(Updated 2020)
Although business loan facilities types have changed, benefits improved and interest rates been reduced, basic credit evaluation criteria have not changed since we published this article.
If any of these reasons apply to your company, you may still find it tough to obtain approval for your business loan application.
It’s a common situation all SME owners face: just when your business needs assistance with cash flow, you just can’t seem to get a business loan. Even when banks reject your application, they may not tell you why. Here are some insights.
Financiers like to see a reasonable PUC for your business, which signals that Directors/Shareholders have “skin-in-the-game”. This minimizes fraud risk and is a strong incentive for company directors to achieve profitability in order to repay the loan.
If the PUC is minimal (e.g. only $1), it may signal that the directors are not confident of the business.
Financiers don’t want to feel that they are financing your entire business; they prefer to co-share the risk with you. One way to achieve this is to have a reasonable amount of PUC, as well as evidence of retained earnings from previous operating years.
All legal suits are captured on the director’s individual, and the company’s, publicly available ACRA records. Different legal suits impact credit assessments differently, but are generally bad due to the implications regarding the company’s behaviour.
The worst record a company can have is a credit facility legal suit, where another financial institution had sued it to recover funds. It diminishes confidence that you will be willing and able to repay new loans.
Conversely, most traffic suits have a negligible impact, unless there is a large potential payout still pending. The company’s (defendant) financials could be altered significantly, should the ruling go against the company.
Most business loans have duration of between 1 – 3 years and many financial institutions will not stomach any risk of future bankruptcy.
Oh, but you argue that you are not specifically in the marine or construction industry? Unfortunately, banks calculate their exposure based on the group of industries listed in the Singapore Standard Industrial Classification (SSIC) code.
If your business happens to fall within this broad high-risk category, you will most likely be evaluated together i.e. Civil Engineering might not be in the construction sector per se, but is still considered to be within the construction industry and hence, assessed together.
There are many reasons for bouncing cheques but the ones we are talking about are, returned cheques due to insufficient funds. Excessive returned cheques (> 1 a month) within 6 months indicate that the company is likely facing cash flow issues and hence may be unable to repay a new loan.
It also reflects poor book-keeping practices within the company, even if it’s not due to insufficient funds.
Financial institutions rarely extend loans when they have uncertainty in a customer’s repayment ability. They prefer to finance normal operating or expansion purposes and rarely for bridging purposes or to tide the company over difficult periods.
A company’s DSC ratio shows how much profit it generates annually compared to their loan repayment obligations. A higher DSC would mean a greater likelihood of a company being able to fulfil its loan obligations with profits, making it therefore more likely that you would get a loan.
For example, your current DSC is 1.5x, due to existing loans. If this requested new loan is approved, your DSC ratio falls to 0.8x, which suggests that annual profits are no longer able to support all the repayment.
Formula below.
DSC Ratio = Net Operating Income / Debt Service
Net Operating Income = Net Income + Amortization and Depreciation + Interest Expense + Other Non-cash Items
Debt Service = Principal Repayment + Interest Payments + Lease Payments
Lendingpot.sg operates a Business Loan Marketplace that allows an SME to connect to over 45 lenders with just one application, allowing the SME to know who its prospective lenders and what their rates are, in a very short time. Let us know if you need our help!
Eric Koh is passionate about helping SMEs grow and has spent years interacting with business owners at OCBC and IFS Capital. He is interested in 70s rock ‘n roll, the odd novel and copious amounts of historical trivia.
