When financing their businesses, most SMEs in Singapore choose to take out loans instead of issuing equity. The high competition in the Singaporean market makes it difficult for businesses to grow. Additionally, rent and operating costs are high, which is why many SMEs need financial assistance. And finally, many business owners see debt financing as less risky than equity financing.
Difference Between Equity vs Debt Financing
Small businesses can secure debt financing from a bank or private investor. This financing is easy to obtain legally, but the biggest drawback is the interest payments that need to be made. Often, a bank will ask for collateral in the form of your property, even if your business is an LLC.
Small business debt financing can give your business the funds it needs to grow and succeed. Small business loans, small business administration loans, P2P loans, business credit lines, business credit cards, and company businesses are all potential sources of funding for your small business. If you need money to purchase new equipment or inventory, or if you need to cover any other expenses, debt financing may be a good option for you. Be sure to research all your options before choosing a financing method, and work with a reputable lender.
Equity financing is the process of selling company shares to investors to raise money. The money raised is usually based on a mutually agreed-upon business valuation. Equity investors become part owners of the company and may be able to control how it is run and how their money is spent, depending on the agreement between the two parties. Types of equity investors include angels and venture capitalists. If the business succeeds, angel investors and venture capitalists will earn a return on their investment.
SMEs Choose Debt Financing Over Equity Financing. Why?
Debt financing is often the go-to option for Singapore’s small and medium-sized businesses (SMEs). This financing is used to cover the costs of working capital and growth. However, deep-tech startups with high growth potential may offer better options than debt financing. Equity financing is a better option in these cases, as it doesn’t require monthly loan payments and reduces cash flow pressure.
Debt financing can provide a business with the money it needs quickly to keep it running. This is especially beneficial for small and medium-sized businesses that may need more time to wait for equity financing to come through. Another significant advantage of debt financing is that it doesn’t give the business any ownership or control over the company. This makes it a more attractive option for some businesses.
Also Read: Learn How Government Loan Schemes Help Businesses
Waiting Time Duration
Depending on the bank’s credit requirements and other factors, small businesses can take a few weeks to a month to get approved for a loan. Equity financing will take longer, as investors need time to do due diligence and decide whether or not to invest.
Approval Terms
If you want to try a new business idea, you may need the approval of your shareholders. Equity investors can request a directorship and input on business operations, but business decisions require board approval. Debt financing creditors are more interested in the company’s loan repayment than in making decisions about the business.
Deductions on Tax
When you take out a business loan, the interest you pay on that loan is tax deductible. This means you can claim the interest payments as a deduction on your profit and loss statement, reducing your taxable income. Over time, this can save your business money.
Accessibility
Small and large businesses can borrow money from banks in Singapore. This makes it easier for businesses to get financing, benefiting businesses of all sizes. There are many SME banks in Singapore, so it’s easier for small and medium-sized businesses to get a bank loan than venture capital funding.
Ownership Dilution
Equity financing is when you sell stock to investors who own a part of your business. On the other hand, loan financing doesn’t give up control of your business. The loans are repaid with interest.
Good Credit History
Your credit report will benefit if you repay your loans on time. A good debt-repayment history will also make you a more desirable borrower, which could lead to getting a loan top-up or better loan terms.
Learn How to Decide Between Debt & Equity Financing
Debt or equity financing for a business depends on many factors, including the business’s budget, credit score, and repayment abilities. Lenders typically require a guarantee from the owner of a business that is seeking a loan, and businesses that are not generating income may have to wait until they do before securing funding. In exchange for funding, businesses may be asked to give up a portion of their ownership. Businesses should consider their funding objectives when seeking debt or equity financing.
Closure
Singapore business loans offer more control over decisions and operations than traditional equity financing. Because you are not using shareholders’ money, their opinion doesn’t matter. Debt facilities seem better than equity financing, but the final decision depends on you. You should decide the risk-to-return ratio and whether debt financing will give you a good return on investment.
MSMEBlog advises MSMEs on how to obtain proper financing and provides information on available funding sources. Find out more about MSME financing at https://www.msmeblog.com/.
