Start-Up Loan
With the lack of track record, SMEs struggle to get the funding to kickstart their business. Here are 3 types of start-up loans that you can consider.
- The Classic Personal Loan
Up to 8x your monthly income, 5 years, ~8% p.a. - The Share-backed Loan
Borrow up to 70% of the value of your publicly held shares. As low as 3% p.a, 2 years - The Insurance-backed Loan
Borrow against the surrender value of your insurance policies. As low as 3% p.a., 2 years
One of the biggest struggle that new companies face is the lack of track record or even an existing operation. Thus, it becomes almost impossible to obtain a traditional business loan. Even if a loan is obtained, it is likely that you might be faced with a high interest loan (possibly 3-4% per month). As such, when you actually do the math, a personal loan might actually be a way better option. Here’s a few reason why.
As new companies are often subject to high interest rates from alternative lenders (3-4% per month. Personal loans rely on your annual income and can go as low as 5-6% p.a. If you have collaterals, they can even be as low as 2-3% p.a.
Business loans are disbursed at a proportion of your revenue which is negligible for a start-up or pre-revenue company. However personal loans are provided at a multiple of your monthly income. This can stretch up to 8x for some banks which can be a good boost for your business.
Reduce the need for administration with a business loan which entails, monthly reporting, provision of financials and bank statements etc. With a personal loan all information required are often already captured through MyInfo with no documentation required.
A personal loan is properly defined as a loan that is disbursed into a borrower’s personal bank account. This is not to be mistaken with other loans typically associated with it such as an auto loan or a renovation loan. The two mentioned are loans that are paid directly to the car dealer and contractor and not into the personal bank account. As such, auto loans and renovation loans are not appropriate for business use as there is no flexibility in its usage.
Depending on your annual income, you may be entitled to a loan quantum that is a multiple of your monthly income. See table below.
Maximum Loan quantum | Banks | Licensed Money Lender |
|---|---|---|
Less than S$20,000 | – | Max S$3,000 |
S$20,000 – S$30,000 | – | x6 |
More than S$30,000 | x2 | x6 |
More than S$40,000 | x4 | x6 |
More than S$120,000 | x8 | x6 |
As you can see, banks in Singapore only serve the segment earning more than $30,000 a year and can lend up to 8 times your monthly income. Thus, anyone earning less than S$30,000 can only borrow from a licensed money lender.
Individuals earning S$20,000 to S$30,000 are best served as they can borrow up to 6x of their monthly income. For individuals with no declared income, or income lesser than $20,000, the maximum loan they can obtain is S$3,000.
The second most important thing that many lenders see is your Credit Bureau Report. Here’s a quick guide to understand your credit bureau report.
While there are many things to look at the report, the 3 things that can determine your eligibility are:
- Overall Grade
- Presence of default or bankruptcy
- Absence of score
Factors | Banks | Licensed Money Lender |
|---|---|---|
Overall Grade | Min DD and above | No restriction |
Presence of default or bankruptcy | Not eligible | Not eligible |
Absence of score | Typically not eligible | No restriction |
As you can see, banks present a significantly cheaper option with rates ranging from 6-8% p.a. (EIR). Licensed money lenders on the other hand charge monthly interest rates and can go up to 4% per month. This is a upper cap regulated by Monetary Authority of Singapore (MAS).
Banks | Licensed Money Lender |
|---|---|
6 – 8% p.a. (EIR) | 1 – 4% per month |
1.5% processing fee | 2.5 – 7% processing fee |
Understanding Interest Rates
When comparing personal loans in Singapore, you may have realized that each loan has at least two different interest rates.
Effective Interest Rate (EIR) | Annual Percentage Rate (APR) |
|---|---|
The effective interest rate, or EIR, must be stated alongside the advertised rate in Singapore. This includes processing and other costs, as well as the specifics of your repayment plan. In a nutshell, EIR displays the personal loan’s “actual” interest rate as it takes into account the compounding of the interest as you make your repayment. | The yearly interest earned by an amount charged to borrowers or paid to investors is referred to as the annual percentage rate (APR). APR is a percentage that indicates the real annual cost of money for a loan or investment over the period of the loan. This includes any fees or other expenditures incurred throughout the transaction, but does not include compounding. |
One of the great benefits of banks is that they can lend for an extended tenor up to 5 years which significantly reduces your monthly instalments. As for money lenders, because interest rates are almost 3-4x, it seldom makes sense for a loan to go past 2 years.
Banks | Licensed Money Lender |
|---|---|
Up to 5 years | Up to 24 months |
The choice between banks and licensed money lenders is not entirely obvious for personal loans as there is a gap that money lenders are able to fill that traditional banks cannot. While banks are the preferred choice in most scenarios, here’s 3 scenarios you want to go with a money lender.
Your income is less than $20,000 | You do not have a good CBS record | You need a larger quantum but earn less than $40,000 |
|---|---|---|
Licensed Money Lenders can provide loans up to $3,000 | As long as you are not in default, licensed money lenders are still open to providing credit | While most banks can only extend up to 2 times, Licensed money lenders can lend up to 6 times your monthly income |
A team that will support you
We have a dedicated team that will walk you through your entire loan process and help you do the market research you need.
We let lenders compete for your loan
Be ready to be spoilt for choice when we help you compare the best deals across all banks and non-banks so you only get the lowest interest rate and the highest cash out amount. Our rates are same as what the banks can offer or even better.
What is the turnaround time for a personal loan application?
For a classic personal loan, the golden standard is the same day. However, this might take longer for some lenders including banks. Some banks can facilitate same day disbursement while others might take more than 2 weeks. For shares and insurance backed, these might take at least 2-3 weeks as transfer of shares and assignment of proceeds will need to be completed before the loan can be disbursed.
For share-backed loans, will there be a margin call should there be any averse move in the market?
There will not be any margin calls. However, lenders can ask for a top-up on your loan should the market price of your shares held in collateral is not able cover at least 90% of the value of your loan.
For share-backed loans will I be able to sell my shares held as collateral in a market move?
No. Shares held as collateral cannot be sold until the loan is fully redeemed. You will still get to enjoy upside capital gains and dividends from your owned shares.
What if you lose your employment during the period of your personal loan?
Fear not, there is no credit review for personal loans and your bank will not call for a demand for early repayment. However, you will still need to make good on your instalments.
Why is a personal loan the best option for a start-up?
Here’s a few reason, one is the lack of vintage and track record for your business which many banks set as a minimum criteria, even for some of the start-up loans that are much touted by some banks, these are highly selective and require companies to be post-revenue. Also if you have a full-time employment, this enables you to obtain a much cheaper source of financing than a business loan. We would advise you to take a loan while in employment with the longest tenor. Most personal loan can stretch up to 5 years.