It is an unfair expectation for all startups to be financially well-equipped to get the ball rolling. Many of them rely on funding or loans to kick start their business ventures. However, it has often been a catch 22 situation for them. The business loans available to enterprising entrepreneurs often require considerable amount of collateral, which they are clearly in no financial standing to have amassed it yet. Very simply, before they can make money from their businesses, they are usually expected to possess enough money to convince the banks on why they are trustworthy and reliable enough to deserve the business loans. This can be enormously frustrating for budding entrepreneurs.
But fret no more if you are amongst the stymied pool of potential business leaders. OCBC has announced a new type of loan last month that has never existed in the banking landscape of Singapore – OCBC Business First Loan. These are business loans that are collateral-free with interest rates that are lower than most other unsecured business loans. Newly formed companies that are no older than half a year can now apply for this loan that will endow them with capital for business operations at up to a maximum of $100,000!
What are the eligibility criteria for this loan?
- You company:
- Must not be older than 3 years old
- Must not have more than 10 employees or a S$1 million in annual turnover
- Must have at least 30% of shares held by a Singapore Citizen or PR
- Must have at least one guarantor who is Singaporean or Singapore PR between the ages 21 and 62
Now, imagine what a double whammy this is. Time-starved startups need not waste precious time on consolidating capital or undergoing complex bank loan application processes, and at the same time are able to jumpstart their business enterprises with expedited access to funds within a day. All they need to submit are:
- Completed 1-page Application Form
- Latest Notice of Assessment, and
- Bank statement
The sheer speed at which the loan can be disbursed to the applicants and its collateral-free nature are unprecedented features of the business loan. Expected to cut the time spent on fundraising by half, OCBC believes that startup companies will immensely favour the development of such loans.
This is too good to be true. What is the catch?
Well, this loan that is provided under Spring Singapore’s Micro Loan Programme, needs a guarantor to vouch for the loan. This may be seen as a key deal-breaker, as many startups do fail and may not make money in the first year, and it will be an uphill task to find a guarantor who will oblige to guarantee a loan for a startup.
How can I work around this problem?
By adopting a predictable business model, you are better able to convince guarantors to vouch for you in order to set the wheels of your business in motion. This means sticking with a traditional concept of running your business, such as a food and beverage distribution business for example.
What if I cannot find a guarantor for my company?
It is not an uncommon problem. Many companies nowadays start with no business model or paying customers for over a year, but instead engage extensively in product development. For such companies, venture capital (VC) is by far the more popular choice of obtaining funding.
The popularity of VC firms is accounted for by the fact that they acknowledge the possibility of failure and the inability of entrepreneurs to return no money. This translates to a huge alleviation of pressure from newly emerged entrepreneurs. VC companies also offer business mentorship, opportunities and many other support services such as strategic planning, recruitment and operational advice to help new companies overcome their initial teething problems so as to help them achieve success. One such local startup to have benefited from VC is Intraix, which has received over $150,000 in VC since 2012. The downside of VC firms is that they tend to exhibit preferences towards tech companies as they are keener to possess substantial shares in such type of companies. This was why many local startups, like the social gaming events organizer Gaming How, which had zero accessibility to VC, had to entirely rely on bank loans and government grants.
As clearly demonstrated, there are pros and cons in obtaining capital from both bank loans and VC. But one thing is certain. Their combined presence in the entrepreneurial landscape of Singapore only serves to augment the vibrancy and symbiosis of capital providers for local entrepreneurs to grow their businesses.