Long-term loans are designed to finance an investment or a business plan over a time horizon of several years.
They must be focused on profitable projects in order to return the money with solvency. Otherwise, the credit will be a burden for several years.
The cost of financing is the first thing to consider in long-term loan in Singapore. From the costs of formalizing the contract to the payment of the installments, which will knock on the door punctually every month.
When considering an operation of this type:
The objective of the loan and the expected return on capital must be well evaluated.
It is essential to plan and control each payment well over the years because the costs must be borne from day one.
What should not be done is to request a loan to correct treasury imbalances. It would be like plugging one hole with another.
To cover the lack of liquidity there are other better solutions. At Oasis Credit Services, we help the self-employed and SMEs to advance the collection of their invoices through the new collective financing model: crowd factoring.
What are long-term loans?
A loan is a financing operation in which one party lends an amount of money to another. The borrower is obliged to repay the money received plus interest following the agreed repayment plan.
What are long-term loans in Singapore for companies?
Long-term loans are part of a company’s liabilities. Within the section of demandable debt (long-term demandable liabilities).
They are a source of external financing that must be returned and remunerated, with an explicit cost: interest, commissions, and other expenses (registration, notary, taxes, etc.)
The long-term loan in Singapore condition means that the repayment of capital and interest is made over several years in the form of periodic installments.
The installments are calculated based on the borrowed capital, the interest rate, and the repayment period/duration of the loan:
The installments are the same throughout the entire period, but the first payments include a higher percentage of interest and the last payments include capital. That is, the interests are amortized in a decreasing way and the capital in an increasing way.
This fact is very relevant at an accounting and fiscal level. The part that corresponds to the amortization of the capital -the pending debt- is not the same as the part that implies financial cost (interest or commissions).
Although the loan is justified, the requested capital may take a while to pay off. It is crucial to have short-term liquidity to face this first phase.
Disadvantages of long-term loans
Each organization must evaluate its objectives well and make the appropriate decisions. In this case, it is about analyzing the advantages and disadvantages of long-term loans and their role in the company.
In this financing formula, it is very difficult to find loans without collateral. The longer term increases the risk of insolvency and also the demands of financial institutions.
The advantage they have lies in being able to finance larger projects with more comfortable installments. It is also possible to renegotiate the debt at some point.
Some of the drawbacks are significant. If there is not certain initial solvency, they can be unfeasible and dangerous:
- Endorsements and guarantees: financial institutions will require endorsements or guarantees to cover themselves against any contingency, taking into account the long return period.
- More money to pay: longer-term more installments. The advantage of deferring the payment over several years is reduced because the final amount returned is very high in relation to the capital borrowed.
- More complex management: a long-term contractual relationship requires more formal requirements and expenses.
On the other hand, the higher risk raises the possibility that the money will be denied.
- Financial instability: the demandable debt must maintain a correct proportion in relation to the own funds. An excess of long-term debt complicates future stability.
An additional disadvantage is not calculating the amount of the loan correctly because each dollar
accrues interest and commissions throughout the period.
A company is solvent when it can meet all its payments without delay (including those generated by its debt). It is an objective linked to liquidity.
Lack of liquidity arises when payments exceed receipts in a given period.
Why is it avoided to ask for a long-term loan in a company?
Long-term loans are mostly avoided because of the risk. Especially since they are usually signed for high amounts.
Your benefit depends directly on the expected return on the money and the problem is that compensation is not achieved.
Long-term expansion and development plans are key in the strategic planning of companies. However, if the scenario is not favorable, it is better to be cautious.
The most important thing is to ensure short-term solvency and long-term commitment to less burdensome formulas to dispose of assets (leasing or renting).
It is normal to have some indebtedness but you have to control the debt ratios. Two companies with the same assets/liabilities may have different levels of risk depending on the composition and percentage of what they owe (relationship between own and external financing).
The main reasons not to ask for long-term loans are:
Risk of future instability.
Avoid an excess of debt that penalizes other financial operations.
Do not generate solvency doubts with investors, suppliers, or in relation to the administration.
In short, no company wants to mortgage its future. Fewer still are the self-employed who are personally liable for the debts of their business, even after unsubscribing.
Alternatives to long-term loans
After what we have seen, it is normal for the self-employed and SMEs to prefer to rely on other financing formulas that do not commit them so much. The idea is to strengthen first in the short term.
One of the most common practices is the use of trade credit. A strategy that has two-way repercussions: it makes it possible to delay payment to suppliers, but customers also request deferrals and it takes longer to collect.
Alternatives to long-term loans: Supplier financing (negotiating payment terms)
Supplier financing is the only debt that does not have an explicit cost (interest). That is why it is so widely used by companies.
The perfect complement to this strategy is crowd factoring. Crowdfactoring loans, which we offer at Circulantis, are the latest innovation for the discount of promissory notes and the advance payment of invoices.
It is a methodology that reduces costs thanks to online operations and is more accessible than traditional loans (without guarantees or requirements).
Thanks to this combination of actions, collections are better adjusted to payments. In this way, a solid financial structure is built little by little, protecting liquidity.
And the ground is being prepared for more ambitious projects.