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4 Good Reasons to Take Out an SME Business Loan

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Small to medium enterprises or SME's utilize business loans in Singapore, hoping that the borrowed working capital will become more profitable. Loans may come from sources other than banks, such as public funds, credit unions, or even private investors. These small to medium enterprises may also tap into inventory or accounts receivable as their loan collateral.

Depending on how and where the loan comes from, borrowing money could be severely costly; there are high interest, and fees are associated with almost every business loan in Singapore. Enterprises can and should add the overall amount of interest paid in the entire business loan before accepting one.

Here are four good reasons why an SME loan may be worth the troubles:

To Purchase Real Estate 

Financial institutions are likely to lend money to existing businesses and companies that want to buy real estate assets to expand their operations. Expansion happens when a company is making a profit, has a growing cash flow, and has good forecast numbers. This is an example of a scenario where a bank is likely to grant small business loans. Bank loans aiming at real estate are generally in the form of mortgages. Long-term bank loans will use company assets as collateral and require regular, monthly or quarterly, payments from profits or cash flows. 

The term of these business loans may differ from three up to twenty-five years and might have an interest rate associated with its repayment.

Buy Equipment 

SMEs have two options for purchasing equipment: they can buy or lease equipment. If the business owner requests for funding to buy machines and equipment, they can collect a tax write-off in the first year and depreciate the rest of the machinery over their economic life. 

Equipment and machinery could also be sold off for salvage value if it is no longer working or out of date. A cost-benefit analysis is needed to decide whether it is better to buy or lease equipment for a company. When a financial institution grants a facility loan, it is usually a mid-term loan and is repaid in monthly installments. Repayment will generally be tied directly to the serviceable life of the machines financed.

Purchase Inventory 

Banks sometimes provide short-term loans to SMEs that have developed good relationships with the bank. Timely payment and a positive balance in a savings account are great ways to establish trust with a bank. Some businesses are seasonal, such as hospitality, tourism, retail, and farming. If a business makes the majority of its sales during the holiday season, a short-term loan may be to purchase most of its inventory in advance. Bank loans to buy stocks are generally of a short-term nature; companies are strategizing around repaying them once the season is over, with their revenues.

Increase Working Capital 

A working capital loan is the funding used to manage daily business operations and expenses. SMEs may borrow a working capital loan to meet their operating costs until their revenues reach a certain amount. If they have great credit and a secure business plan, a bank loan may offer short-term money to get off the ground and expand. Working capital loans typically have a higher interest rate than real estate loans since banks consider them riskier. If the business is mismanaged at a critical time, or if the business's earning assets did not generate a profit, the company will have to face bankruptcy.

Of course, SMEs should not take on loans that aren't necessary, but there are circumstances when a loan is the best decision to keep your business afloat. Always weigh the advantages and disadvantages of an SME loan, but if you can grow your revenues through it, then it might be wise to look at your loan opportunities.


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