It can be very challenging to obtain a loan for a startup anywhere in the world. The story is no different in Singapore as the majority of small business bank loans are rejected by Singaporean financial institutions. But smart entrepreneurs should not despair. There are a variety of ways to finance your business besides bank loans. We list some of those options here:
Home equity loan
If you are a homeowner with total or partial equity in your home, you may be able to get a low-rate home equity loan or a term loan to obtain capital for your startup. Only private properties (non-HDBs) are eligible for home equity or term loans in Singapore.
The total amount that you can borrow through a home equity loan depends on your property’s current market value. It will also depend on your outstanding home loan amount, and the CPF funds spent when buying your home.1 As with any financing, the risk here is that you could lose your property.
Loans from friends and family
Family members and friends who trust your capabilities and believe in your business ideas may be willing to finance your startup. These are some of the most common types of loans used by startups. The advantage of these loans is that they can be cheap and flexible when it comes to repayment schedule.
Loans from friends and family may be based on verbal agreements, but it is a good idea to have a formal written loan agreement in place. Verbal agreements alone may lead to misunderstanding and conflict that could have both business and social costs.
Venture capitalists are investors who are looking for a very high rate of return on their investments, which can be at 25% or above of their investment within a period of two to five years. Very few startups are dynamic enough to ensure the rate of return demanded by venture capitalists. This is why they usually invest in high-growth areas such as IT and biotechnology.
The advantage of venture capitalist funding is that VCs offer advice on increasing the profitability of your business, effectively managing your operations, and can help you connect with experts to provide valuable input.
Although the venture capital industry in Singapore is small compared to Western and even other Asian markets, it has been seeing steady growth. A list of venture capital funds with a presence in Singapore can be found here.
Angel investors are wealthy individuals who provide both financing and business expertise to startups in exchange for equity. The main difference between venture capitalists and angel investors is that the latter have a higher appetite for risk and do not demand the stratospheric rates of return expected by VCs. Angel investors would play an active role in the business.
There may be individual angel investors or a group of angels. Individual angels invest S$25,000 to S$100,000, while group angels would be willing to invest larger amounts.
Peer-to-peer lending and crowdfunding
Peer-to-peer lending is a very new and innovative financing option for startups in Singapore. There are already a small but rising number of platforms engaged in P2P lending. P2P lending platforms match investors with startups that require financing, whereas P2P borrowers in Singapore can have their loans approved within three days.
How much you can borrow depends on a review of your borrowing power and credit rating by the platforms. Most platforms also limit funding to campaigns that ask for at least $100,000 for a maximum of 12 months. This is because the platforms have to comply with Singapore’s strict moneylending laws. Currently, P2P lending is limited to companies in Singapore for this very reason.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
Do you know more about this story? Contact us anonymously through this link.
Satish Bakhda is the Chief Operating Officer at Rikvin. He brings with him over 15 years of experience in the corporate services industry and is a regular speaker at marketing events around the world. He is also a consultant on matters relating to incorporation, relocation, accounting and taxation in Singapore.