Business Financing: How to Effectively Secure a Loan
Small and medium-sized businesses applying for business financing in Singapore can be rejected after the credit evaluation process has been completed. Although we are unable to say for sure whether the exact business loan appraisal requirements are used (banks keep it hidden to avoid fraud), we can deduce it from the most common grounds for refusal.
Small and medium-sized businesses will boost their chances of securing business financing if they look into and improve these aspects of their business.
Company is New
It is highly essential to have a track record in the credit appraisal process of the financial institution. If the company is too young, the business may not have been founded and does not have strong or full financial statements for review.
Loss-Making the Last Financial Year
During this challenging time, most SMEs are probably not expected to do well in the last few months. However, companies and businesses are presumed to be successful for the LAST financial year to apply for any business loans (even at this time).
This could refer to the financial year ending 31 December 2019 (the virus has not yet affected the markets) or 31 December 2018 (if your accountant has not yet prepared the financial statements for 2019).
Financiers would like to know that an SME could be profitable again once the pandemic passes and business continues.
Too Many Current Company Loans / Overloaded Loans
An SME is deemed over-expenditure when its current monthly debt servicing obligation exceeds its ability to repay using usual business proceeds.
Although the company’s guarantors or directors may be willing to continue making payments using personal funds, it is not considered wise for financial institutions to lend (and continue to give to the company) because this is not sustainable.
The Business is in a Restricted Industry
A well-known but not-always-explicit concept is that certain financial institutions stop lending to companies in some industries.
Some industries, such as Jewelry and Entertainment Outlets, have strict assessment criteria regardless of the economic climate, while others, such as Construction, Marine, Oil & Gas, may be considered high-risk under certain economic conditions.
There is no way to know for sure that your sector is currently listed as high-risk because financial firms do not disclose this information. However, you could usually find out informally from the relationship managers.
The Company is Utilizing the Director’s Personal Bank Account/No Corporate Account
It is also the case for one or two-man small and medium-sized companies, where the primary operator of the business is often the owner/director of the company.
For the sake of convenience (and reduced costs), these small and medium-sized businesses may simply use their accounts to deposit and withdraw business proceeds.
Still, most financial institutions will not be able to accept personal credit assessment accounts as they are unable to distinguish which transactions are personal and which are business-related.
Without a clear corporate bank account statement, the financial institutions will miss a critical data point to the credit evaluation process.
Had Multiple Bounced Cheques in their Bank Account Statements
Ideally, in 6 months, there must be no more than two bounced cheques in the company’s corporate bank statements.
While errors that trigger a bounced cheque (wrong address, recipient, etc.) could happen, recurring bounced checks demonstrate either an issue with the company’s repayment behaviour or a lousy cash flow management. Either of which would lessen a company’s creditworthiness.
The Director Has No/Low/Negative Declared Personal Income (Notice of Assessments)
In Singapore, most SME loans are ensured by personal guarantees from the directors or the business owners. These “Unsecured Business Term Loans” are not secured by collateral (like property) but will still compel personal guarantees.
Therefore, as part of the business loan credit evaluation process, the creditworthiness of personal guarantors are also evaluated.
Personal guarantors function as a second way-out where financial institutions may reclaim Non-Performing Loans (NPL) from if the company is incapable of continuing to make loan repayments.
Financial institutions will, therefore, assess these personal guarantors negatively if they have low or negative declared personal income (in the Notice of Assessment) as the guarantors may not have the financial capability to make the loan repayment on behalf of the business.
Directors Have Bad Personal Credit Records
Likewise, small and medium-sized companies with directors that have poor personal credit histories are adversely affected, as these directors are expected to be the guarantors of business loans.
Poor credit histories contain actions such as having a history of late payments, bankruptcy, negotiated settlement, forced closing of personal credit facilities, and so on. Personal credit records can also allow financial institutions to obtain a glimpse of the capability and existence of the SME operator. Personal credit reports can be obtained from the Singapore or Experian Credit Bureau.