender lends regularly to your industry. If the lender does, the chances of them approving a loan, or at a better rate, may increase. While this may or may not lead to savings in money, it would certainly help to save time, especially in situations where your company may urgently need the loan and time is of the essence.

 

4)  Know Whether You Can Afford It

Lastly, the most important factor in picking a business loan is whether you can actually afford or risk it. Both in terms of the amount you’re borrowing, and the payment terms, you must have some measure of confidence to pay off the loans, i.e. to have enough in your company balance each time you need to pay an instalment.

 

If you can’t honestly manage the ideal business loan package you have your eye on, it may be better to replan your business goal and borrow a more manageable loan.

 

Can’t Go Wrong with ETHOZ

As one of Singapore’s most well-known names, ETHOZ has been serving the needs of businesses for many years. In addition to providing affordable and high-quality personal and corporate car rental and leasing, ETHOZ also offers loans to help companies achieve their business aims through ETHOZ Capital. Offering term loans, working capital loans, as well as a range of SME financing and microloans, ETHOZ is the ideal partner for your business loans and other financing needs.

Get in touch with us today, and discover how much we can help you with some of the most suitable loan packages for your business today! You can’t go wrong when you go with us.

 

 

How Borrowing with High Interest Costs can Kill Businesses

Businesses need financial funding to be able to progress successfully in the marketplace. However, loans will add up and too much borrowing can lead to more liabilities for the business. Business loans are a popular or famous choice for new startup businesses besides opening a line of credit or corporate credit cards. The amount of loans borrowed differ in loan companies, with different interest rates. Thus, some rare cases involve businesses keeping themselves out of financial risk by getting investment from family and friends. That being said, we will understand in this comprehensive article about how borrowing business loans with high interest rates will slowly kill businesses.

 

Why Do Businesses Take Loans? Cash Flow

The first reason for borrowing is the cash flow that a business needs. When a business starts to operate, the profit, capital and revenue are generally low and cannot cover much of the normal expenses. Moreover, the business needs to offer salary for employee and personal expenditures – especially if the wages or salaries need to be paid punctually. Apart from its personal expenditures on labour, the business would need to pay for its rent, utilities, insurance and other significant regular expenses that are norms of a business operations. These can be covered by a business loan such as a working capital loan.

 

Potential Expansion

Your business is already doing well, and it has garnered much attention and awareness in the market. Thus, the demand for your products or services have significantly increased. What happens next is the potential business expansion that you need and this comes with new additional expenses. If your company has outgrown its current potential capacity and it requires a bigger space, that means more rental, maintenance and operational fees. This would mean that you need to receive more funds to meet the increased demand for your product or services, through a business loan like a term loan. Moreover, you have to obtain the funds to pay for manufacturing costs, hire new employees – causing an increase in funding. Thus, the amount of funds you have borrowed would also differ and depends on the extent and type of interest rates inputted.

 

Disadvantages of High Interest Loans from Borrowing

Once the business has started on its borrowing and once it starts to accumulate, the loans become extremely large till the business owner finally notices how bad the situations are. It is then difficult to recover and pay from a large amount of debt. The recovery process would take some time for the business due to its incredible large amount accumulated from high interest rates.

Firstly, the business is legally and ethically obligated to pay back the principal borrowed from the loan company along with its interest amount. Businesses that are already suffering from cash flow problems may then face a difficult time of repaying the money with its incremental and additional cost of high interests. If the principal cannot be paid on time, there will be punishment or penalties that are given to these companies.

Moreover, the previous point will lead to how debt or loan financing will affect the credit rating of a business. If the company or business is known to have a significantly greater amount of debt than equity or capital financing, it is then considered risky. What happens next is that a company with a lower credit rating generally will have to pay a higher interest rate to attract investors to invest in their business. And this means that the company or business who have to pay more interest may even experience a potential cash flow problem in the near future.

Thus, the business or company that seeks to obtain debt financing must meet the lender’s cash requirement, which means that they need to have sufficient cash on hand. And if they require even more funding in future, but still have outstanding debts, the business might potentially shut down and still have debts owing on hand. This is not an ideal situation, especially if the interest rate is extremely high. Thus, it is difficult for businesses depending on debt financing for further cash support. Some companies or businesses may even have to put up collateral to qualify for financing. And it is quite embarrassing to be owing a huge amount of debt, in an industry full of successful businesses.

 

How to Move Forward

At this point, we believe that you have understood the impact of having high interest rate borrowing from loan companies. What’s important for you then is to find a professional, reliable and affordable financing provider for your business.

As one of the top professional providers of affordable capital and financing solutions in Singapore, ETHOZ offers capital financing, SME micro loans, term loans, equipment leasing solutions, commercial vehicle financing, auto leasing, and other financial and automotive services to businesses in Singapore seeking to optimise their operations, where zero downtime, predictable operating costs and controlled cash flow outlay are paramount. For companies looking to save costs and support their cash flow, ETHOZ has a solution for you.

Evolving from its humble roots in car leasing to become a full-fledged financial solution and automotive provider, we pride ourselves in helping businesses to save costs and obtain the financing they need to grow and thrive.

If you ever need any help to support the financial aspirations of your business, you can simply reach out to a member of our team at contactus@ethozgroup.com to explore the options available to you.