Working Capital Loans are ideal for immediate funding, especially during emergencies. They are also an excellent way to increase the cash flow to invest in new business opportunities. They are short term loans to increase the cash flow. They are often used to fund the daily operations of the business. A working capital loan is not used to buy long term assets or investments. Instead it's used to clear up accounts payable, wages, etc.
Difference Between Secured And Unsecured Loans
- Working Capital Loans can be secured or unsecured.
- A secured Working Capital Loan is one that is supported by an asset and/or personal guarantee.
- The asset could be a house, factory or inventory. They can be fully paid up assets or assets with existing mortgages or loans.
- The amount of collateral the bank or financial institution will seek depends on their assessment of the ability of the loan seeker to pay back the loan.
- The bank may also require personal guarantees from the owners and/or directors.
- Lenders give unsecured loans only to borrowers who are considered to be low or no risk. Start-ups are usually perceived to be risky and are unlikely to be granted unsecured loans.
Common Types Of Working Capital Loans
There are various types of Working capital Loans and different banks use different terms to describe the same type of loan. Overdraft or Line Of Credit and Short Term Loan are some of the common types of Working Capital Loans. The salient features of an Overdraft Loan and a Short Term Loan are given below.
Overdraft/Line Of Credit
- An overdraft allows to draw funds beyond the available limit of the bank account.
- The maximum amount one can overdraw is the line of credit. The terms and amount depend on the relationship with the banker and his/her assessment of the loan seekers credit worthiness.
- Overdrafts are flexible and simple to operate. Interest is paid only on the amount that is overdrawn. However the interest rate charged is 1-2% above the bank's prime rate.
- Overdrafts are suitable for all businesses and start ups.
Short Term Loan
- A short term loan has a fixed repayment period-usually 12 months and fixed interest rates.
- A collateral asset would be required for the loan.
- If the repayment history of the loan applicant and his relationship with the bank is good, the bank may even provide the loan without collateral.
- Short Term loans are suitable for all businesses and start ups.
Working Capital Loans Offered By The Singapore Government
In Singapore the Government has taken initiative in providing various assistance programmes to provide Companies with loans and Working Capital. These in turn help enterprises save jobs, enhance business capabilities and position themselves for continued growth and global competitiveness. These loans are offered through the Internalization Finance scheme, Loan Insurance Scheme and Micro Loan Programme.
Working Capital Loans In Singapore
Some of the Working Capital Loans in Singapore are:
Internationalization Finance scheme is for Singapore based companies, who would want to venture overseas. The Singapore based company or its overseas subsidiary can apply directly for the loans, provided the overseas venture is related to or complementing the business in Singapore and results in economic growth in Singapore. A loan amount of up to S$50 million can be availed to buy fixed assets or fund the overseas expansion.
Loan Insurance Scheme is a scheme to secure loans by getting them insured against default, in which the Government would subsidize 90% of the Insurance premium. Any enterprise seeking domestic facilities can make avail of the scheme as long as 30% to 100% of the shareholders are residents of Singapore. For any enterprise seeking export oriented facilities, the business qualifies as long as the business entity is incorporated in Singapore and have the the presence of at least 3 strategic business functions in Singapore.
Micro Loan Programme
Micro Loan programme is for small businesses. They can avail of fixed interest loans of up to S$100,000.Any enterprise registered or incorporated in Singapore, having between 30% to 100% of shareholders as residents of Singapore and having up to 10 employees. In addition the group fixed assets must be up to 15 million.
Micro Loan programme is for small businesses. They can avail of fixed interest loans of up to S$100,000.Any enterprise registered or incorporated in Singapore, having between 30% to 100% of shareholders as residents of Singapore and having up to 10 employees. In addition the group fixed assets must be up to 15 million.
