Working Capital Loans: A Guide to Understanding This SME Loan

Taking an SME loan is part of building and expanding a business. During this outbreak of COVID-19, Singapore, like many other countries, took a radical but necessary step towards the closure of non-essential workplaces and schools.

All businesses will be affected by this unprecedented move. Companies with steady cash flow will be able to sustain themselves during this period, especially if their employees are able to continue working effectively from home. Others will struggle, as sales and output are likely to decline over the next few months.

Previously profitable firms that never needed a loan may now find themselves bleeding cash during this period. Business loans, if used correctly, can help a business survive this period.

However, business owners who have never taken a loan before may be overwhelmed by the different types of SME-related loans available, especially if they do not have an experienced finance manager on their team to help them navigate through the options available.

Working Capital VS Fixed Asset Loans

A working capital loan is an SME loan that refers to borrowing the money needed for day-to-day operational use. This includes the payment of suppliers, employees, and rent. Working capital loans are usually required for companies operating in a business environment where they first have to incur costs ( e.g., paying suppliers) before receiving payment.

On the other hand, fixed asset loans are required when a business has to make a one-off investment in a fixed asset (usually property, machinery, or equipment) that is essential to its business growth. For instance, a company may need to invest in a piece of machinery or equipment required for a project. This machine could help the company increase its revenue throughout its lifetime. Still, the company has to pay for the equipment first today. This is where fixed asset loans are beneficial to help businesses finance their purchases.

Types Of Working Capital Loans

There are a few various types of loans that you can tap into in the category of working capital loans. Here are a few examples.

Temporary Bridging Loan

The Temporary Bridging Loan are government-assisted loans to aid small and medium-sized enterprises affected by the outbreak of the pandemic. The purpose of the loan is to enable businesses to have access to working capital in order to ease their short-term cash flow problems during this period.

As announced in the Solidarity Budget, temporary bridging loans, initially limited to the tourism sector, are now available to businesses in all sectors. With this improvement, companies that have been severely affected by the outbreak of COVID-19 can now have quick access to loans that could keep their businesses going.

SME Working Capital Loan

The SME Working Capital Loans are also government-supported loans that fall under the Enterprise Finance Scheme. It helps businesses finance the daily cash flow requirements of their operations. Similar to the Temporary Bridging Loan, the government’s risk-sharing will also increase to 90%.

For both the Temporary Bridging Loan and the SME Working Capital Loan, eligible SMEs may apply to defer their principal repayments for the loan for a period of up to one year, subject to the permission of the financial institution from which they borrow.

Loans Should Support Your Business Plans

To keep themselves steadily afloat, businesses need to have commercially viable plans that generate sufficient revenue to cover their operating costs. Any business loans taken must fit into these commercially viable plans. Loans can be thought of as part of the toolbox of the business owner. They can be extremely useful when used correctly, carefully, and at the right time. However, if deployed poorly, they would incur additional costs for the business and cause additional strain.