What are SME Micro Loans?

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Written By Loanbuddy Singapore
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What are SME Micro Loans?

There are so many loan options including micro loans available to SMEs in Singapore currently. Whether you want to expand your business or need to run it smoothly, you can tap on loan options with a faster application process.

To help local SMEs, the government of Singapore has specifically set aside S$2 billion under the SME micro loan scheme this year. With the assistance of lower interest rates and easy approval, SMEs can increase their business’s growth potential.

What is SME Micro Loan?

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 The SME micro loan is a government-backed financing scheme which provides finance access to SMEs. Companies operating on small levels and SMEs need to undergo the loan assessment procedure to check whether they are eligible for the scheme. After their successful evaluation, they get access to the benefits of lower interest rates, lower fees and convenient loan terms offered by participating banks. Once the approval is done, SMEs can get a micro loan of up to $100k.

SMEs can use micro loans for managing their regular operations, maintaining a healthy cash flow in the business, or any other purpose a business may need to fuel its growth.

Since, this scheme is assisted by the government of Singapore itself, banks, financial institutions, and other money lenders share a reduced risk exposure. Due to low-risk exposure, banks and financial institutions keep the interest rates low which in turn, becomes beneficial for SMEs.

There are other loans that an SME can apply for if it wants to raise above S100k. SME working capital loans and Temporary Bridging Loan are the two popular Loans that government offers with additional terms and features. As compared to these two loans offered by the government, most SMEs generally look to cover their basic financing costs and fees to keep their revenue in check. Thus, micro loans are most suitable for such types of SMEs.

Who are the participating banks under SME Micro Loan Scheme?

Currently, there are nine banks registered and operating in Singapore that participate in the SME micro loan scheme of the government. The names of these banks and financial institutions are as under:

The eligibility criteria to apply for a micro loan of each bank may slightly differ from each other. So you must check all the terms and conditions before applying for a Micro Loan from any of these nine banks.

What are the features of an SME Micro Loan?

The SME micro loan is a specifically designed scheme that targets relatively young SMEs. Therefore, the features of micro loans are modified in accordance with such SMEs.

  • Loan Amount– The amount of loan under the micro loan scheme is up to $100k only. A small business requiring small funding for a business is suited for this scheme. The government has specifically invited those small businesses who need funds of smaller amount but do not want to go through the tiring assessment loan process of banks. For raising beyond $100k, you cannot apply to micro financing. Other loan options such as temporary bridging and the working capital loan can be good options in case of more than the S$100k requirement.
  • Rate of Interest– The interest rate under SME microfinancing may vary from bank to bank because of their different terms and eligibility criteria. Generally, the interest rate under this scheme ranges between 3.2% and 4.5% per annum. As compared to other loans by offered banks and money lenders, the interest rate is relatively very low. This is a great feature of this scheme because SMEs do not have to worry about higher loan interest and installment payments every month or quarter.
  • Repayment period– The participating banks and financial institutions generally set the repayment period of a loan for 1 to 5 years depending upon the amount borrowed and the bank you are borrowing from. In case of early repayment by SME, the bank may also charge a fee for early repayment of the loan.
  • Government shares the risk of default with banks– SME micro loans scheme is a government-initiated loan contract for small businesses operating at a low level. The banks that are participating in this scheme do not own the risk of loan default on their own. The government absorb most of this risk because of which banks charge a lower interest rate as compared to other loans.

What are the things to keep in mind before applying for an SME Micro Loan?

Before applying to any of participant banks, make sure you have evaluated yourself on these specific below factors to ensure a successful SME Micro Loan approval.

  1. Back yourself with documents- Even if it is a government-backed scheme, banks will not give you any money based on no information. Banks do not trust startups that are in their initial years of business. To pitch the banks for micro loans, you still need to show your business viability and plans. You must have the following details and documents in hand to increase your chances of loan approval.
  2. Your updated ACRA business profile
  3. Bank statement for at least 6 months
  4. Cash flow projections of the business
  5. Income statement/ profit & loss account statement
  6. The latest audited balance sheet of your company
  7. Personal tax assessments documents of all major business owners and directors
  8. Business plan
  9. Any other backing that increases your creditworthiness. For example, advance orders from customers, transactions with vendors
  10. All other significant bookkeeping records

By providing these documents to the bank, you can enhance your chances of getting the loan. Never go unprepared or underprepared otherwise your application might face rejection even if you are eligible for a micro loan.

  • Keep your personal credit rating as high as possible– A new startup does not have its own credit score. Hence, your business will be evaluated based on your personal credit rating. Banks evaluate the loan application for small businesses in detail as compared to other companies because the company is new and the business is either not commenced yet or is in operating only for a small duration.

Knowledge of your personal credit history is all a bank has to assess whether to sanction a loan or not in absence of the company’s credit record. You are required to maintain a good personal credit score to increase the company’s chances to get funding. In addition, banks may also ask you to be the personal guarantor for your startup for which they will check your credit report. Thus, you are anyhow to keep your personal credit rating as high as possible.

  • Make sure that you agree with the bank charges– Banks make money through charges on loans as well. You must have full knowledge of the bank fees you are subjected to while applying for micro loans. In case of non-utilization of funds, banks certainly don’t charge any fee. Still, the hidden cost on your loan may put your business in danger if it’s obtained without giving proper attention to the fine print on fees.
  • Specify your business needs– You must be crystal clear as to why your business needs this loan. While applying for micro loans, you must have a future business plan on paper to show the bank how its money is going to be utilized. Make sure you have identified your business needs to take benefits of the micro loan in full. Micro loans come at a lower cost and hence you must fully utilize the advantages of low interest rates and fees by applying the loan to business expansion and growth.

What Bank should I go to?

Smaller banks are more likely to approve your micro loan as compared to large multinational banks. Since there are only nine banks participating under the micro loan scheme, you get to compare all within less time. Large banks offer high-interest rates in comparison to small financial institutions. You must check the terms and conditions of every bank you are approaching and then decide which bank suits your business’s needs best.

What type of SMEs can get more benefits from SME Micro loans?

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Small and medium enterprises that need short-term financing to operate their business are fitter than others. If you require financing for a longer period, you should explore other financing options offered by the government of Singapore. However, if you qualify for traditional business loans and can afford a higher interest payment month on month, you should seek more options available in mainstream banks of Singapore. And in case, you don’t want to pay a heavy interest amount, you can also go for equity financing. Under equity financing, you will have no obligation to repay the loan and make interest payments but you will require to dilute the equity of the company.           

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