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This is a commonly asked question yet lacking in response from most lenders, leaving many SMEs burdened with no answers. Despite the seen ambiguity SME lending is a traditional one that has always relied on a set of key metrics for assessment. This is what many in the industry would call “program lending” where almost 90% of the credit decision is made on hard data with little human assessment of the business. As such, one simply needs to know these key factors to greatly improve their chances of getting their business loan approved. That said, changes to these metrics can take time, some up to 2 years and so one can do this simultaneously, getting alternative financing while improving your credit quality.
We’ll share the top 5 reasons why SME loans are rejected.
There are two parts that one needs to note. One is the years of incorporation. This is quite simple, most banks state that they require a min of 2 years of incorporation though we have seen some exceptions, OCBC First business loan is made eligible to companies at least 6 months old. We have also seen DBS offer loans to companies of vintage less than 1 year. Most private lenders also require a min incorporation period of 6 months. Therefore, it seems that there are 2 magic numbers here. 6 months is the minimum period and 2 years is where many lenders consider you stable. A bit of a downer for construction companies is that banks require a minimum of 7 years of incorporation.
The second part is length of operations. This helps lenders ensure that you have not just left the company dormant for most part since its incorporation. This must be supported with bank statements showing incoming revenues and outgoing expenses with a min period of 6 months. Companies that were acquired, merged, or had business transferred in less than 6 months generally face such a problem where they were not able to show at least 6 months of bank statements despite being in operations for more than 6 months.
One might ask if there is a way around vintage and unfortunately the answer is no. You will have to wait the period out for at least 6 months before any lender would consider a loan. This is a simple fact of stability. New start-ups tend to face teething issues and struggle with market acceptance, as such are not able to give lenders comfort in ascertaining future cashflows. While there might not be a thing called “start-up loan”, one should rely on a personal loan. They can either go for a classic personal loan which can help them get up to 8x of their monthly income, a property-cash out, a share-backed financing or even an insurance policy-backed financing. If you need help making sense of these options, speak to a loan expert or simply apply on Lendingpot and be connected to the most suitable lender.
While a business loan is generally taken on the business, as an owner, you will most likely be called to be the guarantor of the loan. Thus, lenders want to evaluate your personal credit quality as it reflects on the your commitment to repay the loan timely. This supposed credit quality is properly defined by your Credit Bureau Score (CBS) report. Read here to make sense of it’s content as it can get quite technical. In essence, it determines a grade based on your past repayment of your credit with the banks. This includes both secured and unsecured credit like home loans, auto loans, personal loan and even your credit card. It also takes into consideration the number of enquiries. This means that if you applied to many banks at a single time, you will receive a proportionate number of enquiries which in turn reduces your credit score. This is why, at Lendingpot, we recommend you to make a self-enquiry to be submitted so that our relationship managers do not need to make an enquiry themselves and result in a further deterioration of your score.
In general, a score of at least EE from a scale of AA to HH is acceptable (AA being the best). However, that does not rule out scores of FF to HH from getting a loan. This will contribute to the overall program algorithm in determining the loan outcome. That being said, 3 key aspects of your credit score would likely rule out any possibility of you getting a loan. They are a default record, a bankruptcy record or a GX rating (unrated). The first two are self-explanatory by nature and defaults need to be worked out with a bank. Any default record will also rule out private lenders from providing any loans to you or your company as it displays unwillingness to address indebtedness. The most contentious of the scores is a GX rating. This means that you do not have any credit score. While many would consider a person who has never taken a credit prudent, banks consider them as a black box. This is typically coupled with the borrower’s age, thus one is always encouraged to apply for at least some kind of credit earlier on in their career to display some level of diligence in handling credit. The later you apply the harder it gets and at some point it becomes too late. In that case, we typically advise GX borrowers to apply for a credit card against a fixed deposit with the bank as a starting point and spend the year to build up some credit record. Nonetheless this is very much a bank problem, so while a GX record rules out a bank loan, you may still qualify for a loan from a private lender. An additional note would be that private lenders might require an additional credit report which is the Money Lender Credit Bureau (MLCB) report which is another score that measure your repayment quality and indebtedness in amongst Licensed Money Lenders in Singapore.
This is an easy point to make sense. There are a few benchmarks that one should know. The first the $500,000 revenue mark. This is typically the min revenue that most banks would consider making a loan to, with international banks like Standard Chartered stretching it to more than $750,000. The other benchmark is $100,000, this is typically the min revenue most non-bank lenders would consider. This is because lenders typically lend against your monthly revenue and cashflow. A loan of $30,000 over 6 months would mean a $5,000+ monthly repayment. If a company’s sales are only $100,000 a year ($8,333 a month), this means that more than half of its sales would be used to make the instalment. This could be a huge burden for even a growing company. Thus, many lenders determine that a business should at least make $100,000 in sales before considering a loan.
Bank balances are one of the magic elements in credit assessment for SMEs. Banks and lenders generally treat this as an asset of buffer in a business. The higher the buffer the more comfortable lenders tend to be especially when it is to cover their monthly instalment. A good rule of thumb is to have at least 3 to 6 times of your expected monthly instalment as an average cash balance. It is often difficult to measure the daily average balance, but a simple and quick way is to average the ending balances for the past 6 months in your statements. Also, you need to note that credits indicating a loan disbursement would likely be factored in evaluating your bank balance. Therefore, it is wise to keep your bank balance clean for at least 6 months before presenting to a lender.
In our opinion, this might be the easiest fix of all the factors we mentioned in this article as lenders have a short horizon in evaluating of your bank balances. This means that anything after 6 months is not taken into consideration and fresh capital injected can be simply placed for 6 months for the sole purpose of obtaining a loan and then withdrawn after the loan is disbursed. Still, this will take 6 months and if your cashflow is already tight, pumping in more capital to strengthen your balances might prove difficult. Again, we do highlight that is one of the limitations of a program lending is it assumes capital injected as a commitment from business owners when it can actually be withdrawn any time.
Finally, lenders are restricted in how much they can lend based on your level of leverage. Logically, additional debt on hand is an additional barrier to future repayment. Without proper accounting for your balance sheet, lenders rely on your revenue and your cash balances as a reference instead of equity. Against your revenue, a good benchmark is to make sure that your monthly repayment does not exceed 50% of your monthly revenue. And against your cash balance your total monthly repayment is not more than 30% of your current cash balance.
Here’s an example:
ABC Pte Ltd has an annual revenue of $600,000 ($50,000 monthly) and an average bank balance of $30,000. Based on the two factors, if he has a loan of $600,000, he is overly leveraged and might not qualify for further loans as his maximum allowable loan should be $540,000.
Knowing why you got rejected is half the battle won, the next is to rectify areas within your control. If it is a credit score issue, make changes to your credit behaviour to improve your score. If it is a bank balance issue, consider pumping in some fresh capital or refrain from drawing too much dividends to pay shareholders. Most importantly, if you are rejected for the right reasons, like being overly leveraged or having too low a revenue, it might actually be a good thing. The last thing you want is to be burdened by too much debt. Bootstrap and put on that entrepreneurial hat to work with the current restrictions.
In any case, speak with us at Lendingpot and we will be happy to provide advice to you for free. If we do think you might be suitable for a loan, we will be glad to match you with one of our 45 lenders to help you achieve your dream.
Leading digital loan marketplace Lendingpot connects SMEs to its network of 45 lenders comprising relationship managers from banks, financial institutions, and private and peer-to-peer lenders in Singapore for free. It aims to help SMEs overcome the information asymmetry problem and lack of transparency prevalent in the SME financing sector by offering SMEs financing options such as business term loans, property loans, revenue-based financing, credit lines, working capital loans, bridging loans, invoice financing, and more.
Benjamin heads up Lendingpot with a background in all things SME. He was previously a commercial banker at Citi with experience in Relationship management, Credit Risk, Trade Operations and Corporate FX sales; and understands the difficulties SMEs face in this opaque world of SME financing.
