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Why should SMEs opt for loans over equity?

Why should SMEs opt for loans over equity?

By Joseph Wong, Senior Vice President – Legal & Compliance

Have you watched TV shows Shark Tank or the Dragon’s Den? Singapore too has its very own hit series ‘StartUp’ featuring on Channel News Asia. (Season 4 airs November 12, 2016)

TV shows like these teach us many lessons – how investors work, how to pitch, how to negotiate and how a successful deal can be the stepping stone to success. These shows also give entrepreneurs a chance to pitch smart ideas directly to VCs and Investors. Now that’s something most SME’s know that it’s hard to come by.

Although most entrepreneurs seek seed funding through these avenues we also find some SME owners who raise funds for their growing business. There is no doubt that these shows give a business some much-needed publicity and access to an investor pool but, it is important to evaluate whether giving away equity is indeed good for your business. Here are three disadvantages you might want to consider before signing the dotted line.

A smaller piece of the pie

As your business grows, you may find yourself looking for a working capital or seeking funds to expand your business. At this stage, you could be tempted to consider offers from investors to fund your company in lieu of equity. After all, it comes with no interest costs and caters to your immediate need. It could also mean that your business is hitting all the right buttons in attracting investors.

Selling shares could not only cost you a significant portion of your profits but also hinder your expansion plans in the future.

Why is a loan a better alternative? A loan might look expensive in the short term. You could be facing uncomfortably high-interest rates or processing fees.

The upside to a loan is – you own your company and enjoy the profits. Your company gets a good credit report and that will be helpful in expanding your business.

Higher Taxes

When dividends are paid out to shareholders, they cannot be considered as expenses. According to, Cash or stock dividends distributed to shareholders are not considered an expense on a company’s income statement. Stock and cash dividends do not affect a company’s net income, and they represent part of a company’s retained earnings returned to a company’s shareholders. While cash dividends reduce the overall shareholders’ equity balance, stock dividends represent a reallocation of part of a company’s retained earnings to the common stock and additional paid-in capital accounts.

Why is a loan a better alternative? When you opt for a loan, buy accutane pharmacy online your interest expenses which fulfill certain conditions (subject to applicable jurisdiction) may be tax-deductible and therefore lower the actual cost of the loan.

In Singapore for example, interest expenses incurred on loans or borrowings taken to finance income-producing assets are tax-deductible under the following conditions:

1. They are incurred wholly and exclusively in the production of income; 2. They are incurred in the basis period for the Year of Assessment; and 3. The deduction of the interest is not otherwise prohibited under Section 15 of the Income Tax Act.

Reduced control over your business

If you raise funds for your business by issuing shares to new shareholders, not only are you sharing your profits but also the control over your business.

Under the Companies Act of Singapore, the approval of shareholders is required for disposals of the whole of the company’s property, issuances of new shares, and increases in the fees paid to a director of the company. In addition, several approvals of shareholders may be required for other corporate or business actions.

Perhaps one of the reasons you started your company was to become your own boss. Now, reflect on this idea – do you really want to give away your company’s equity?

Why is a loan a better alternative? When you take a loan, you remain the sole decision maker for your company and its day-to-day business activities. You get to achieve the personal fulfillment of running a business and make the money you once dreamt of!

In conclusion, whether you choose to give away equity or take a loan, what makes you a successful business owner? The willingness to take chances, the ability to recognise a good opportunity and see it through.


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