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Collateral-free OCBC loan for startups

Observers say bank still needs personal guarantee, which no one will like to offer
Friday, May 2, 2014 - 06:00
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OCBC Bank has unveiled a first-of-its-kind collateral-free loan that provides startups as young as six months old with expedited access of up to $100,000, even as venture capital (VC) appears to remain the preferred mode of funding among entrepreneurs here - PHOTO: REUTERS

OCBC Bank has unveiled a first-of-its-kind collateral-free loan that provides startups as young as six months old with expedited access of up to $100,000, even as venture capital (VC) appears to remain the preferred mode of funding among entrepreneurs here.

The OCBC Business First Loan, introduced on April 25, lets startups borrow funds in as quickly as a day, and requires them to complete only a one-page form and submit their latest Notice of Assessment and bank statement.

"By taking the complexities out of loan application, we believe it will benefit the time-starved startups who can then focus on their business operations," said Eric Ong, head of emerging business at OCBC.

Startups will find this immediately attractive, given their lack of collateral and the speed at which the entire loan can be disbursed upfront, as fundraising typically takes twice the time they envision, Gwendolyn Tan, head of business development for APAC at tech news website Tech in Asia, told The Business Times.

This loan is offered under the Spring Singapore-backed Micro Loan Programme, which comes with a minimum 5.5 per cent interest rate over four years, subject to the participating bank's risk assessment.

OCBC declined to disclose the exact interest rate, but said it is lower than that of most unsecured business loans.

Meanwhile, observers were quick to point out that while the loan is collateral-free, the bank still requires a guarantor.

"This is a key deal-breaker," said serial entrepreneur Darius Cheung.

As startups have a high failure rate, no individual will want to personally guarantee a loan, not even the founders themselves, he said.

Rather, the loan seems more suitable for traditional small businesses with a predictable model - such as a food and beverage distributor - who may just need some cash to get operations running, said Vinnie Lauria, general partner at VC firm Golden Gate Ventures.

"A VC-backable startup, on the other hand, operates quite differently from a traditional small business, mostly due to its use of technology for massive scaling. There are usually no paying customers for over a year, or even a business model to start with; that is learned through product and customer development in their first six months," he added.

VC funding will continue to be more popular because of the value-add it provides, even with OCBC's simplified loan application process, said Daryl Zhang, co-founder of energy management software startup Intraix, which has raised over $150,000 in VC funding since its 2012 launch.

He explained: "Startups can fold anytime and may not be able to repay a bank loan. VC firms, on the contrary, know that with every investment, there's a likelihood it will return nothing. Moreover, they provide mentorship, business opportunities and advice."

And the advice covers anything from strategic planning and operational issues to global expansion and recruitment of key personnel, which startups appreciate, said Kris Leong, vice-president of Walden International Singapore.

For six-year old social gaming events organiser Gaming How, it has solely relied on bank loans and government grants for funding, and not once approached a VC firm.

"When we started out, we had no access to VC firms, which were more interested in tech companies and would take a significant share in these companies," said co-founder Lee Teck Hou, adding that the startup has been able to comfortably repay its loans.

There are clearly merits in both bank and VC financing, and they play a symbiotic role in the growth of companies here, concluded Brijesh Pande, managing director and head of private equity at SBI Ven Capital.

"But I wouldn't count government grants as a permanent funding alternative, because for Singapore's ecosystem to become vibrant and true, it needs to be supported by private capital providers." he added.

Besides OCBC, other local banks also offer a range of lending products to startups, such as UOB's BizMoney and DBS' Micro Loan.

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