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.
Qualifying for a small business loan can be extremely difficult, especially for new business owners who do not understand how credit assessments work. Recent surveys have shown that even though there are more business loan options available in the market, small business owners are still struggling to gain access to capital.
The problem with having so many SME financing options is that, some SME owners do not understand how some of the SME financing products work. Also, of the business owners who have applied and got rejected, most of them do not know why their business loan application did not get through. They keep trying and trying but to no avail, and this can be a very frustrating problem.
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 an SME 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, simply 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. Perhaps, the next time you apply, you will have already plugged the holes that caused your application to sink.
Here in this article, we identify 8 reasons why your business loan applications are being rejected:
1. Poor Credit Score
An essential detail to take note of the business loan applications in Singapore is that it is mandatory for the Director of the company to 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 healthy credit score. 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 scores. 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 score 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 score will inadvertently get rejected by most financing institutions.
The good news is that knowledge of the reasons for a poor credit score will allow you to address it properly before applying for business loans in the future.
2. Insufficient Cash Flow
Probably the single most important criterion that most banks and financial institutions look at. If record shows that your company’s income barely meets your expenses, few banks will 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 institutional lender just wants to know that you will be able to repay back the money that they lent you.
3. Lack of Assets
Few banks would want to risk lending money unless they are confident that the borrower will be able to make repayments.
One of the ways to increase your chances of getting a business loan is to secure the loan with an asset. For example, a physical property that the lender can get ahold of if the loan is not repaid. This will give banks more assurance and confidence to approve a business loan for you.
Having a list of tangible assets, comprising both business and personal, which you could put-up as collateral for a business loan would be useful.
4. Startup Business
Track record is key. Banks 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 revenues and active operations, it can be very difficult to win the confidence of the banks.
However, that does not signal the end of the road for startups. The good news is that there are alternative sources of financing for new startups, which include crowdfunding, SME grants, or even equity funding.
5. Too Much Existing Debt Commitments
Any bank or financial institution that lends to you will always prefer to be your only source of financing. If your company is already laden with debts from business loans from other financial institutions, most banks will be hesitant to extend additional funding.
Ensure that your company makes timely and consistent repayments on all installments. And as far as practicable, maintain low outstanding balances on any existing credit lines. This way, banks will see that your company is responsible and credible, which provides for more confidence and assurance in approve your business loan application.
6. Lack of Proper Plans and Projections
As with all business ventures, having a good business plan is fundamental. So the saying goes… Fail to plan, plan to fail.
So ensure that you provide the bank or financial institution that you are applying to 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 Business Loan
As a point of compliance and due diligence, financiers will always ask for the purpose of the funds. Always keep your answer general.
Companies take up business loans for various reasons, but note that banks are more likely to approve business loans that will be used by the borrower to grow their business, or for general operational expenses – whatever generates revenue. This is so that they are more assured of repayments. Remeber that banks are always seeking assurance.
8. Risky Economic Conditions
Aside from the 7 reasons above which are arguably within your control, this last reason is one that refers to external conditions that are beyond the scope of our control.
Unfortunately, external factors can also have a strong influence on a bank’s decision. For example, if you want to expand your food delivery service, but fuel or food costs are rising, banks may consider a business loan too risky because the 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 bank’s decisions and is 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 are aware of external events or influences that will jeopardize your business, you may have to apply for a business loan at a later time or look for alternative financing options.
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?