SME Loan : 5 Key Loan Covenants that SME owners should note when getting a working capital loan in Singapore

SME Loan: In recent times, many SME business owners in Singapore are looking for working capital loans.  The Singapore government has in recent times provided credit insurance to back such SME working capital loans and as a result such loans are not provided on a non-recourse basis.

Before we go into the 5 key legal clauses that you should note when obtaining such loans, we would like to highlight the main key requirements for an SME Company to qualify for such loans:

• The company must be incorporated in Singapore for at least 2 years
• At least 30% Singaporean or PR shareholding
• Group annual sales of ≤ S$100m or group employment size ≤ 200^

Please find set out below 5 key legal clauses that business owners should note when negotiating SME working capital loans.

#1: Loan Principal Amount – SME Loan

The most important clause to negotiate in any loan agreement is the principal amount.  When negotiating this provision you should understand from the documentation whether the principal amount can be drawn down once or in stages. 

Also do check whether you are given a revolving facility.  Obtaining a revolving facility means that once the principal is repaid (whether whole or partially) from the borrower to the lender the loan amount can be drawn down again by the borrower.

#2: Interest Rate of your SME Loan

There are generally two types of interest rates.  The fixed interest and floating interest rate.  In a generally low interest rate environment, when negotiating with the banks it would be best to lock in a low fixed interest rate for as long as possible. 

If the bank allows you to get a few years of fixed interest rate for the loan and thereafter a floating interest rate, you should then look at the cost of breaking the loan (in your loan agreement) and then looking at alternatives (whether in the same bank or in another bank) for refinancing your loan after the fixed interest rate period runs out.

#3: Event of Default under your SME Loan

There are generally 2 types of loans.  A term loan and a loan which is repayable at will (the types of loans that people always hear of given by loan sharks).  In a term loan agreement, the borrower promises to repay the principal with interest on a fixed date.  The event of default clause in a term loan agreement, allows the lender to convert the term loan into a repayable at will loan when any of the trigger events in the event of default clause is triggered.  Thus you should spend some time checking through the events of default to see if any operational event of default will be triggered easily and cause the loan to be recalled prematurely.     

#4: Personal Guarantee

With the latest COVID measures, the Singapore government has bought credit insurance against the loan books for Singapore SME companies.  So the three major banks (subject to criteria being fulfilled) together with Enterprise Singapore are able to provide non-recourse bank working capital loans of up to S$1 million.   All such non-recourse loans allow the company to borrower such amounts without the major shareholders providing a personal guarantee to get such a loan.

#5: Information rights

Most of the banks have standard form information rights clauses which allow the bank to require the borrower to send on a consistent basis company accounts and other information requirements to the bank.  We have seen some information rights clauses where the bank required the borrower to provide accounts in US GAAP which is unusual given that Singapore companies usually only prepare accounts in Singapore FRS (Financial Reporting standards).  So a borrower should spend time reading through the information rights clauses to see what is expected of them to comply with on an ongoing basis.

Thus, we hope that in covering these 5 key legal terms in an SME Loan in Singapore, you will be able to better able to review your loan terms when they are offered to you. Obtaining good legal advice when reviewing such loan documents is important.  You should study those terms early in the bank loan negotiations to ensure that you not prejudiced (unknowingly).

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