Need a business loan but worried you won’t qualify? Well, you don’t always have to borrow a large amount, nor be in business for multiple years. You can tap into capital via microfinance in Singapore, which typically comes in the form of small business loans.

In this article, we will be taking a look at how microfinance can help owners of small and medium enterprises (SMEs) launch, sustain, and expand their business.

What is microfinance in Singapore?

Microfinance loans or microloans are small loans intended to help startups and SMEs to maintain and scale their operations.

As the name suggests, microloans are available in smaller amounts compared to other types of business loans. This makes them suitable for young businesses or small-scale operations that do not yet require high amounts of capital.

Additionally, microfinance in Singapore can also be useful to SMEs that require a small boost of funds to help them tide over a difficult period. It can be used to fund research and development efforts, pay for marketing and publicity, hire additional staff during crunch time, and many other business-related expenses.

Do note that lenders are expected to honour the financial obligation that comes with taking a microloan, and loan repayments must be prioritised and managed well. Failure to do so will result in legal consequences.

How does microlending for SMEs work?

Business owners and entrepreneurs may receive an offer of a microloan from an investor. Alternatively, SMEs and startups may also approach a financial institution that offers business microfinancing.

Often, investors might keep an eye out for promising SMEs that need microloans. In exchange for providing the capital you need, the investor may charge interest on the amount borrowed, take partial ownership of the business, or claim a portion of the profits.

In contrast, taking a microloan from a financial institution such as a bank or a licensed moneylender is more straightforward–you simply need to pay back the loan at the agreed interest.

When processing your microfinance loan, the lending institution is likely to look into your creditworthiness by assessing your credit history, the value of assets you own, and your repayment capability.

This allows the lender to tell if you’re a good candidate to loan money to, or if you’re an applicant who might be at risk of defaulting on the loan.

Providing a microloan to a small business might be a little riskier for investors to undertake (as compared to banks providing a traditional bank loan). Part of this is because small businesses and startups may be more sensitive to disruptions, which heightens the risk of defaulting on the loan.

As such, microfinancing loans in Singapore might have higher interest rates that range between 7-12% per annum (for banks) and 0.8-12% per month (for other financial institutions).

How can SMEs get the best interest rate for microloans

Four ways SMEs can benefit from microfinancing in Singapore

1. Easier approval with fewer credit checks compared to traditional business loans from banks

Typically, many SMEs turn to microloans because they may be easier to get, compared to traditional business loans from banks, which come with more stringent checks, regulations, and requirements. Funds can also be disbursed to the borrower more quickly with fewer credit checks.

2. Smaller loan quantum and shorter loan tenure

Microloans can have a much lower loan quantum and shorter tenure, compared to other business loan packages. This means that microloans may be easier to manage for certain types of borrowers.

3. Your credit ratings may be improved if you make repayments on time

Those who have not borrowed before (and hence, have no credit history) may find difficulty applying for credit cards and unsecured loans in general.

Applying for a microloan and paying it back on time is a good way to create a favourable record in your credit history, or improve a bad credit score. This will enhance your eligibility for other types of unsecured loans.

4. Option to reach out to investors on your terms

Microfinancing also gives you the option of reaching out to investors to grow your company on your terms. An independent investor may be more open to new or unconventional ideas, allowing you to run your business with more creativity and freedom.

What are the disadvantages of microfinance or microloans?

1. Collateral might be required

Microfinancing is not always the best option for all businesses. While they may be a little easier to receive than business loans from banks, there may still be some collateral required by financial institutions or investors to secure the loan. These can include pledging your company assets or personal assets.

2. Detailed documentation required

There are also many required documents, such as a business profile from ACRA, bank statements, cash flow projections, and audited balance sheets, amongst other things. These help to give an idea of the viability of your business, and how you might intend to use the money you receive from microfinancing.

3. High-interest rates

Another disadvantage of microloans is that interest rates may be higher, ranging between 6% to 25% per annum. This makes taking a microloan a less favourable option for some businesses, especially if you require a somewhat larger amount of money.

If you are a large business that can qualify for longer-term loans with lower interest rates, you might be better off taking a longer-term loan through more traditional avenues.

Where can I apply for microfinance in Singapore for my SME?

If you’re looking for a short-term micro loan in Singapore, there are many options available. These include Enterprise Singapore’s Micro-Loan Programme (MLP), which comes with selection criteria like having up to 10 employees, having a 30% local shareholding, being registered in Singapore, and having an annual turnover less than or equal to $1 million.

Some of the other options available include banks and crowdfunding platforms such as Fundedhere and Fundnel.

But perhaps none of these options are as convenient and easily accessible as taking a business loan from licensed moneylenders, which generally only requires a quick online application, followed by a short, in-person meeting at the moneylender’s office.

If you’re looking for a short-term SME business loan, Elite Investment & Credit offers safe microloans at low interest rates, with instant loan approval and generous repayment terms. Apply with us now.

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