Before you ever need to apply for business loans — whether it’s through a traditional bank loan or an option from alternative lenders such as invoice factoring, lines of credit, cash flow loans or an SME loan — there are actions you can take to prepare.
A lender will look at four primary factors to determine your eligibility. In order of importance, they include cash flow, time in business, credit score and collateral.
Cash flow: It may go without saying, but every business should ensure its books are accurate and updated. Ideally, companies should use accounting software like Xero or QuickBooks that can be easily referenced by a lender for historical records.
In addition, lenders primarily underwrite by looking at the inflows and outflows of your business’s bank account. Key metrics that a lender will look at are average daily balance (the higher, the better), volume of deposits and total number of non-sufficient funds (NSF).
Time in business: Much like credit, the longer you can demonstrate a track record of your time in business, the better. It’s critical your business is registered locally and your nine-digit tax information is registered appropriately. If you’re just starting, we recommend you incorporate your business during the idea phase.
Credit score: Your personal record of financial management is just as important as your business’s. After all, it’s indicative of overall management and attention to detail. Not sure what your credit score is? There are several free credit services like the Credit Bureau of Singapore and others that provide you with scores and advice on how to improve your score.
Collateral: Assets are crucial when it comes to securing financing because the lender needs reassurance that there’s a way to recoup costs if the loan defaults. Be sure to document all equipment, property and anything that could qualify as an asset under management, along with the associated value as each asset is added to the business.
If you can check all four boxes, you’ll have the best chance at getting the right loan. Conversely, if you have zero boxes checked, you’re unlikely to be approved. If you happen to only have one of the four, there might be an option, but with a higher interest rate or less than favorable payment terms increasing your cost of acquiring the capital you need.