Everything You Need to Know About the Application Process of a Business Loan
It’s hard to operate a business without external funding. Loans can come in handy when you’re starting or scaling a business, purchasing property, or — given the current COVID-19 pandemic — simply trying to sustain operations.
This is why it’s important for SMEs to have long term plans for their fundings in case of rainy days. To do this, you will need to ensure that your loan applications are always optimal. In this guide, we break down the application process to show you what you need to know before getting a business loan.
Loan jargons explained
The language used in loan applications and documents can sometimes be complex. Here are six important key terms you should know beforehand.
1. Effective interest rates (EIR)
The EIR is the ‘all in’ rate that you will end up paying for in your loan. It accounts for things like processing fees and a progressively decreasing principal. When considering loan options, look at the EIR and not just the flat rate. At OCBC, we always state the applicable EIR upfront.
2. Collateral and guarantors
An unsecured loan is one that is not secured by collateral. Collateral are assets such as property or even a fixed deposit account. Guarantors are people that are legally obliged to take on the responsibility of the loan in the event that the applicant is unable to do so.
3. Early repayment fee and lock-in periods
Because of the way banks lock in their own funding costs, in some cases, repaying a loan early — also called prepayment — will incur penalty fees. Many loans have this lock-in period where such fees apply and you can only prepay the loan without penalties after this period.
4. Working capital
Working capital is the funds required for the day-to-day operations of a business. In accounting terms, it is the difference between your current assets and current liabilities. Some types of business loans must specifically be used for working capital needs.
Many loans are amortised, meaning the principal is progressively paid down. An amortisation schedule will show you how much the monthly instalment amount is. To give you a better understanding of the calculations, please refer to the following:
a. Instalments can be calculated using this formula:
[P x R x (1+R)^N]/[(1+R)^N-1]
In this formula, P is the principal, R is the interest rate per month and N is the number of monthly instalments.
b. You can also calculate the total interest to pay over the duration of the loan using this formula:
(Monthly instalment x number of monthly instalments) – loan amount
c. Here is an example of what an amortisation schedule could look like for a S$50,000 loan for three years, to be paid in monthly instalments with an interest rate of 5% per year.
|Month||Starting Balance||You Paid||Interest||Principal||Ending Balance|
6. Loan moratorium
A loan moratorium allows you to postpone (defer) instalment payments on your loan for a predetermined period. For example, to help SMEs affected by COVID-19, OCBC allows you to defer the principal portion of the loan payment. You can also opt to increase the tenure of the loan by the length of the deferment period.
What loans should you be looking at and are you eligible?
Now that you know these key terms, let us look at what loans are available for you. Business loans come in a variety of forms. To get your loan approved, you should first understand what each business loan type is tailored for, their maximum loan amounts and tenure, as well as their respective eligibility criteria.
It is especially important to pay attention to these eligibility criterias, as failing to meet them would mean a rejection.
Here are some of the loans Singapore business owners can apply for:
- Introduced in March 2020 to help SMEs with the impact of COVID-19
- Funding of up to S$3M
- Repayment period of up to 5 years
- For local SMEs with a group annual sales of up to S$100M or a group employment size of less than 200 people
- Funding of up to S$300K
- Repayment period of up to 5 years
- Finance up to 80% of the property’s purchase price or current market valuation, whichever is lower
- Repayment period of up to 30 years
4. Other types of business loan
There are also more specialised business loan types like business venture loans that are more suited for innovative, high-growth SMEs looking to avoid equity dilution. There is also contract financing, which allows SMEs to finance the costs of fulfilling awarded business contracts.
Master the loan application process with the right documentation
Once you have confirmed that you are applying for the right type of business loan and can meet all the relevant eligibility criterias, you are already ahead of most other applicants. The final step is to ensure that you have all the documents necessary to get the business loan.
These include (but are not limited to):
- Company’s bank statements and financial reports
- Director’s IC copy and Notice of Assessment
- Proof of director’s personal income and credit history
- GST Form 5
- Debtors and creditors ageing list
Finally, for best practice, we recommend you to:
- Keep your company’s financial reports and bank statements updated
- Plan out your loan applications ahead of time
- Ensure your personal credit facilities are prompt
With OCBC, skip the submission of key documents and easily apply for a loan online using MyInfo Business. Your business loan application can be processed immediately and the loan status will be provided within a day.
OCBC Business Banking — here to help finance your everyday business needs
These are trying times for SMEs, and at OCBC, we want to help you in whatever way we can. See all the business loan types we offer.
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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.