Business Loans' Interest Rates — Here's What You Must Know
Are you in the process of choosing a business loan? One important factor — or perhaps the most important factor — is the interest rate. This rate will play a huge role in your monthly cash flow and by extension, your entire business’ operations.
In this article, dive deep into the interest rates of business loans in Singapore and understand the three ‘Hows’. Learn how interest rates are determined, how they compare against each other and how you should evaluate them in a broader context of other loan conditions.
How interest rates are set in Singapore
If you’re a business in Singapore looking for a loan, you may want to know, “What is the range of business loans’ interest rates here?”
There are two aspects to the answer and it depends on whether the loan is a government-assisted loan or a “standard” commercial loan.
1. Government-assisted loans
For government-assisted loans, the Monetary Authority of Singapore (MAS) — in conjunction with organisations like Enterprise Singapore (ESG) — enables Singapore enterprises to access financing more readily. Under the Enterprise Financing Scheme, ESG will take on a risk-share on these loans. One such scheme would be the Temporary Bridging Loan Programme, which has 70% risk share and allows eligible enterprises to borrow up to S$1 million, with a repayment period of up to 5 years.
To further help SMEs get through the COVID-19 pandemic, MAS is allowing eligible banks, like OCBC, borrow funds at an interest rate of just 0.1% per annum. By lowering the rate in which MAS lends to the banks, we can then directly pass these cost savings on to SMEs.
2. “Standard” commercial loans
For non government-assisted loans, like revolving term loans or overdrafts, they typically have a different use case. These loans tend to have a shorter tenure, where you can choose to draw down and pay interest only when you need it. This means that while the effective interest rates are higher, the overall cost to the business may not be.
Comparing interest rates of business loans
Interest rates vary from time to time and differ depending on the company. Here’s how our various OCBC business loan types can stack up. Keep in mind that this is only an indicative range.
|Loan Type||Effective Interest Rate (EIR)|
|SME working capital loan||6 – 8% p.a.|
|Unsecured business term loan||8 – 11% p.a.|
|Equipment and machinery loan||4 – 6% p.a.|
|Commercial property loan||3 – 7% p.a.|
The EIR can be calculated with this formula:
1 + (simple interest rate / number of compounding periods) ^ (number of compounding periods) – 1
The number of compounding periods depend on the frequency of instalments — e.g. a one-year loan paid quarterly has four compounding periods. Also, the formula above does not factor in any administrative or processing fees. And yes, it can get complicated.
But you need not worry. Under the Association of Banks in Singapore’s Code of Consumer Banking Practice, all banks are required to disclose both the simple interest rate and the EIR on their loans. The EIR published will factor in everything, including the fees.
How should you evaluate business loans’ interest rates?
Most business loans have fixed interest rates. This means whatever rate is set during the loan agreement will be maintained throughout the duration of the loan. A notable exception to this is commercial property loans, due to their long tenure. However, note that revolving facilities like trade financing or overdraft facilities have interest rates that can be periodically revised.
Since most commercial loans’ interest rates are fixed from the outset, it is tempting to compare them against each other solely on that basis. However, you should also consider other factors such as:
- Eligibility requirements
- Processing fees
- Annual fees
- Collateral requirements
- Penalties for early redemption
- Whether partial payments are allowed
Note that even if you compare business loans using the EIR, it does not capture factors like redemption penalties and collateral requirements. Therefore, while interest rates are the most important factor when comparing business loans, you must not ignore these other factors.
To ensure you are getting the complete picture when comparing various business loans, make sure you read the terms and conditions carefully. Don’t be afraid to ask your relationship manager if you need more information.
Compare and pick the loan of your choice with OCBC Business Banking
At OCBC, we are committed to helping our SME clients meet their business needs. Whether it’s getting through the COVID-19 pandemic, expanding the business, or funding daily operations, let OCBC help you finance your everyday business needs.
Compare and pick the loan of your choice with OCBC Business Banking. We are confident that our loans are competitive and can help your business’ financing needs.
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The information provided herein is intended for general circulation and/or discussion purposes only. Before making any decision, please seek independent advice from professional advisors. No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake any obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.
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