Startup loans Singapore: Finding the right working capital structure for your company

Are you a startup founder looking for startup loans in Singapore?

One of the biggest challenges for SMEs is securing working capital financing. There are many types of financing options readily available in the market, usually categorized into three groups – debt, equity or grants.

We will be breaking down the more commonly used debt instruments below, and briefly cover the grant and equity options as well.

1. Invoice Financing

Invoice financing is a debt instrument pegged to a value portion of an invoice. It will benefit businesses with clear-cut business transactions (hardware supply, services provider) that have long credit terms. Businesses can utilize advanced capital to shorten cash cycle and reduce stress on working capital. 

There are two forms of invoice financing

a) Purchase Order Financing

Purchase Order financing involves financing the supply side of the value chain. For example, Superstar Hardware Pte Ltd received a Purchase Order from All Goods Hypermart Pte Ltd for a total of 5 fridges and went ahead to place an order to purchase the 5 fridges from Supercold Fridges Pte Ltd. Then, a Purchase Order financier would pay Supercold Fridges on behalf of Superstar Hardware.

b) Receivables Financing

In contrast, receivables financing involves advancing outstanding payments from debtors whereby work contracted for has been completed. For instance, Superstar Hardware Pte Ltd successfully delivered all the fridges to All Goods Hypermart Pte Ltd and is awaiting payment under a credit term of 60 days. Then, a receivables financier would come in and pay Superstar Hardware on behalf of All Goods Hypermart.

2. Working Capital Loans

Working capital loans typically have a termed (monthly) or bullet (single) repayment arrangement. Financiers tend to look at the strength of the cashflow, financials and key ratios of a business seeking financing. Frequently, businesses take up working capital loan is to support their day-to-day operation requirements.

3. Project Financing

Project financing is a more bespoke debt instrument where a financier will provide capital in tranches based on a project’s milestones or requirements. It relies heavily on the record of accomplishment of the business executing the project. This is because most financiers are reluctant to finance business with a lack of references. When the business has a healthy track record for completing projects, debt financiers are more likely to extend this kind of instrument. 

Project financing benefits businesses that generate revenue from project execution (constructions sector as an example) with complex terms and milestones. This form of financing provides massive relief to businesses, freeing much needed cashflows to pursue aggressive growth. 

4. Grants

Next, grants are funds given by public body or government entities for various purposes to benefit the economy or public. Usually businesses that are not yet revenue generating benefit most as repayments are not required. They can utilize grants to hire additional talent, build products, and/or to fund research and development activities.

5. Venture Capital

Lastly, in venture capital financing businesses choose to sell a portion of ownership of their company in exchange for capital to fund their growth. Generally speaking, it is usually available to businesses that have hypergrowth potential and a clear path to an exit (an opportunity where financiers can sell their equity at a higher price for return). However, venture capital is not suitable for all businesses. It benefits companies with hyperscale potential that are capital intensive (usually much more than the revenue they can generate in the early days) to scale. 

Closing Thoughts

While working capital loans are suitable for almost every company, ranging from project financing to invoice financing, each financing option comes with pros and cons. Thus, understanding the type of financing available in each category is important as it helps business owners in sourcing for capital more efficiently (avoid barking up the wrong tree). 

For a more in-depth discussion on all the above and more, reach out to us at [email protected]! Happy to have a chat on the the startup loans available for your business in Singapore!

Jake Wong