Can A Sole Proprietorship Get Business Bank Loan?

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Written By Loanbuddy Singapore
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Can A Sole Proprietorship Get Business Bank Loan?

A sole proprietorship is the easiest business structure an entrepreneur can operate in Singapore. As far as registration is concerned, it takes not more than 30 minutes online for a Singaporean permanent resident or citizen. There are quick regulatory reporting and filings in comparison with other businesses like firms and companies. The enterprise does not have to comply with requirements like appointing a corporate secretary and preparing annual reports. In addition, you don’t have to obtain approval from any partners or shareholders.

However, when it comes to financing, a sole proprietorship business can face rejection from mainstream banks. The reasons include informal business structures and restrictions on financial institutions lending licenses.

Some of the financial institutions might be subjected to MoneyLenders Act which restricts and regulates lending to sole proprietors. Due to this reason, lenders prefer giving business loans to companies over other businesses.

Why Is It Tough To Get A Business Loan For A Sole Proprietorship Business?

Conventional banks or financial institutions do offer SME loans to sole proprietors. However, it becomes harder for sole proprietorship businesses to qualify for SME loans.

In addition, some banks may also discount the credit ratings of sole proprietors based on their internal credit score program or lending algorithm. The reason for this could be lesser information available to evaluate the creditworthiness of the sole proprietors.

It is to be noted that sole proprietorship businesses have the advantage of fewer maintaining and reporting requirements. This advantage of not filing mandatory annual reports affects the assessment procedure of credit rating by mainstream banks and financial institutions.

How to set up your business in Singapore

What Are The Reasons To Have A Lesser Possibility Of Getting A Sole Proprietorship Business Loan In Singapore?

There can be independent reasons for lesser chances of getting loans based on business loan applications. However, sole proprietorship businesses face common challenges while applying for a business loan. Some of them are:

  • Credibility Issues

As compared to private and public limited companies in Singapore, the general perception of business financing lacks credibility. Banks often fear giving loans to a single person who runs the business. It has become a general insight about sole proprietors that they lack structure and credibility as compared to companies where every decision is taken after the approval from members.

The ACRA also gives freedom to sole proprietors to not comply with financial reporting. As a result, many entrepreneurs run a startup with bootstrapping because it saves a lot of cost and time that goes into the preparation and presentation of financial statements.

Therefore, it cripples sole proprietors when it comes to scaling the business. They require capital infusion for expansion which banks often do not give due to lower credibility.

  • Growth Opportunities Are Limited

Companies that are looking for scalability can easily offer shares of the company and raise funding from investors. Angel investors and venture capitalists get a return on their equity which motivates them to invest in companies.

However, this option is not available for sole proprietors who want to upscale their business operations. Either they have to change their business structure or be ready to face difficulty in raising any funds. It becomes near impossible to get loans from the investors via equity split method. Debt raising also becomes difficult due to fundamental issues and as a result growth of the business limits.

  • Debt Handling

A sole proprietor is personally liable to suppliers and creditors for all types of debts. Whereas, a company is a separate legal entity which means its members and directors are not personally liable for any of the debt it owns. Even in case of default by the company, members and directors are not fully liable to repay the debts. On the other hand, a sole proprietor must repay all the loans and interests charged thereon in his or her individual capacity.

Likely to a sole proprietorship, a partnership firm does not own a separate legal identity and hence the partners are liable to repay the loans in personal capacity as well.

  • Tax Exemptions

A sole proprietorship business can show business expenditure in its income statement and claim to calculate tax. However, the proprietor will be taxed at individual personal tax rates prevailing at the time of tax assessment.

On the other hand, a newly incorporated private limited company is eligible to claim tax benefits. Currently, newly registered companies can get a tax exemption of 75% on their first chargeable income of $100k and 50% on the next $100k. This benefit can be availed by companies for 3 first consecutive tax assessment years.

Therefore, if we see, a sole proprietorship business’s income is taxed according to provisions which apply to the individual persons. Whereas, a company is taxed differently from its members and directors. The members and directors are taxed under applicable tax rates to individuals.

  • Assets and Business Identity Is Not Separate

The owners or the beneficial owners of a company can segregate their assets from the company’s assets. Assets, liability, ownership and identity- all can be legally differentiated in the case of registered companies.

In addition, a holding company can set up multiple subsidiaries, associates and joint ventures. This layered structure of companies helps them to bifurcate the operations and activities they perform. On the other hand, a sole proprietor does not have the privilege to treat the business assets separately from his or her assets. This result works as a barrier for banks and financial institutions to give business loans to sole proprietorships.

Click Here To Read: Enterprise Financing Scheme – SME Working Capital Loan

Despite all of the above constraints, a sole proprietorship business can get a business loan if he or she dominantly possess these below qualities in business:

  • A strong cash flow can help to acquire loans from banks and financial institutions. A smooth cash flow in the business can meet requirements for an expansion such as investment in plants and equipment, the ability to pay vendors within due time and fetch payments from debtors.
  • A well-prepared and presented financial statement also helps in providing a clear picture of the business. Whether the business has the chance to grow and upscale can be evaluated through its profit and loss accounts. If a sole proprietor has strong finances, it becomes easier to attract investors by giving funding for expansion.

If you have filed a true and fair income in your NOA (Notice Of Assessment) which matches with your ECI (Estimated Chargeable Income), a trust can be bridged with the business and loan providers.

What Are The Options In Business Loans Available To Me In Singapore?

‘Business Loan’ is a blanket term which covers all types of loans that a business can get. The types of loans depend upon business needs. Some of them are offered for business expansion or working capital requirements. Whereas some of the loans offered are for capital expenditure requirements such as investment in plants or machinery. The most common business loan a sole proprietor can be offered are discussed below-

  • Business Loan

This is the most basic loan which can be obtained for a term of 5 years. Since no collateral or security is needed, this loan is unsecured. Mainstream banks such as DBS, UOB, and OCBC offer business loans to local proprietors. There are certain factors which affect the principal and interest components. Some of the factors include lifetime revenue and business life.

  • SME Working Capital Loan

The basic and most significant condition of an SME working capital loan is that it is offered to local proprietors who have a maximum number of 200 employees. The government of Singapore in collaboration with banks offers to finance up to $1 million per business. The repayment term ranges from 1 to 5 years.

  • Startup Business Loan

It is also called a ‘first business loan’ for a startup which is a smaller version of a general business loan. The minimum loan amount offered is $100k. This is the easiest business loan to obtain and you don’t need to be in existence for a longer term. Only a few months of incorporation can easily fetch your startup business loan. In addition, you also don’t need to have a powerful financial record.

Here’s the list of the top 5 profitable businesses to start in Singapore.

 Why The Loan Applications Get Rejected?

The government has encouraged many startups by providing funding to small businesses. However, it doesn’t always work out. Your loan application can still face rejection which you get to know only after spending a lot of time on the application. Here are the common areas of problems where a loan application may get denial:

  • Limited or Small Track Record Of The Business

Lenders extensively study the business record and even the revenue proof for that matter. Financial institutions typically require a business to be in existence for at least 6 months. Sometimes the proprietors suffer from lower revenues which create hurdles in getting loans. Since lenders want interest, they want to make sure you earn well to pay their interest and repay the principal.

  • Lower Credit Ratings

This is one of the biggest reasons for not getting loan approvals. Once a lender identifies your poor creditworthiness, it won’t lend you money and will always doubt your repayment capacity. A lower credit score impacts business image in a significantly negative way.

For a sole proprietorship business loan, all the personal income and expense records are checked and verified before processing any loans to the business. Personal credit score affects a lot when it comes to availing loans for sole proprietorship businesses. The owner is solely responsible for all finance-related matters which is why banks check the proprietor’s capacity to pay back.

Conclusion

A sole proprietorship business is easy to set up and run without many problems such as regulatory requirements, accounting and company law compliance. It also saves time and cost that goes into salary for hiring professionals for complying with the ACRA.

At the same time, a sole business enterprise always faces difficulty when it tries to raise funds from banks and other lenders. Reasons for this we already have discussed in detail.

It is advised to convert your sole proprietorship business into a private limited company for many reasons. It gets easier for a company to obtain loans from banks and other financial institutions due to high trust and high compliance. A company is penalized for not filing its annual returns and income taxes and that is why to avoid such hefty penalties, companies are very much consistent and credible.

Considering all these points, lenders are comfortable lending their money to more organized and structured businesses. Therefore, you should consider the conversion of your business structure to build trust with banks and lenders. This will not only free you from separating your assets and identity from the business but will immensely help in business expansion and brand building.

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