An insufficient amount of adequate funding is the most common issue that startups face during their development.The Singapore government has taken this issue under consideration and has given itself the important task of alleviating this situation. The recognition is that this problem cannot be overlooked in helping to build Singapore’s success as a start-up friendly nation.
Business development is high on Singapore’s agenda to create an entrepreneurial country. The government has developed a pro-business environment favorable to entrepreneurs who want to start a business in Singapore. Startups based in Singapore receive the benefit of a business-friendly environment, well-designed infrastructure, a low-tax system favoring businesses, lack of bureaucratic interference, strong legal environment and a high-performing workforce.
The Singapore government has developed several initiatives that will strongly assist staritups in gaining access to much-needed funding for their businesses. The funding initiatives consist of cash grants, government-backed equity financing schemes, business incubator schemes, debt financing schemes, and tax incentives.
The guide below illustrates the various support programs that have been launched to assist Singapore startups with receiving funding that can turn their business ideas into operating companies. Startups in Singapore benefit from all the promising opportunities provided by government-aided financial assistance schemes.
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Equity Financing Schemes
In exchange for a share of ownership in a company, investors provide capital known as equity financing. This option of financing is great for startups that are in need of a surplus in capital, to assist in the early stages of company development. In addition to private sources of equity capital, there are co-investment equity financing schemes launched by the Singapore government in order to add support to the supply of private capital. In other words, the government provides investment in startups, assisting a third-party investor who cannot cover the entire investment. The most common government-backed equity financing schemes include the following:
SPRING Startup Enterprise Development Scheme (SPRING SEEDS)
SPRING SEEDS is an equity investment scheme where SPRING SEEDS Capital, a branch of government agency SPRING Singapore, co-invests in strong commercial Singapore-based startups along with independent third-party investor(s), matching dollar-for-dollar up to a maximum of S$1 million. The first round of investment is usually limited to S$300,000. SPRING SEEDS Capital and the third-party investor(s) will retain equity stakes in the company in proportion to their investments.
Business Angels Scheme (BAS)
The Business Angels Scheme is an equity investment scheme where SPRING SEEDS Capital, a branch of government agency SPRING Singapore, co-invests in growth-focused, innovative Singapore-based startups along with pre-selected business angels matching dollar-for-dollar up to a maximum of S$1.5 million. SPRING SEEDS Capital and the business angel group will retain equity stakes in the company in proportion to their investments.
Early-Stage Venture Funding Scheme (EVFS)
The Early-Stage Venture Funding Scheme (EVFS), which is administered by the National Research Foundation (NRF), is a co-funding scheme. Selected venture capital firms who demonstrate that they can raise at least S$10 million from third-party investors will receive dollar-for-dollar matching from the NRF, up to a maximum of S$10 million in order to invest in early-stage technology startups. Technology-based startups who meet predetermined qualifications can approach the venture capital firms directly in order to seek funding of up to S$3 million.
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The key advantage of starting up in a country like Singapore is that aspiring entrepreneurs can greatly benefit from being granted access to business grants provided by different government agencies to fund startups across various industries. Each grant provided has its own set of terms and conditions that include qualifying criteria and payment method. For the most part, grants only cover a percentage of the financing needed. A business owner will be responsible for injecting the remaining capital that is needed. Most grants provided to startups are designed to stimulate investments within innovation, research and development, and social causes. It would be wise for you to review the terms of the grant prior to making an application with the appropriate government agency. Some of the popular grant options that are made available to startups in Singapore include:
ACE Startups Scheme
ACE Startups Scheme is a financial assistance scheme where ACE (Action Community for Entrepreneurship) will match S$7 to every S$3 raised by an entrepreneur for up to S$50,000. This means that an entrepreneur will need to raise S$21,429 if (s)he wishes to receive a grant of S$50,000. For selected ventures, ACE will match S$3 to every S$7 raised by the entrepreneur for an additional S$50,000. For ventures who meet these qualifications, the total grant is capped at S$100,000. ACE does not require equity in exchange for the financial grant.
Technology Enterprise Commercialization Scheme (TECS)
The TECS that is jointly governed by the Infocomm Development Authority (IDA) and SPRING Singapore. The TECS strongly promotes the formation of new technology startups in Singapore by facilitating their early-stage funding needs towards the commercialization of proprietary technology ideas. The following grants are offered under the TECS:
- For applicants who wish to develop proprietary ideas at conceptualization stage: Up to 100% of qualifying costs for each project up to maximum of S$250,000.
- For applicants who want to conduct in-depth research and development on a technology project, including the development of a functioning prototype: Up to 85% of qualifying costs for each project up to maximum of S$500,000. The applicant must provide proof of demand from a potential customer or third-party investor.
The iSTART:ACE (Accelerate & Catalyse Entrepreneurship) grant scheme that is governed by the Infocomm Development Authority (IDA) is focused on promoting and assisting Singapore-based startups to quickly develop technology commercialization and facilitate go-to-market activities by taking advantage of internationally proven technologies. Under the iStart:ACE scheme, the IDA will offer funding assistance to qualifying startups by way of a grant that covers up to 50% of salaries of five technical staff for one year, up to a maximum cap of S$250,000.
Another project by the IDA, iSPRINT (Increase SME Productivity with Infocomm Adoption & Transformation) assists with improvements through an arrangement of packaged solutions. These packages can be as simple as accounting and payroll, to more complex customized solutions for business functions such as customer relationship management and supply chain management. All customized solutions will require that the development must be for the first-time automation of business functions. Additionally, the process should be carried out in Singapore, and cannot have been started before the grant is approved. iSPRINT is open to all locally registered or incorporated SMEs.
ComCare Enterprise Fund (CEF)
The ComCare Enterprise Fund is governed by the Ministry of Social and Family Development (MSF; formerly Ministry of Community Development, Youth & Sports). The CEF assists with seed funding for social enterprise startups (strictly from the social services sector) that provide job training and actively employs disadvantaged Singaporeans for up to 80% of the capital expenditure and the first two years’ operating costs, which is capped at a maximum of S$300,000.
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Business Incubator Schemes
Business incubators are an extremely valuable resource for start-up entrepreneurs who are not only in search of funding options but are also actively seeking guidance and know-how for their venture. The typical provisions of a business incubator are a physical space for the new business to place its operations in, along with access to cost-effective shared services, valuable business guidance, and key financial assistance during the early stages of development. It is an ideal situation for startups that are looking for consistent support, access to mentoring, the ability to receive funding and networking opportunities that come with low-start up costs. The current incubation schemes that are available to startups in Singapore include:
NRF Technology Incubation Scheme
The National Research Foundation has selected 15 technology incubators to develop high-tech Singapore startups through the process of mentorship along with providing funding. The NRF will cover up to 85% co-funding in each start-up company in the incubator, capped at a maximum of S$500,000. The incubator will be required to provide the remaining investment amount of at least 15%. NRF and the incubator will retain equity stakes in the company in proportion to their investments.
Incubator Development Program
The Incubator Development Program is governed by SPRING Singapore. It provides up to 70% grant support to incubators and venture accelerators that actively provide programs that help develop startups, including the cost associated with hiring mentors, the expenses incurred to market services/events, the hiring of incubator managers, the training of staff, providing shared services/equipment for startups, etc. Innovative startups will receive great benefit from participating in the programs offered by the various incubators and venture accelerators supported under the Incubator Development Program.
Incubator for Disruptive Enterprises and Startups (IDEAS) Fund
The IDEAS Fund that was launched by Innosight Ventures Pte. Ltd., a Singapore-based venture capital firm, and the National Research Foundation (NRF) is an incubator fund for early-stage start-up companies. Startups that develop businesses with disruptive innovation potential will be targeted and offered a great deal of guidance during their early-stages including maximum funding investment of S$500,000 to S$600,000. The NRF provides the incubator with 85% co-funding.
Fast-Track Environmental and Water Technologies Incubator Scheme (Fast-Tech)
The Fast-Tech scheme that is governed by the Economic Development Board offers startups that operate in the environmental and water technology sector funding assistance of up to S$300,000 or up to 85% support level, whichever option is lower, over the course of two years. Additionally, the startups chosen will be placed in water-technology incubators that will offer a vast amount of mentorship and guidance. The appointed incubator will retain an equity stake in the company. The grant will be paid out to the start-up on a reimbursement basis.
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Debt-financing is a feasible start-up funding option for entrepreneurs who want to raise capital without having to give up a share of their profits due to giving away company equity. The risk involved with this option is that loan repayments must be made on time and that borrowers are indebted to lenders, presenting a huge liability, which must be paid whether the start-up is generating profits or not. The traditional sources for securing debt financing is through “friendship loans” from family and friends as well as utilizing private debt-financing schemes. Fortunately for startups, there are a significant number of government debt-financing schemes that have been designed for SMEs in Singapore. Startups that satisfy the qualifying criteria can choose to partake in any of these schemes. The various government debt-financing schemes in Singapore include:
Under the Micro-Loan Program, participating banks and financial institutions will provide eligible Singapore companies loans of up to S$100,000 to facilitate their daily business operations or for automating and upgrading factory and equipment to produce more revenue. The SMEs will be required to pay a minimum 5.75% interest rate for a four-year or less loan tenure.
Loan Insurance Scheme (LIS)
The Loan Insurance Scheme provides the protection of loans against default risks. The government will assist in the coverage of insurance premiums with the start-up enterprise. The LIS provides support with both domestic trade and overseas trade facilities. There is no maximum loan stipulations for the LIS. The premium rate, interest rate, and loan tenure will be factored by the insurer based on the risk profile of borrower. The government is willing to provide premium support of 50%. The repayment options and collateral required will be determined by the participating financial institutions.
Local Enterprise Finance Scheme (LEFS)
Under the LEFS, participating banks and financial institutions will provide eligible Singapore companies loans of up to S$15 million for the business endeavors, which include automating and upgrading factory and equipment and/or purchasing factory and business premises. The SMEs are required to pay a minimum 4.75% interest rate for a four year or less loan tenure and 5.25% interest rate for a loan tenure for more than 4 years.
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Tax Incentive Schemes
One of the very shrewd and significant initiatives of the government has been the development of several tax benefits for startups. Tax breaks provide an incentive for entrepreneurs to actively build more companies, generating more jobs for the economy. Listed below are the various tax incentives that are made available to startups and SMEs in Singapore.
Tax Exemption for Startups
Singapore startups that meet certain qualifying conditions can benefit from full tax exemption on a certain amount of their taxable income for each of their first three consecutive years. A newly incorporated Singapore company that satisfies the required criteria (viz. be incorporated in Singapore, be a tax resident of Singapore and has no more than 20 shareholders of which at least one is an individual shareholder holding at least 10% of shares) will be taxed as follows:
- For each of its first three consecutive tax years – corporate tax rate of 0% on the first S$100,000 of taxable income and 8.5% (partial exemption) tax rate on the next S$200,000 of taxable income. The taxable income above S$300,000 will be charged at the normal headline corporate tax rate of 17%.
- From the fourth tax year onwards – 8.5% tax rate on taxable income of up to S$300,000 per annum. The taxable income above S$300,000 will be charged at the normal headline corporate tax rate of 17%.
Development and Expansion Incentive (DEI)
The DEI encourages Singapore-based companies to move towards high value-added business activities, actively expand their operations in the country, and obtain advanced machinery and equipment by offering a reduced tax in the range of 5%-10% on incremental income derived from qualifying activities.
Companies have the option to request capital allowance on plant and equipment used to operate their trade or business, subject to meeting required criteria. Budget 2016 introduced a four-part Automation Support Package to help companies implement automated systems, increase productivity and significantly grow their business. Qualifying projects may be eligible for an investment allowance of 100% on the amount of approved capital expenditure (capped at $10 million per project), net of grants. This option will be in addition to the existing capital allowance for plant and machinery.
Pioneer Incentive Scheme
Companies that operate in manufacturing or the service sector engaging in activities that increase the overall industry standards may be eligible to receive full corporate tax exemption on qualifying profits for up to 15 years.
Productivity and Innovation Credit (PIC) Scheme
The PIC scheme is a tax benefit scheme that was first introduced in 2010 to encourage companies to engage in innovative methods and productive activities. Under the scheme, businesses can receive up to 400% deduction or allowances on up to $400,000 of business expenses incurred in each of the following qualifying innovative activities. The qualifying activities include Research & Development, Intellectual Property registration, Intellectual Property acquisition, design activities, automation through technology or software and training of employees. The PIC Scheme, after being extended in Budget 2014 for another three years (until 2018), will expire and not be available for 2019.
Qualifying expenditure incurred from 1 August 2016 will have a lower cash payout rate of 40% (from 60%). At the same time, to be more efficient and accelerate the processing of PIC cash payout applications, it is required to e-file the PIC cash payout applications. This will be effective from 1 August 2016.
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Industry-specific tax incentives
In addition to the above-mentioned tax incentives, there are numerous industry-specific tax incentives for Singapore-based SMEs, including startups.
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Today, Singapore has positioned itself as a premier destination for businesses to locate their business operations. The World Bank validates this claim, as it has consistently ranked Singapore as the best place to do business for the last six consecutive years. It has also been ranked as Asia’s most entrepreneurial economy and an entrepreneur-friendly country, due to a government that provides a nurturing environment for startups by expats.
Singapore has transformed into a preferable hub for first-time entrepreneurs and the city has witnessed the significant boom of several startups over the past few years. Startups which are defined as companies employing at least one employee and less than 5 years old, have increased from 27,000 in 2002 to more than 36,000 in 2009 in Singapore. These startups have been responsible for employing more than 300,000 workers and are generating more than S$166 billion in turnover.
The Singapore government has recognized the key role played by new businesses in spurring economic growth and as a result has spent considerable amount of money, time, and effort in devising a strong support ecosystem for startups in Singapore. Singapore would like to be known as the most entrepreneurial country in the world, even more entrepreneurial than the USA.
As more and more entrepreneurs recognize the great opportunities that exist in the country, this title may soon be accomplished. The world as a whole is becoming more focused on entrepreneurship, and Singapore wants to position itself to be at the forefront of the movement.