This article proposes to offer a summary of the financing avenues from commercial lenders that SMEs can take in Singapore.

Banks and Financing Institutions:

Overdraft

A loan which can be drawn down, subject to a limit that is pre-approved by a bank, and repaid whenever the borrower wishes to. The repaid amount can be withdrawn again.

Term Credit Facility

A fixed loan amount that is usually secured against the company’s fixed assets (but in some cases can be unsecured), such as property and equipment. The loan is fully disbursed at the beginning and the borrower has to make regular repayments.

Working Capital Loan/Revolving Credit Facility (revolver)

A loan which can be drawn down, subject to a limit, and repaid whenever the borrower wishes to within the loan period. The repaid amount can be withdrawn again. This type of loan frequently has as collateral the borrower’s receivables and/or inventory.

Trade Financing

Financing that occurs in international trade. A broad range of credit facilities has been created to mitigate the risks and facilitate the activities of trading. For example, a letter of credit is commonly issued by the bank to guarantee that payment will be released to the seller upon receipt of the good by the buyer.

Structured Loans

A business loan which approval and loan quantum depends on the company’s performance based on its account cash flow, and to a lesser extent its asset base.

Banker’s Guarantee

A payment guarantee made by the bank in the event of any default.

For instance when a buyer pays for a good and the seller fails to deliver it, the bank will compensate the buyer for his loss.

Home Equity Loan (aka Cash-out Loan)

If you own a private property that is at least partially paid up, you can use it as collateral for a loan. Termed a home equity loan (aka cash-out loan), the loan amount can be used for many purposes, including meeting a business need but excludes the funding of a second property.

The bank will usually allow borrowing of up to 80% of the property’s value from which it will subtract the outstanding mortgage and the CPF used for the purchase of the property. This is because in the event of default and the property has to be sold, the bank can only lay claim to the remainder of the sale proceeds after the mortgage is repaid and the owner’s CPF account replenished.

Illustrating the loan amount for a home equity loan, we use as example:
Property Value: $800,000
80% of Value: $640,000
Outstanding Mortgage: $300,000
CPF Utilised: $100,000
Loan Quantum = $(640,000 – 300,000 – 100,000) = $240,000

As with all other loans, eligibility criteria have to be met and risks are present. So if you are considering taking such a loan, speak to a mortgage specialist at iCompareLoan today for some free expert advice.


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