For entrepreneurs in need of quick money – as working capital to cover expenses such as utility bills, payroll, rent, and inventory -one of the biggest questions is whether to take on short-term debt.Sometimes this short-term financing can also help companies take advantage of new opportunities, or help seasonal businesses purchase inventory to prepare for higher volume upcoming months.
In fact, one of the perfect uses of a short-term business loan is when a retail tourist business take on a loan to buy inventory well in advance of the tourist season, and is not able to repay the loan until after the season is over.
Another use for short-term business loans is – while you may be waiting for credit customers to pay their bills, you need to pay your own bills to fulfil your supplier obligations. This is particularly important if your company is a cyclical business. Imagine a situation where you need to pay your suppliers within a week so that you can honour a client’s order who can pay in the next 30 days. A short-term loan is definitely worth it in this scenario.
Granted though that taking on short-term loans can be a tricky issue. On one hand, you would be paying higher interests to borrow for shorter periods. On the other hand, without taking the risks, you could be sacrificing important growth opportunities for your business. A good question to ask to avoid this confusion will be – whether failing to secure new capital will cost your company guaranteed revenue? If the answer is yes, a short-term loan is almost always a good choice.
Thus, there are several key considerations to keep in mind when you plan to go for a short-term loan in Singapore, which we will examine in detail in this article. But let’s start by understanding the characteristics of short-term loans first.
What is a short-term loan?
Short-term loans essentially work the same as medium- and long-term loans, with the only difference being a shorter repayment period, which is usually within one year. Though some lenders view a period of less than two years also as short-term.
These types of loans have the benefit of foreseeability i.e. when taking out a short-term loan, you are reasonably aware that you will be able to pay off the loan within a year. But importantly, most short-term loans are often repaid much more quickly than either one or two years, and often within 90-120 days, as per the industry average.
- In a nutshell, a short term loan is a very simple investment product, with an upfront lump sum and a scheduled repayment period of generally under an year, with repayments usually every week compared to monthly repayments in case of longer-term loans. They are a viable option not only for small businesses or start-ups which are not yet eligible for bank loans, but also for individuals in a temporary but sudden financial crisis.
- The loan amounts can vary from as small as $100 to as large as $1,000,000.
- Notably, while the interest rates associated with short-term loans are usually higher as compared to longer-term loans, the stress is considerably lower. The borrower needn’t worry about living a decades-long debt-ridden life, as short-term financing doesn’t demand long term commitments.
- Another difference is that a short-term loan can be either secured (with lower interest rates) or unsecured (without any collateral such as your property or car etc.)
- Moreover, short term loans can be processed within one day through reputable lenders, which normally look at the borrower’s cash flow rather than the credit history. But do note that the rate of interest on the short-term loan will certainly take into account your credit history, along with other criteria.
Characteristics of Short-term Loans in Singapore
Compared to long- and medium-term loans, short-term loans are characterised by smaller loan amounts, higher interest rates, shorter repayment periods, and weekly/monthly repayments.
Benefits of short-term loans
Quick application process
Many short-term loan lenders offer a quick and easy application process allowing business owners to apply for a loan online in as little time as possible. So, less paperwork, less hassles, which means fast turnaround time. Many short-term loan lenders have websites and mobile phone applications which makes it convenient to apply for a loan any time of the day.
Obtained faster than traditional lending
Following from the above point, short term loans can be approved within 24 hours, with the funds given out the next business day (within the same day in some cases). This so as short-term loans are deemed less risky, with the time taken for the lender’s underwriting process being shorter. Thus, the borrower can obtain the needed funds more quickly.In comparison, even traditional lenders such as the banks when giving out short-term financing take several days, or weeks.
Short term loans are flexible
Such loans are a very flexible business funding option, as they can be customised to suit individual borrowers in terms of repayment options, and interest rates.
Less interest is paid as the duration of the loan is short
It’s simple really. The longer you owe the lender, the higher total amount of interest you pay. A short-term loan is beneficial in terms of lesser interest amount payable, even if the interest rates associated with short-term loans is a bit higher.
Easier to acquire
As noted above, short-term loan lenders look at the cash flow, rather than a company’s or an individual’s credit history. That’s why they are a lifesaver for borrowers with less than stellar credit scores.
Help improve your credit score/rating
A major benefit of short-term loans is that you can use it to improve your credit rating/score, so that you become eligible for taking out a large sum loan for a longer period from a traditional lender. As long as you repay the short-term loan on time, you will see your credit score/rating improve.
Pitfalls of Short-term Loans
Short-term loans are high-cost loans
It is one of the most expensive types of loan as there is generally a higher interest rate associated with short-term loans as opposed to long-term loans. Typically, short-term loans attract high-interest rates and high monthly payment. Since you are financing the principal debt over a shorter period, you may end up paying a significant amount of money every month compared to what you will pay if you are servicing a long-term loan.
Higher penalties for default
Like the repayment costs are high and frequent, so are the penalties for late payments, which are generally severe.
Default is easy as repayment is frequent
Sometimes, borrowers find it difficult to manage the monthly payments, due to inconsistent revenue streams. That’s why it is important to ensure that money is budgeted to pay off these short-term loans so that no negative effect on the business happens.
Easy to fall into a debt trap and form a habit of borrowing
Following from the above point, if cash flow is really tight, you run the risk of not being able to make the payments on that loan—which can mean needing another loan to make the original payment. Here you get caught up in a common and painful debt trap. The flexibility, convenience, and easy availability of short-term loans can make you fall into a never-ending cycle of borrowing. This risky process leads to inefficiency in businesses operations and lower productivity. You may actually end up spending more than you can afford, or even worse, wasting money if you qualify for a lower-cost term loan elsewhere. Hence it is advisable not to depend on short-term loans seasonally.
Types of Short-term Loans
This type of loan is a form of short-term borrowing that is extended by a lender to its business customers based on unpaid invoices. The lender loans the money and charges interest based on the number of weeks that invoices remain outstanding. When an invoice gets paid, the lender will take the interest charged on the loan before returning to the borrower what is due to the business.
Payday loans are emergency short term loans where the entire loan amount, plus interest, must be paid in one lump sum when the borrower’s payday arrives. Repayments are typically done by the lender taking out the amount from the borrower’s bank account, using the continuous payment authority.
Lines of credit
A line of credit is much like using a business credit card, but with much less annual percentage rates. A credit limit is set, and the business is able to tap into the line of credit as needed. It makes monthly instalment payments against whatever amount has been borrowed.
Merchant cash advances
This is actually a cash advance but still considered a loan. So, to explain, this is how it works. The lender loans the amount needed by the borrower, who makes the repayments by allowing the lender to access the borrower’s credit facility. Each time a purchase by a customer of the borrower is made, a certain percentage of the sale is taken by the lender.
Short-term Loan options in Singapore
Licensed Money Lenders
Importantly, in Singapore, licensed moneylenders lenders – whose number as of February 2019, is 155 – are restricted by the amount they can lend, the fees they can charge, and the acceptable interest rate. You can find a full list of licensed moneylenders on the Ministry of Law’s website here.
According to Singapore’s Ministry of Law, for secured loans, you can obtain a loan of any amount. For unsecured loans, please refer to the table below for the total maximum amount that you may borrow at any time across all moneylenders in Singapore:
|Borrower’s annual income||Singapore Citizens and Permanent Residents||Foreigners residing in Singapore|
|Less than $10,000||$3,000||$1,500|
|At least $10,000 and less than $20,000||$3,000||$3,000|
|At least $20,000||6 times monthly income||6 times monthly income|
With effect from October 1, 2015, the maximum interest rate moneylenders can charge is 4% per month. This cap applies regardless of the borrower’s income and whether the loan is an unsecured or secured one.
If a borrower fails to repay the loan on time, the maximum rate of late interest a moneylender can charge is 4% per month for each month the loan is repaid late.
The computation of interest charged on the loan must be based on the amount of principal remaining after deducting from the original principal the total payments made by or on behalf of the borrower which are appropriated to principal. [To illustrate, if X takes a loan of $10,000, and X has repaid $4,000, only the remaining $6,000 can be taken into account for the computation of interest.]
Moreover, the late interest can only be charged on an amount that is repaid late. The moneylender cannot charge on amounts that are outstanding but not yet due to be repaid. [To illustrate, if X takes a loan of $10,000, and fails to pay for the first instalment of $2,000, the moneylender may charge the late interest on $2,000 but not on the remaining $8,000 as it is not due yet.]
Banks in Singapore offering Short-term Loans
There are many banks in Singapore that offer short-term loans for personal and business use. While they offer low interest rates ranging from 3% to 6% per annum and are flexible in terms of the loan amount from small to large sized loans, their approval process is quite long. And then there’s the additional need of a good credit score/rating to get a bank’s loan approval.
A few options to compare various bank loans include:
Private Funders/Lenders in Singapore
Private funders in Singapore are classified under the country’s Excluded Moneylenders Act. If a lender’s business model fits fully the description of an excluded moneylender defined under section 2 of the Moneylenders Act, it is deemed as an excluded moneylender. This means that it will not be regulated by the Monetary Authority of Singapore (MAS).
But importantly, in Singapore, private funders/lenders are allowed to lend money only to accredited investors, which MAS define as:
- an individual
- whose net personal assets exceed in value the minimum amount of $2 million (or its equivalent in a foreign currency) or
- whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency)
- a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency).
Few major private lenders in the city-state are:
If an individual or a corporation is an accredited investor as per MAS norms, they will be able to take out a short-term loan from any of the above. All of them offer medium to large sized loans at interest rates ranging from 10 to 17 percent per annum, which is much less than the licensed money lenders. But do note that private funders/lenders generally require some form of collateral, which the accredited investor risks losing in case of a default.
In summary, as noted above, while there are few risks associated with short-term financing, sometimes a short-term loan is what you need to save your business, access working capital, or even embark on a high growth path. As is the case with finances always, do your due diligence, and think about engaging short-term financing experts who can guide you on the best possible option. Do remember, overextending may result in you facing higher costs to borrow funds and getting stuck in an endless cycle of habit-forming and crushing debts, which will eventually ruin your entire business’ cash flow.
So before making a commitment to a short-term loan, be sure to weigh all your options thoroughly.
- If you need a small amount of money urgently, and only for a week or a month, licensed money lenders may be the right option.
- If you have an asset such as an investment property to put as a collateral and you can wait for a week to access the money, private funders/lenders, with their lower interest rates as compared to the licensed money lenders, may be the right option.
- If you can wait weeks, and months to access the money, and have a good credit history, banks may be the right option. They offer the most competitive interest rates and have a wide variety of loan options to choose from.