Singapore small business loans: Leverage improves returns and capture business opportunities
September 21, 2009 by property
Filed under SME Business loan
Singapore Small Business loans: Leverage improves returns and capture business opportunities
Much has been touched on the issue of good debts and bad debts. In terms of personal debts, most personal financial advisers would generally advocate that consumption debts like credit cards and hire purchases are bad debts.
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This is for obvious reasons since banks typically charge the highest interest rates to credit cards and personal loans ranging from 12% – 24% p.a.
Debts Incurred for higher potential gains can be good
Debts incurred for loans like education loans however are considered good debt since there’s a good chance that the expected increase in income in future can cover the interest charged.
Business loans, if used prudently can also be a good debt for a company. Let’s take a very simple illustration on how a small business can take advantage of a business loan to generate higher growth.
Example: IMPORTING AND CAPTURING DEMAND
Company A imports product X for $1 and sells it off for $2. Business is growing and it receives 10 orders for product X. However, it has only sufficient capital to fulfill 5 orders. Company A would then take a $5 loan from the Bank, which charges 10% interest for every dollar lend. Company A would still pocket a 90 cents profit per product after accounting for the interest charged by the bank.
USING THE BANK’S MONEY
This is just a simplified example on how companies leverage on financing loans to meet growth and demand, a popular concept also known as using OPM (other people’s money). The bottom line is: As long as the business can generate higher revenue/mark up than the interest charged by the bank, then a business loan would be considered a good debt.
If you can get a bank loan for your business for a viable business model, that would be best. At least you will not have to mortgage your home to get your housing loans to fund your business.
INTEREST EXPENSE CAN BE TAX DEDUCTIBLE
Apart from fuelling revenue, business loans could also be used as a vehicle for tax reduction. The current corporate tax rate in Singapore is at 18% on chargeable income. The market rate for unsecured business loans is around 5%-10%.
So it does make accounting sense for companies to take on a small amount of debt and charge it to the Profil and Loss as finance and interest expenses to shelter their chargeable income/profits. This of course has to be done legally and with the expertise of a qualified accountant/management consultancy, to avoid trouble with IRAS.
Most companies have debt in order to improve returns. Too much debt is not healthy of a company, but so is too little debt. Debt leverage gives the company higher returns and faster growth.
You can talk to a Standard Chartered Banker about these loans.
About Property Buyer Contact Property Buyer
www.PropertyBUYER.com.sg
We are a Research-focused Singapore Mortgage Consultant which helps you compare Singapore Home loans either for new home loans or refinancing, we balance risks versus rewards for each home loan to match your risk profile and financing needs.
Buying property is a serious affair, we do NOT advocate a Greed based buying approach, we emphasize that you need to check your affordability and do your sums right. If you are unsure, we are happy to help you check.
Not Simply Cheap, but what Fits. We Research, You Save!
Tel: 6100 – 0608
SMS: 9782 – 8606
Email: loans@propertyBUYER.com.sg
If you are a Commercial loans banker and you would like to be featured, please feel free to let us know at info@propertybuyer.com.sg
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