Equity Financing Guide: Definition & Types
This article reveals what equity financing is, types and examples of equity financing, and its pros & cons for businesses in different stages.
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Financing plays a crucial role in the growth and sustainability of any business, especially in a dynamic market like Singapore. Choosing a suitable financing option could significantly impact your business's future, whether it would be a fuel for your growth or become a barrier due to poor cash flow management. From traditional bank loans to invoice financing, Singapore offers a diverse range of company financing solutions.
Whether you are a startup seeking initial capital or an established company aiming to expand, choosing the right financing option can significantly impact your business trajectory. Singapore offers a diverse range of company financing solutions, from traditional bank loans and government-backed schemes to innovative alternatives like venture debt and invoice financing. We have gathered 11 company financing options tailored to help businesses in Singapore for businesses to consider. Read more with Choco Up for details now!
Bank loans are one of the most traditional and widely used company financing options for businesses in Singapore. These loans are typically offered by major banks such as DBS, OCBC, UOB, and Standard Chartered. The loans come in various forms, including term loans, equipment loans, trade loans, and working capital loans. Bank loans generally involve borrowing a fixed sum of money that is repaid over a fixed period with interest, making them suitable for businesses that have a clear repayment plan and steady cash flow.
In Singapore, bank loans can be either secured or unsecured. Secured loans require collateral, such as property or equipment, which reduces the lender’s risk and may result in lower interest rates. Unsecured loans, on the other hand, do not require collateral but typically have stricter eligibility criteria and higher interest rates. The loan amounts can range widely depending on the business’s creditworthiness and financing needs.
One key advantage of bank loans is their competitive interest rates and longer repayment terms. However, the approval process can be more time-consuming as it requires comprehensive documentation such as business financial statements, ACRA records, and a good credit history. Some banks also assess factors like business track record, ownership structure, and the ability to repay before approving the loan, which makes some startups difficult to be eligible to get the approval.
Government-assisted loans are financing options supported by the Singapore government to help local businesses, especially SMEs and startups, access capital more easily and on favourable terms. These loans are typically administered by Enterprise Singapore (ESG) under the umbrella of the Enterprise Financing Scheme (EFS), which consolidates multiple loan programs into a streamlined platform and covers a wide range of financing needs, such as working capital and project loans.
The key feature is that the government shares a significant portion of the loan risk with participating financial institutions like banks and finance companies. It encourages lenders to provide financing to companies that might be difficult to secure loans on commercial terms.
For example, the SME Working Capital Loan helps companies finance day-to-day operational cash flow with loan amounts up to S$500K and repayment terms of up to five years. Meanwhile, the SME Fixed Assets Loan supports the purchase of equipment and machinery with financing up to S$30 million and longer tenures.
To qualify for government-assisted loans under EFS, businesses must meet specific eligibility criteria: they must be registered and physically operating in Singapore, have at least 30% local ownership by Singaporeans or Permanent Residents, and generally fall within the SME definition, in which annual sales turnover is up to S$100 million or there is no more than 200 employees. The scheme is open to all industry sectors except those excluded by government policy, such as gambling or vice trades.
Equipment and Machinery Loans are specialized company financing solutions designed to help businesses acquire or upgrade essential equipment and machinery without straining their cash flow. These loans typically allow companies to finance up to 90% of the purchase price or market valuation of new equipment, with slightly lower financing available for used machinery. A high loan-to-value ratio is possible as the equipment itself serves as collateral, reducing the lender’s risk and often resulting in more attractive interest rates compared to unsecured loans.
The repayment terms for equipment and machinery loans in Singapore are generally flexible, depending on the lender and the asset’s expected useful life. This longer repayment period helps businesses spread out the cost of their investment, aligning loan repayments with the revenue generated by the new equipment. Interest rates are often competitive and can be fixed or floating, with some banks offering lower rates for sustainable or “green” equipment under government-supported schemes.
To be eligible for these loans, companies usually need to be incorporated in Singapore for at least two years and have at least a certain percentage of the local ownership by Singapore citizens or Permanent Residents. The loans are suitable for a wide range of industries, especially for those relying heavily on machinery and equipment to operate efficiently. Additionally, businesses can often combine these loans with government grants to further reduce the net cost of upgrading their assets.
Government Funding and Grants are vital company financing options provided by the Singapore government to support businesses in various stages of growth and transformation. Unlike loans, these grants do not require repayment, making them highly attractive when compared with other financing options. For businesses with different needs or in different sectors or sizes, the government offers a wide variety of grants that often matches what they need specifically, helping them reduce the cost and support them to grow.
The Enterprise Development Grant (EDG) and Productivity Solutions Grant (PSG) are the most popular scheme that attracts businesses each year. The government also provides targeted grants for startups, such as Startup SG Founder, which offers mentorship and a startup capital grant of S$50,000 to first-time entrepreneurs with innovative ideas. The government funding and grants have definitely contributed a great part to a supportive SME development environment in Singapore.
A Business Line of Credit (LOC) is a flexible financing option that allows businesses in Singapore to access funds up to a pre-approved credit limit whenever needed, without having to take the full loan amount upfront. Interest is charged only on the amount actually withdrawn, making it a cost-effective way to manage short-term cash flow needs or unexpected expenses.
Unlike a traditional loan with fixed repayment schedules, a line of credit works like a revolving credit facility. Once the borrowed amount is repaid, the credit limit is replenished and can be used again. This ongoing access to funds provides businesses with financial agility to invest in new projects, cover operational costs, or handle emergencies without reapplying for financing each time.
Business lines of credit can be either secured or unsecured. Secured lines require collateral, such as business assets, which may result in better terms and higher credit limits. Unsecured lines depend more heavily on the business’s creditworthiness and may have stricter approval criteria. Both options usually require a credit assessment and business documentation for approval.
The main benefits of a business line of credit include flexibility, convenience, and cost savings since interest is only paid on funds used. It also helps businesses plan finances better by providing a safety net for cash flow fluctuations. However, borrowers should be mindful of variable interest rates and avoid overspending to prevent debt accumulation.
Invoice Financing, also known as receivables financing or factoring, is a short-term funding solution that allows businesses to access cash tied up in their unpaid invoices. This financing method is particularly beneficial for companies that offer credit terms to their customers, which can lead to significant gaps between revenue generation and actual cash inflow. By leveraging outstanding invoices as collateral, businesses can obtain immediate working capital, bridging the gap caused by delayed payments.
The process typically involves a business selling its unpaid invoices to a financial institution or factoring company. In return, the business receives an immediate advance at a discount. This allows SMEs and other businesses to get almost instant cash on hand, regardless of whether their clients' payment terms are 30, 60, or even 90 days away. The remaining percentage of the invoice, minus any fees, is paid to the business once the client settles the full invoice amount with the financing company.
There are generally two main types of invoice financing: invoice factoring and invoice discounting. With invoice factoring, the financial institution takes over the collection of payments from the client directly. In contrast, with invoice discounting, the business retains ownership of the invoices and is responsible for collecting payments from its clients. Invoice financing is a flexible option, with loan durations ranging from as short as 15 days to a year, offering a quick fix for capital injection for short-term needs.
By converting unpaid invoices into cash quickly, invoice financing helps businesses improve their cash flow, manage operational expenses like salaries and rent, and seize growth opportunities without having to wait for customer payments. This makes it an attractive alternative to traditional business loans, especially for SMEs that need to maintain liquidity for daily operations or manage seasonal demand.
Choco Up supports businesses with an invoice financing product, Upfront, to improve cash flow management and seize growth opportunities without any delays. Learn more details about Upfront here.
Equity Financing is a method of raising capital by selling shares or ownership stakes in your company to investors. Instead of borrowing money that must be repaid with interest, equity financing provides funds in exchange for a percentage of ownership and often some degree of control in the business. This approach is commonly used by startups and growing companies that need capital for expansion, product development, or operational costs without taking on debt.
Investors in equity financing can include angel investors, venture capitalists, private equity firms, or even the public through an initial public offering (IPO). Angel investors typically invest early in exchange for minority stakes, bringing not only capital but also expertise and networks to help the business grow. Venture capitalists and private equity firms usually invest larger sums at later stages, expecting significant returns as the company scales.
One of the main advantages of equity financing is that the funds raised do not require repayment, reducing financial risk and preserving cash flow. However, it also means sharing profits and decision-making power with investors, which can dilute the original owners’ control. Businesses must carefully weigh these trade-offs and often combine equity financing with other funding sources to optimize growth and control.
Learn more about equity financing with our complete guide: Equity Financing Guide: Definition & Types
Venture Debt Financing is a specialized form of debt financing designed to support high-growth startups and innovative companies that may not have significant assets to offer as collateral for traditional bank loans. In Singapore, this financing option is often used alongside venture capital to extend a startup’s runway without diluting ownership. Unlike equity funding, venture debt requires repayment with interest, but it typically involves more flexible terms suited to startups’ cash flow patterns.
Under Singapore’s Enterprise Financing Scheme – Venture Debt (EFS-VD), startups can access loans of up to S$8 million with repayment periods of up to five years. The government shares the lending risk with participating financial institutions, covering up to 70% for young companies, which helps lower barriers for startups to obtain financing. This scheme also allows the loan to be backed by warrants or redeemable convertible preference shares, providing lenders with equity upside while offering startups more flexible repayment options.
Venture debt is particularly attractive for startups that have already raised equity funding from venture capitalists but want to minimize further ownership dilution. Typically, the loan amount ranges from 10% to 30% of the latest equity round raised. This financing helps startups grow by funding capacity expansion, new projects, working capital needs, or mergers and acquisitions without giving up additional equity.
While venture debt carries higher interest rates than traditional loans to compensate for the higher risk, it offers startups a valuable alternative to equity financing. It enables founders to retain more control over their companies while securing the necessary capital to scale. The growing startup ecosystem in Singapore, supported by government initiatives and specialized lenders, has made venture debt an increasingly popular and strategic financing option for innovative businesses.
Asset Financing is a financing method that allows businesses to acquire or use essential assets such as machinery, equipment, vehicles, or property without having to pay the full purchase price upfront. Instead, the company either leases the asset or borrows funds secured against the asset itself, spreading the cost over a period through regular payments. This approach helps businesses preserve cash flow while still gaining access to critical resources needed for operations or growth.
There are two common forms of asset financing. The first is a finance lease or hire purchase, where the business uses the asset and makes scheduled payments over time, often with the option to own the asset at the end of the term. The second involves using existing assets—like inventory, accounts receivable, or short-term investments—as collateral to secure a loan, enabling companies to unlock working capital tied up in these assets.
Asset financing offers several benefits, including easier access to funding compared to traditional loans, improved cash flow management, and the ability to invest in growth without large upfront expenditures. It is especially useful for capital-intensive industries or businesses that require regular equipment upgrades. Additionally, spreading payments over time can provide potential tax advantages and help maintain financial flexibility.
Revenue-Based Financing (RBF) is a capital-raising method where a business receives funding from investors in exchange for a fixed percentage of its ongoing gross revenues. Instead of fixed loan repayments or giving up equity, the company repays the investment through a share of its revenue until a predetermined total repayment amount—usually a multiple of the original investment—is reached. This means repayments fluctuate with the company’s income, increasing when revenue is strong and decreasing when it falls.
Unlike traditional debt financing, RBF does not involve interest payments or fixed schedules, making it more flexible and aligned with the business’s cash flow. It also differs from equity financing because investors do not take ownership or control of the company, allowing founders to retain full independence. This hybrid nature makes RBF attractive for growing companies, especially those with predictable, recurring revenues such as SaaS or subscription-based businesses.
The repayment cap typically ranges from three to five times the initial investment, and the repayment period usually spans one to five years. Because repayments depend on revenue performance, RBF naturally adjusts to business cycles, reducing financial strain during slower periods. It is a non-dilutive financing option that requires less documentation and no collateral, providing a practical alternative for companies seeking growth capital without sacrificing equity or taking on rigid debt obligations.
A Merchant Cash Advance (MCA) is a type of business revenue-based financing where a company receives a lump sum of cash upfront in exchange for a percentage of its future credit and debit card sales. Instead of fixed monthly repayments like traditional loans, repayments are made daily or weekly as a portion of the business’s sales revenue, making it a flexible option that adjusts with cash flow. This structure is particularly suited for businesses with steady card transactions, such as retail stores, restaurants, and service providers.
MCAs are not loans in the traditional sense but rather an advance on future sales revenue. The financing company purchases a portion of future sales and recoups the advance by automatically deducting a predetermined percentage—known as the “holdback rate,” typically between 5% and 20%—from the business’s daily card transactions until the advance plus fees are fully repaid. Repayment periods usually range from 3 to 18 months, depending on sales volume, so faster sales mean quicker repayment.
One of the main advantages of a merchant cash advance is the speed and ease of access to funds, often with less stringent qualification criteria compared to bank loans. This makes MCAs attractive for small businesses facing cash flow challenges or those unable to secure traditional financing. However, MCAs generally come with higher costs, including factor rates and fees that can make them more expensive than conventional loans. Businesses should carefully consider these costs and use MCAs primarily for short-term working capital needs or urgent expenses.
To learn more about revenue-based financing, read more here: What is Revenue-Based Financing? Here is Everything You Need to Know
Personal Savings is one of the most common and straightforward ways to finance a business, especially at the startup stage. Using your own savings means you don’t have to take on debt or give up any ownership or control of your company. It allows you to invest directly in your business without incurring interest or repayment obligations, making it a cost-effective funding source for manageable startup costs or early expansion.
Many entrepreneurs combine personal savings with other financing methods, as it’s rare for personal funds alone to cover all business expenses. Importantly, a significant investment of personal savings also signals strong commitment to lenders and investors, which can improve your chances of securing additional financing like bank loans. However, relying on personal savings carries the risk of losing your own capital if the business does not succeed, so it’s crucial to balance investment with maintaining an emergency fund for personal financial security.
Personal savings can come in various forms, including cash, liquid assets, or even bonds. This form of self-funding is often called bootstrapping and is especially suitable for small businesses with relatively low startup costs. By using personal savings, business owners retain full ownership and decision-making power, avoiding dilution that comes with equity financing.
Understand the purpose of the funds—whether it’s for working capital, purchasing equipment, expanding operations, or managing cash flow. The amount of capital required and the desired repayment terms will help narrow down suitable options.
Lenders and investors consider revenue, profitability, cash flow stability, credit history, and existing debt when approving financing. A strong financial position can secure better terms and interest rates, while weaker financials might limit options or increase costs.
Compare fixed versus variable interest rates, repayment schedules, and flexibility. Some options, like lines of credit or revenue-based financing, offer repayments tied to cash flow, which can ease pressure during slower periods. Understanding the total cost of financing, including fees and penalties, is essential to avoid surprises.
Secured loans require assets as collateral, which can be seized if repayments fail, while unsecured loans or equity financing don’t. Personal guarantees can put owners’ personal assets at risk, so understanding these obligations is important.
Options like government grants, venture debt, or merchant cash advances may offer faster access, less stringent criteria, or better fit specific business models. However, they may come with different pros and cons. It is suggested to evaluate the choices’ advantages and disadvantages carefully according to your business’s situations.
Wondering how to fuel your business growth? Choco Up understands the obstacles businesses are facing. We are dedicated to growing with our customers by providing custom funding solutions that surpass traditional company financing. Talk to our experts now to find out more financing suggestions.
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This article reveals what equity financing is, types and examples of equity financing, and its pros & cons for businesses in different stages.
Accounts receivable financing, aka receivables financing, enables businesses to unlock cash tied up in outstanding invoices. Know more with our guide to fuel your business growth.
