Why Should a Business Loan Interest Rate Not Scare You

The ongoing financial development of your venture will often be intertwined with the financial resources you have at your disposal or with the company’s shareholders’ risk aversion. Do you want to expand your business operations, invest in new potential profitability avenues, and also delve deep into new, growing markets with potential for the future? In that case, like that old saying goes, you will need money in order to make money. Truth is, in most cases, the success or failure of newly created ventures often comes down to available funds. 

Are you in a tough spot, or have you simply discovered a business expansion opportunity that’s too good to turn down? Then, you should consider a Singapore SME loan provided by a private lender. A long-term SME loan will cover your venture’s funding needs and provide your organization with the cash influx required for future expansion, restructuring, or technological upgrades. Do you require short-term cash in order to manage your daily operations at a satisfactory level? In such a case, a business loan could represent a saving grace that will give you the flexibility you require until your venture’s profitability expands beyond the loan’s associated interest rates. 

Business loans can provide you with capital for internal restructuring plans, are excellent if you need quick cash in order to keep up with emergency expenses and are also safe, as the Singaporean government limits the maximum interest rates associated with them and also imposes a clear transparency framework that must be followed by the lenders who commercialize these types of credits. Will a business loan always be a solution for your case? Perhaps not. But if your venture is eligible for one and in the right circumstances, it could be one of your organization’s biggest contributors to long-term financial success. 

Why Is a Business Loan Interest Rate Not as Scary as It Seems? 

While it’s true that the interest rates associated with secured business loans can pile up over time, business owners should see these costs not as liabilities, but more as the minor consequences of long-term corporate growth. Without the right cash influx to keep up with market trends and profit from newly-found business expansion opportunities, more than likely, your venture will ultimately stagnate and fail. In fact, no less than 30% of Singaporean SMEs fail in the first three years of operations.

Without a proper cash infusion, keeping up with market developments is next to impossible, and once your venture gets outplayed by the competition, your avenues for profitability expansion will get severely limited. A medium-term business loan interest rate is not a loss, but rather a way for your venture to generate extra income, which hopefully, will ultimately expand beyond the APR associated with your contracted credit. 

Let’s Talk Numbers

In Singapore, the business loan interest rate is tax-deductible, which, in many cases, could represent a financial benefit that will contribute massively to your venture’s profitability forecasts. Let’s say, for example, that you borrowed S$100,000 with an annual interest rate of 5%, and a repayment period of four years. The administration fee associated with the credit will come at $S2,000, the corporate tax rate applicable for your organization is capped at 17%, and after the loan, you accounted for an approximate 20% increase in total revenue. 

For such a loan, your total interest rate plus the administration fee will come to S$14,500, but since these sums are tax-deductible, you could technically utilize them to significantly reduce your total tax liability. If your old revenue was capped at $S80,000, a 20% profitability increase after the loan is approved, made possible by an investment in your venture’s expansion, will be equivalent to $S96,000 spread over four years. 

At 17% per year, your total tax rate over 4 four years will come to almost S$76,000, of which around S$12,300 will be tax deductible. The business loan interest rate should not be a problem as long as the loan is associated with a profitability increase of at least 3.9% per year, which, realistically, should be achievable. Is a Singapore SME loan a solution for every business active in our country? No, after all, at the end of the day, the profitability margins associated with such a loan will be determined by the interest rates you can obtain. However, considering that more than 69,000 businesses are started each year in SG, these types of financial packages have gained rapid popularity in recent years.

What Are the Eligibility Criteria for an SME Loan? 

First of all, your company would need to be registered in our country and be at least 30% owned either by an SG resident or a PR of our country. On top of that, even though it is not technically an obligatory lending requirement, most private lending agencies will prefer for the company to have been active for at least 6 months before applying for the credits. SME secured loans for startups with no proven track record are indeed possible. However, the application’s success in such cases could be trickier. 

As for the documentation expected from the company’s shareholders, the lending agency will typically require NRIC copies of all the businesses’ directors and a detailed statement of their credit score, as assessed by the Credit Bureau of Singapore. Plus, the lenders will need your ACRA business profile, the director’s last two years’ worth of NOAs, detailed financial statements that showcase long-term profitability forecasts, and, of course, a business plan that will detail your venture’s expansion objectives. 

The loan will typically need to be associated with collateral, and the repayment tenure will often not extend beyond three to five years. As for what a good business loan interest rate is, this will vary from lender to lender. However, anything below 5% per year could be considered an excellent deal, while a range between 7.5% and 9% is what can be considered typical for an SME working capital loan provided by a private lender.