Why Should You Apply for a Business Loan? Business Loan Application Requirements, Eligibility, Limitations and Interest Rates Explained.
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As the saying goes, “It is easy to open a shop but hard to keep it always open”. In order to seize business opportunities when they arise or to sustain business development during difficult times, you need to keep your working capital and cash flow in a solid state1. When should a company apply for a business loan to optimise cash flow? What are the conditions and limitations for applying for a business loan? With various scenarios and case studies cited below, this article will provide detailed information to note when applying for a business loan and teach you how to detect the early signs of a cash shortage crisis in your business.
Why Should You Apply for a Business Loan?
SMEs often face cash flow challenges. Compared to a lack of profit, a lack of cash flow is, in fact, a more common cause of business failures2. Therefore, companies should manage their business cash flow carefully.
Regardless of where your company is in the following stages, you need to maintain cash flow and review your cash flow state in a timely manner1:
- Starting a new company3: Acquire or build a new business
- Business expansion3: Purchase of business installations and equipment. At this point, your company will require additional funds for purchasing new installations, enhancing productivity, expanding to new markets, etc. Business loans allow businesses to maintain good cash flow without having to empty their cash on hand at once. Business loans also enable your company to make investments, which can help to achieve higher returns and profits.
- Seasonal fluctuations3: In the event of market and economic conditions fluctuation, an emergency business loan may be used to pay for the company’s operating expenses and cover working capital, such as wages, supplier payments, rent, etc.
- Shortage of working capital3: When a company lacks daily working capital or has multiple outstanding debts, it may be able to restructure its debts through certain special business loan schemes to pay off some high-cost debts first, in order to lower the total interest expenses.
What Are the First Signs of a Cash Shortage Crisis?
Before falling into a serious cash shortage crisis, SMEs usually exhibit warning signs. As an SME owner, you may need to be aware of whether your company has faced these situations before.
● Seasonal fluctuations4: They include peak seasons and sudden business surges, especially in certain industries that may experience explosive growth during public holidays or peak sales seasons. Although seasonal business surges bring good news for the company in terms of profitability, it also leads to an increased demand for production and working capital. If cash flow is not properly managed during peak seasons, some of the increased expenses, such as funds used for pre-ordering large quantities of raw materials and salary expenses for newly hired staff, may put a strain on working capital after the peak seasons.
● Allowing late bill payments4: The business principle of putting customers first can earn the company praise. Although allowing late payment could be a great way to attract new customers, it also puts your company at risk of running out of cash. If customers’ delays in payment overlap with the need to pay staff salaries and goods, it can lead to a cash shortage problem.
● Long-term reliance on major customers’ payments5: Long-term partnerships with major clients can bring in cash earnings. However, if the company has a long-term reliance on its major clients’ payments to cover its basic day-to-day expenses, when it faces situations such as late payments, requests for fast delivery or over-ordering, it can easily cause serious cash flow problems, impacting the company’s financial health and capital turnover.
● Over Stocking6: Inventory management is essential for a company to maintain a healthy cash flow. Stockpiling of goods equals to locking up your funds in the warehouse, which may also cause the company an additional amount of storage fees. This situation is particularly common in the early stages of a business, as a company’s rapid growth leads to over-optimistic inventory build-up, ignoring the potential challenge of market saturation. When the company enters a period when sales are slow, there is a possibility for a cash turnover crisis due to excessive inventory.
What Are the Requirements for Different Types of Business Loans?
The following is a brief description of the three main types of loans, namely start-up loans, government financing guarantee schemes, and bank loans.
Start-up Loan: Take the Youth Business Hong Kong (YBHK) scheme of the Hong Kong Federation of Youth Groups as an example - YBHK vets applications 4 times a year and outstanding business proposals are then shortlisted through a Vetting Panel interview. Each successful application will receive a maximum of up to HK$150,000 as an interest-free business start-up loan7.
Government-backed SME Financing Guarantee Scheme: Companies that have been in operation for at least one year in Hong Kong can consider the SME Financing Guarantee Scheme, administrated by the Hong Kong Mortgage Corporation Limited8. This scheme provides a government guarantee for SMEs to apply for a concessionary business loan from banks. Since 2012, there have been 3 additional special products, with application deadlines, offering 80%, 90% and 100% guarantees8.
Business Loan from a Bank: DBS SME Banking offers business instalment loans, which can be applied online, with a maximum loan amount of HK$10 million9.
The required documents for applying for DBS’ Business Instalment Loan and the loan amount limits are as follows9; click here for details:
- Company registration documents and business profile
- Latest financial reports
- Latest bank statements from major Banks (if any)
- Business owners' information
- Loan amount of collateral-free Business Instalment Loan up to HK$3 million
- Loan amount of a secured loan up to HK$10 million as working capital
What Are the Interest Rates for Various Business Loans?
- Government-backed SME Financing Guarantee Scheme (SFGS):
-Business Loan with 80% loan guarantee under SFGS: The overall interest rate is capped at 10% per annum10 but is decided on a case-by-case basis.
-Business Loan with 90% loan guarantee under SFGS: The overall interest rate is decided on a case-by-case basis but is capped at 8% per annum (for companies with 3 or more years of operation) and 10% per annum10 (for companies with less than 3 years of operation).
- Bank Business Loans: DBS SME Banking offers SME Business Instalment Loans, with an annual interest rate as low as DBS’ privilege interest rate (P) - 0.25%^. Click here for more details.
The above information is for reference only.
^ Only applicable to DBS selected customers
Take Advantage of Different Loan Products to Grow Your Business
Business loans should be considered not only when a company is facing difficulties or during an economic downturn. SMEs, in particular, grow at an especially rapid pace. When business expansion plans are in motion, or when investment prospects arise, they need the extra capital in hand quickly to take advantage of the fleeting marketing opportunities. Click here to learn more about DBS SME Banking’s financing services.
To borrow or not to borrow? Borrow only if you can repay!
Article published on 13 November 2023
1Source: Forbes - 5 Things Business Owners Should Know About Working Capital Advances (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.forbes.com/sites/forbesfinancecouncil/2023/08/10/5-things-business-owners-should-know-about-working-capital-advances/?sh=730ef5c33b62)
2Source: The DTC Association - “Guide for SMEs in obtaining Business Loan from Lending Institutions” Part IV: When would your business need a loan? (https://www.dbs.com.hk/sme/disclaimer.page?url=http://www.dtca.org.hk/docs/guide-for-sme-eng.pdf)
3Source: The DTC Association - “Guide for SMEs in obtaining Business Loan from Lending Institutions” Part III: Determine why you need the loan (https://www.dbs.com.hk/sme/disclaimer.page?url=http://www.dtca.org.hk/docs/guide-for-sme-eng.pdf)
4Source: Forbes - 14 Clear (And Subtle) Signs A Business Is Running Low On Cash (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.forbes.com/sites/forbesfinancecouncil/2023/02/10/14-clear-and-subtle-signs-a-business-is-running-low-on-cash/?sh=aa062c52647d)
5Source: Forbes - 15 Smart Ways To Diversify Your Business' Cash Flow During A Crisis (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.forbes.com/sites/forbesfinancecouncil/2020/05/29/15-smart-ways-to-diversify-your-business-cash-flow-during-a-crisis/?sh=104136651884)
6Source: LinkedIn - How do you optimize your inventory and supply chain to avoid cash flow bottlenecks? (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.linkedin.com/advice/0/how-do-you-optimize-your-inventory-supply-chain)
7Source: The Hong Kong Federation of Youth Groups - Youth Business Hong Kong (YBHK) (https://www.dbs.com.hk/sme/disclaimer.page?url=https://sic.hkfyg.org.hk/en/ybhk/)
8Source: The Hong Kong Mortgage Corporation Limited's SME Financing Guarantee Scheme (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkmc.com.hk/files/product_shortcut/6/74/eng/SFGS%20Factsheet_Eng_Final_clean.pdf)
10Source: The Hong Kong Mortgage Corporation Limited's - SME Financing Guarantee Scheme Factsheet P.6 “Overall Interest Rate” (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.hkmc.com.hk/files/product_shortcut/6/74/eng/SFGS%20Factsheet_Eng_Final_clean.pdf)
^Terms and conditions apply.
***Subject to eligibility and conditions.
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