Raising funds via business loans in Singapore has never been more difficult than it is today, especially when faced with a slow global economy, where every bank has tightened their belts. Well, let us look from their perspective, and perhaps, we will understand their reasons, as well as uncover the secrets to meeting their requirements.
Successfully getting a business loan for SMEs could be a huge challenge. This is especially so for first-time SME business owners. Many do not even know why their applications are being rejected. Worse still, they are never told of the reasons that led to the rejection. Bankers are bound by the Banking Secrecy Act that restricts them from revealing the reasons to business owners.
Here in this article, we try to identify 8 reasons why your applications are being rejected. Perhaps, the next time you apply, you will have already plugged the holes that caused your application to sink.
1. Poor Credit Bureau Rating (CBS)
An essential detail to take note of the business loan applications in Singapore is that it is mandatory for at least 1 Director personally guarantee the business loan. However, in order to even qualify as a guarantor, most banks and institutional lenders have pre-conditioned that the qualifying guarantor must have a decent credit history. Logically, it would not make any sense for a Director to act as guarantor for a business loan if he is not even able to cover his personal outstanding debts adequately.
As a small country, one would find it easy to assume that everyone is aware of their personal credit historical records. However, the result of a recent survey done by the final year students of a local university has proven otherwise. In fact, a surprising 45% of the entrepreneurs that took the survey were not even aware of the existence of the credit bureau report in Singapore. It is a record that shows us our individual credit scores, based on a myriad of factors found in our past credit and repayment patterns. Therefore, before approaching any financiers, do your homework and find out what your personal credit bureau grading is. It does not need to be perfect, but it has to be decent.
Without having to put it into words, the business loan application with a Director who has a poor Credit Bureau Search rating, will inadvertently get rejected by most financing institutions. The good news is that knowledge of this rating will allow you to address it properly before future fund raising exercises.
2. Insufficient Cash Flow
This is probably the single most important criterion the financing institution is looking at. If record shows that your company’s income barely meets your expenses, few lenders would want to look further. It goes without saying then, that it is imperative for any company to manage cash flows very carefully. The greater your profit margins are, the more you will be able to borrow. Every lender just wants to know that you will be able to repay back the money that they lent you.
3. Lack of Assets
Few lenders would want to risk lending money to businesses unless they are assured of reimbursement. For example a physical property that they can get hold of if a loan is not repaid. Having a list of tangible assets, comprising both business and personal, which you could put-up as collateral for a loan would be useful.
4. Start Ups
Track record is key. Lenders typically want to see a good track record and relevant experience in the field before they even begin assessing if a company is eligible for a business loan. Without at least 6 months to 2 years of active revenues and operations, it can be very difficult to win over the confidence of potential lenders.
However, that does not signal the end of the road for start ups. The good news is that there are alternative sources of financing for new start-ups, these include crowd-funding, SME grants from the government, or even equity funding.
5. Too much Debt
Any financier that lends to you will always prefer if to be your only source of financing. If your company is already laden with debts from other loans, most lenders will be hesitant to extend any additional funding.
This is easier said than done, but do make sure that your company consistently pays down loans and as far as practicable, maintain low balances on any existing credit lines.
6. Fail to Plan, Plan to Fail.
As with all business ventures, a good business plan is fundamental. Do make sure that you provide the financing institution with the confidence they want by making sure that you have in place a thorough business plan with realistic sales and profit projections. This will show that you have done your homework in the marketplace, you are clear in your vision & goals and know your business enough to succeed.
7. Weird Reasons for Taking Up a Loan
As a point of compliance and due diligence, financiers will always ask for the purpose of the funds. As a rule of thumbs, keep your answers general. Companies and individuals take up business loans for various reasons. But note that the lenders will only support loans that will be used by the companies to grow their business, or for working capital, so that they are assured of repayment. It is essential to note that lenders always seek assurance.
8. Risky Economic Conditions
Aside from the 7 reasons above that are arguably within your control, this last reason is one that refers to external conditions that are beyond the scope of our control. Unfortunately, these external factors can also have a strong influence on a lender’s decision. For example, if you want to expand your food delivery service, but there are either rising fuel or food costs, a lender may consider the loan too risky because those soaring prices may make it more difficult for you to turn-a-profit.
As an example, we can all take a walk down memory lane to 2008, when the Wall Street meltdown occurred and caused a domino of bank defaults in the U.S., which then swept across the globe and triggered the greatest economic slowdown in human history. When this happened, banks across the world pulled back on lending for fear of losing money. Such events severely affect a lender’s decisions and entirely outside the scope of our control.
Therefore, make sure to that you stay in tune with market news and keep-up with industry trends. If you notice that there will be outside influences that will jeopardize your business, you may have to apply for a loan at a later time or look for alternative loans.
Knowing now that the larger aspect of credit assessments are based on requirements that are within the control of a business owner, what then do you think are possible ways to ensure that all business loan conditions and requirements are met before making an application?