If you are a small and medium-sized enterprise (SME) business owner in Singapore, you will most likely require business financing at some point in your business journey. Business loans in Singapore can be used to expand your business, plug working capital gaps, finance inventory purchases, commercial property rental or purchases.
In this guide, Lendingpot hopes to provide SME business owners with the necessary knowledge to secure business loans in Singapore.
Section Shortcuts:
Government-assisted business loans schemes in Singapore were introduced in 2020 during the height of the COVID-19 pandemic as a way for the government to support enterprises in Singapore.
These loans, administered by Enterprise Singapore (ESG) and their participating financial institutions (PFIs), are attractive to SMEs as they include a government risk-share of up to 70%.
ESG currently offers 2 main credit facilities:
Evaluation Criteria
Financial institutions will evaluate a company holistically based on its past financial performance, current bank statement records. They will also take into account the guarantors’ personal credit records.
Read more here about How Government Risk-Sharing Works.
Structure
The Working Capital Loan is an unsecured business loan, thus the structures will be similar to the unsecured business term loan. It is important to note that the maximum quantum of $500k is an aggregate across all banks which means that if you have a WCL with DBS of $300k, you will only be eligible for a WCL with OCBC for another $200k.
Related: Check out our article on what is next after temporary bridging loan.
Unsecured business term loans are not secured by physical collateral, such as property or equipment, but by company directors’ personal guarantees.
These loans are popular amongst SMEs due to their flexibility. They can be used to fund their daily operational needs such as inventory purchases and payroll, or to finance business expansion plans such as leasing a new retail outlet.
Evaluation Criteria
Financial institutions will evaluate a company holistically based on its past financial performance, current bank statement records. They will also take into account the guarantors’ personal credit records.
Structure
A typical unsecured business term loan funds up to $500,000 with a repayment period of 1-5 years.
For banks, the interest rate chargeable ranges from 7% to 12% per annum and administration fees are levied at 1% to 5% of the approved loan amount. The is evidenced by OCBC and DBS who charge some where between 8.25% - 9% p.a. with a 1-1.5% processing fee. Even new digital bank ANEXT bank is charging at 8.88% p.a. with a 1% processing fee. Read our initial review of ANEXT bank.
For non-banks, interest is slightly higher starting at 1% per month flat and up to 7% on processing fee. It is also important to note that the tenors do not go more than 2 years. Read out comparison between bank and non-bank alternative here.
Unsecured business term loans usually have a “Principal + Interest” repayment pattern. However, for exceptional cases, these term loans may also have an “Interest Servicing Only + Bullet Repayment” repayment pattern.
The loan amount, tenor, charges and repayment schedule vary across different institutions. It is important to choose an unsecured business term loan that is affordable to you and at the same time, solves your business needs.
Related: If you have collateral to pledge, opting for a secured business term loan has its perks.
Merchant Cash Advance (MCA) is a niche financing product that is only available to retail or F&B businesses that use credit card terminals.
Evaluation Criteria
The main evaluation criteria for an MCA facility is the SME’s POS transactions over the last 6 months.
The financials, profitability, and guarantors of the SME will play a smaller role and be evaluated only if the SME requests for a larger-than-usual loan amount.
Structure
The MCA’s advance amount (loan quantum) is first calculated by averaging the monthly POS transaction over the last 6 months and multiplied 1.5 to 4 times (i.e. if the average monthly transaction is $10,000, the advance amount available may be $15,000 - $40,000).
This loan amount will be given to the SME at the start of the facility and repayment will be made over a period of 6 - 9 months.
The financial institution will open a new joint bank account with the SME and direct all credit card transactions into this account where monthly repayments will be deducted automatically.
If the monthly credit card transactions exceed the monthly repayment amount, the financial institution will hand over the excess cash to the SME. However, if the monthly credit card transactions fall below the repayment amount, the repayment period will be extended by 1 month (may last 6 - 9 months).
An alternative is to explore revenue based financing which functions the same way as MCA only that past transactions do not need to be on a card and you can use your invoices or various sales channels to evidence you revenue. Check out our guide to revenue based financing here. Rates can start at 10% flat over a period of 12 months.
Related: Read more about how the MCA works here.
Invoice financing or accounts receivables purchase in Singapore refers to credit facilities that use invoices as a way out for repayment.
Evaluation Criteria
The main evaluation criteria of an invoice financing facility is the financial strength of the SME’s customers. Government or multi-national corporation (MNC) customers are usually preferred over SME customers.
The borrower needs to provide a proven track record of service performance or past transaction history. The profitability and financial performance of the SME will play a smaller role during the credit evaluation process.
Structure
SMEs usually issue invoices to their customers after performing a service or completing a sale.
While awaiting payment, these SMEs may use these invoices as collateral to receive early payment for their work done.
Once approved for an invoice financing credit line (e.g. $100,000), the SME will be able to draw up to 80% of the invoice value (e.g. 80% of a $10,000 invoice is $8,000) for each invoice until the credit limit has been reached.
The financial institution will receive payment for each invoice directly from the SME’s customer after 30 days and refund the remaining value of the payment (20% of invoice value) to the SME after deducting interest and fees.
This should not be confused with purchase financing, where an SME borrows capital (using the supplier-issued invoice) to make payment to their suppliers. This arrangement is essentially another form of an unsecured business term loan.
Related: Confused between invoice financing and invoice factoring? Read this article to find out how they’re different.
An unsecured overdraft (OD) facility is typically viewed as an alternative to business term loans and recommended for SMEs who require short-term working capital.
Evaluation Criteria
There is no difference between the evaluation criteria of an unsecured business term loan and an unsecured OD facility.
The SME will also be evaluated holistically based on its past financial performance and current bank statement records. The personal credit records of the guarantors will also be taken into account.
Structure
However, the structure of an OD facility is vastly different compared to an unsecured term loan.
An OD facility provides the SME with a line-of-credit instead of a lump sum amount. Interest is only charged on the amount that is used. The OD line also allows multiple withdrawals of any amount up to the credit limit.
Unlike the fixed monthly repayment of a term loan, SMEs are required to make a minimum monthly repayment of 20% of the outstanding amount in their OD credit line. This is similar to credit card facilities.
Interest will only be charged for the amount withdrawn and the period of usage (daily interest rate).
Still, its important for you to understand if a business overdraft is ever a good option for you.
Related: Find out what major banks are offering in terms of business overdrafts here.
If you are a start-up with at least 6 months of operations, and revenue of approximately $30,000 a month, you could still be supported by our two friendly local banks, OCBC and DBS. They are able to support companies using just 6 months of track record. For DBS this is offered through their business loan program. As for OCBC, they have a facility called First Business Loan. This facility is an unsecured term loan that caters to young start-ups, which are registered and have been operating in Singapore between 6 months and 2 years.
It is one of the few business loans available to young start-ups and is offered by OCBC Bank.
If your company is less than 6 months old. We recommend that you to consider taking on a personal loan which shares similar liabilities since you would need to be a guarantor for a business loan. You might also get better pricing and loan quantum at a quicker time. Read here to see how a personal loan might be better for a start-up and what other options are there.
Evaluation Criteria
Unlike the usual unsecured business term loan, there will be less emphasis on the financial performance and history of the company due to the lack of records.
The main evaluation criteria for this facility is the company directors’ (guarantors’) declared incomes and personal credit records. At least 1 guarantor must have a minimum income of S$30,000 per annum.
From experience, an SME may obtain a higher loan quantum, up to a maximum of S$100,000, if (a) there is more than 1 guarantor, (b) guarantors have high declared incomes (combined), or (c) guarantors have good personal credit records.
Structure
The Business First loan has the same structure as the term loan. SMEs will receive a lump sum amount at the start, and will be required to make equal monthly repayments for a maximum tenor of 4 years.
Related: Check out our review of the Business First Loan.
Micro loans offered by many digital banks in Singapore are specifically designed to support smaller loan amounts and start-ups. These loans streamline the application process by eliminating the need for physical documents, relying entirely on digital data provided through MyInfo. MyInfo is a digital data platform that integrates personal data across various Singapore government agencies. For these micro loans, crucial data such as the Notice of Assessment (NOA) and Credit Bureau Singapore (CBS) report are used to assess creditworthiness.
This innovative approach benefits individuals and small business owners who may not have conventional proof of income or business revenue, such as hawkers and newly established businesses. For instance, a hawker primarily dealing in cash transactions or an entrepreneur who has recently commenced business operations might struggle to produce traditional bank statements that reflect sufficient revenue. These micro loans offer a solution by focusing on alternative data points to evaluate loan applications, thus broadening access to financial support for these individuals.
Evaluation Criteria
The financial institution will evaluate the company based on it’s shareholders and guarantors as there is less emphasis on the business bank statements.
Therefore items like your NOA and CBS report will be key in the assessment. An NOA of more than 30k would be the minimum while a CBS report of EE and above is preferred.
Structure
The loan structure is similar to a business term loan but of a smaller amount. Digital banks like Maribank and ANEXT bank offers loans of up to 30k under this program while Banks like DBS offers up to 50k.
Related: Check our Lendingpot's list of lending partners.
The following process is a rundown of how a typical business loan process works in Singapore and some of the things that you need to prepare at each stage.
Ensuring that you have the right documents on hand before submission may increase your chances of obtaining the right business loan.
To make life easier for you, let us fill you in on the 5 main documents that are needed for a business loan application.
Firstly, financiers would need your company’s business profile information from the Accounting and Corporate Regulatory Authority (ACRA) – a document that shows your business information, directors and shareholders, as well as your company’s paid-up capital.
With ACRA, financiers are able to identify the company’s directors, understand the type of business you are operating and ascertain who to bring in as a guarantor if needed.
Proceed to ACRA to download your business information.
Secondly, the financier would need the company’s directors’ Notice of Assessment (NOA) over the last 2 years to find out about their declared incomes.
You should note that the NOA here refers to the personal NOA of the directors and not the company’s NOA.
When determining a borrower’s eligible business loan amount and tenor, financiers would refer to the directors’ income in their personal NOAs as one of the factors for consideration.
The NOA, combined with the CBS Report, gives financiers a sense of the total debt-to-income ratio. If the amount of unsecured debts exceed the director’s income, financiers are less inclined to loan because the directors will then be perceived as being less capable to repay the loan.
Proceed to IRAS to download your personal NOA as shown below:
Thirdly, It is important to submit the Credit Bureau Singapore (CBS) report so that the financiers are able to view your company’s directors’ repayment histories, existing loans and outstanding unsecured loan amounts that they have.
In other words, it shows the financier the borrower’s credit worthiness when the latter is applying for a loan.
The general credit ratings range from AA-HH (AA being the best and HH the worst). There are also non-scored risk grades. These ratings are as illustrated below:
There are two ways to obtain your CBS Report. If you have applied for a credit card previously, you can get the CBS Report for free within 30 days of application or pay $8 to get it from CBS.
The image above illustrates the secured and unsecured amounts owed to the lender each calendar month, while the image below shows your payment records.
Financiers would also require the last 2 years of your company’s financial statements, which is a set of documents that records the financial activities of your company.
To determine your company’s historical performance, all financiers in Singapore would require a copy of the latest 2 years of Profit & Loss Statements and Balance Sheets.
These documents can be obtained from your company’s auditors or accounting software that the company uses.
If your company is less than 2 years old, show the financiers your first-year statements and let them know what you have done so far.
Apart from the financial statements, financiers would also need copies of the bank statements to look into your company’s day-to-day bank account activities.
These bank statements display the company’s revenues and expenses, as well as the balance in the account at the end of the month. One of the reasons why financiers require this is to gauge whether the company has sufficient funds in the account to repay the loan at the end of each month.
It also indicates the cash flow of your company.
You can easily retrieve bank statements from the banks in charge of your corporate accounts.
An additional document that you may submit would be the Accounts Receivables Aging List. This lists down the name of your clients and the amount that you are expected to receive from them for the products or services you have rendered.
The Accounts Receivables Aging List shows your overall debts, how long these debts have been overdue, as well as your clients.
This document may be used for determining if you are eligible for invoice financing, another type of business loan.
There are 5 main types of financial institutions that provide financing solutions for SMEs in Singapore.
These are large multi-national financial institutions that possess a full banking license from the Monetary Authority of Singapore (MAS).
Fully licensed banks are usually able to obtain deposits from consumers as their source of funds, which they will in turn lend out as loans to earn a margin as their income.
These are the banks that are actively providing business loans in Singapore:
These are usually local or regional financial institutions that are licensed by either MAS or the Ministry of Law (MinLaw).
Unlike banks, non-bank financial institutions are usually unable to obtain deposits from consumers.
Non-bank financial institutions include:
This new category of lenders that utilises technology to enable financing has grown popular in recent years as they seek to close the financing gap for SMEs in Singapore.
They typically use platform technology to match funds from investors to SME borrowers.
P2P lenders include:
Private lenders are companies in Singapore that provides inter-company loans as their main form of business. They typically lend from their balance sheets. They typically get their funds from shareholder funds.
Private lenders include:
Family offices are wealth management firms that serve ultra high net worth investors. They differ from private lenders in that they typically invest in a range of equity and debt financing products, including business loan financing.
Related: Read more about the pros and cons of opting for other types of lenders.
Every financial institution uses a basic set of eligibility criteria to assess business loan applications for SMEs in Singapore.
The eligibility criteria is different from credit evaluation criteria. An SME may be eligible to apply for a business loan, but may still be rejected if it fails the credit evaluation process.
As mentioned above, SMEs applying for business loans in Singapore may be rejected after the credit evaluation process.
While we are unable to know for sure the exact set business loan evaluation criteria used (the banks keep it secret to prevent fraud), we are able to deduce the most common reasons for rejection.
SMEs can improve their chances of getting a business loan if they improve these 10 aspects of their business.
Having a track record is extremely important in a financial institution’s credit evaluation process.
If the company is too young, the business may not have stabilized and they will not possess accurate or complete financial statements for analysis.
According to OCBC, 30% of SMEs fail within 3 years and that percentage increases to 50% by the 5th year.
With that risk in mind, financial institutions generally prefer applications from companies with some vintage.
However, the requirements vary across financial institutions. For example, DBS only requires SMEs to be at least 1 year in operations, while UOB requires SMEs to be operating for at least 3 years to be eligible for the EFS-WCL and TBLP.
During this challenging time, most SMEs are probably not expected to be doing well for the last few months.
However, in order to qualify for any business loans (even at this time), businesses are expected to be profitable for the LAST financial year.
This could refer to the financial year ending 31 December 2019 (when the virus had not yet impacted the markets) or 31 December 2018 (if your accountant has not yet prepared 2019’s financial statements).
Financiers want to know that an SME can be profitable again once the pandemic passes and business resumes.
Most of the business loan evaluation criteria utilised by financial institutions have a minimum revenue requirement.
Although the exact amount required varies across financial institutions, SMEs are generally required to have at least S$300,000 in annual revenue for the last financial year before they may be considered for their EFS-WCL and TBLP application.
However, the good news is that at least one local financial institution has removed this minimum requirement in order to serve a wider range of SMEs borrowers. Still it is important to maintain a min bank balance of at least $10,000 to show prudence and buffer to weather shocks.
If balances is an issue, you can also apply for a micro loan, where no bank statements are required.
If you’d like to know more, sign up with Lendingpot’s Business Loan Marketplace.
An SME is considered overleveraged when its existing monthly debt repayment obligation exceeds its ability to repay using normal business proceeds.
While the company’s guarantors or directors may be willing to continue making repayments using personal funds, it is not considered prudent for financial institutions to lend (and continue piling debt onto the company), as this is not sustainable.
For SMEs that displayed prudent financial management in the past, many financial institutions have now introduced an option for 6 to 12 months of principal moratorium (pay interest only) for the EFS-WCL or TBLP to address current cash flow concerns.
A well-known but not-always-explicit rule is that some financial institutions avoid lending to businesses in certain industries.
Some industries such as jewellery and entertainment outlets have stringent evaluation criteria regardless of the economic climate, while other sectors such as construction, marine, oil & gas may be considered high-risk during certain economic conditions.
There is no way to know for sure if your industry is currently categorised as high-risk because financial institutions do not publicise this information. However, you can usually find out informally from relationship managers.
This often happens for one- or two-man SMEs, where the main operator of the business is also the owner/director of the company.
For the sake of convenience (and lower costs), these SMEs may simply use their personal accounts to deposit and withdraw business proceeds.
However, most financial institutions will not be able to accept personal accounts for credit evaluation as they are unable to differentiate which transactions are personal and which are business-related.
Without proper corporate bank account statements, the financial institutions lose a key data point, hobbling the credit evaluation process.
Ideally, in a 6-month period, there should not be more than 2 bounced cheques in the company’s corporate bank statements.
While mistakes that trigger a bounced cheque (wrong address, recipient etc.) can happen, recurring bounced cheques indicate either an issue with the company’s repayment behaviour or simply bad cash flow management.
Either of which would reduce a company’s credit worthiness.
In Singapore, most SME loans are secured by personal guarantees from the directors or the owners of the business.
These “unsecured business term loans” are not secured by collateral (such as property) but will still require personal guarantees.
Thus, as part of the business loan credit evaluation process, the credit worthiness of personal guarantors is also assessed.
Personal guarantors act as a second way out where financial institutions may recover Non-Performing Loans (NPLs) from, in the event that the company is unable to continue making loan repayments.
Financial institutions will thus assess these personal guarantors negatively if they have low or negative declared personal income (in the Notice of Assessment), as the guarantors may not have the financial ability to make the loan repayment on behalf of the company.
In a similar vein, SMEs with directors that have bad personal credit records are adversely affected as these directors are required to be guarantors for the business loans.
Bad credit records includes behaviour such as having a history of late payments, bankruptcy, negotiated settlement, involuntary closure of personal credit facilities, and others.
Also, personal credit records may allow financial institutions to get a glimpse of the SME operator’s capacity and character.
Personal credit records can be purchased from Credit Bureau Singapore or Experian.
Related: Find out six ways you can improve your credit rating.
The Balance-to-Income (BTI) ratio rules, where an individual may not borrow more than 12 times of their monthly income, was introduced by MAS to reduce the indebtedness of Singaporeans.
While it does not directly affect the business loan application, the directors can be negatively assessed as they are required to be guarantors of the loan for the abovementioned reasons.
Directors will exceed the BTI ratio if they possess more unsecured interest-bearing debts (i.e. outstanding amounts of personal loans, credit cards, overdraft facilities) than their declared annual income.
If you are a business owner, here are 3 quick ways to improve the credit ratings of your business. Do these before applying to any PFI.
During application, all financial institutions will require the submission of a standard set of documents: company ACRA information, profit and loss statements, bank statements, directors’ notice of assessments and credit bureau reports.
Make sure that these documents are updated as much as possible, especially if the company has grown since the last financial year.
If the latest audited profit and loss statement was more than 6 months ago, consider submitting a management account of the profit and loss statement for the last 6 months to highlight the company’s growth and increased profitability.
One key credit evaluation criteria is the company directors /guarantors’ Balance-to-Income (BTI) ratio. This ratio evaluates an individual’s ability to repay any additional debt by comparing their current debt versus their current income.
This means that the more personal debt the directors/shareholders have, the lower their personal credit rating will be because of the higher level of indebtedness.
Since the directors/shareholders are usually also guarantors for the company’s business loans, a lower personal credit rating will thus lower their company’s overall credit rating.
So consider clearing these personal debts (as much as possible) to present a better overall picture of the company and its directors/shareholders/guarantors’ financial health.
As mentioned above, different financial institutions have different credit evaluation criteria, which may change over time. Just because the company was able to obtain a business loan with one financial institution previously, doesn’t mean that it can get another business loan now.
Since business loan applications and credit evaluation take time, roughly around 1 – 2 weeks each, it’ll be a tedious effort to apply directly with multiple institutions in the event that the first business loan application is rejected.
Lendingpot operates a Business Loan Marketplace that allows an SME to connect to multiple lenders with just one application, allowing the SME to know who its prospective lenders and what their rates are, in a very short time.
Moreover, the applicant’s contact details are obscured and business information anonymised to maintain privacy. Only core business information, such as revenue, profit or industry, are revealed and evaluated by the lenders.
If you expect the application process to drag on and wish to minimise any delays, consider using Lendingpot’s Business Loan Marketplace service.
Read more about why you should start your loan search journey with a business loan marketplace.
Related: Discover five ways to increase your chances of having your loan application approved.
Based on experience, SMEs will usually apply with the financial institution of their operating bank account first. Many of them do that because they believe that this is the institution that they have a “relationship” with, that has their account records and will most likely help them.
However, we feel that this might have been true decades ago. Based on experience, relationships matter less these days as banking becomes less personal and more data-driven.
On the other hand, this also means that if you have the right financial data, other banks/financial institutions will be keen to support your financing needs even if you do not have existing relationships with them.
For example, if your company fails to possess the minimum revenue requirement for one financial institution/bank, don’t be discouraged as there are other institutions that may be able to accept these lower revenue figures.
Lendingpot has consolidated a list of minimum requirements, so contact us to find out more!
As mentioned above, in order for PFIs to continue lending responsibly, they may have not have lowered their evaluation criteria for new business loans significantly.
SMEs that could qualify for bank loans before COVID-19 will be eligible for the new government-backed loans. However, we have found that those SMEs that possess less-than-satisfactory financial records and are not eligible for bank loans before COVID-19, remain ineligible for these government-backed loans for now.
Our previous article “10 Reasons Why Your Application for ESG’s SME Working Capital Loan was Rejected” addresses some of the reasons for rejection.
If your company is in this situation, you may have to accept the fact and seek alternative sources of funding. These alternative sources typically have lower maximum quantum, higher interest rates and shorter loan tenures.
In Singapore, there are other lenders such as the non-bank financial institutions (Hong Leong, IFS Capital Limited), peer-to-peer lenders (Funding Societies, Validus Capital) and private lenders (Airguide Capital, Affinity Financial Services) that complement the local financing ecosystem.
Lendingpot’s Business Loan Marketplace has a network of 47 active partner financing institutions that includes banks, non-bank financial institutions, peer-to-peer lenders and private lenders that you can apply to with one financing application.
If these two options do not work, you may want to hire a business loan consultant who will do a deep dive into your financial data and records.
They will usually recommend a course of action that will improve the eligibility of your company. That said, these suggestions may not improve your eligibility instantly and some recommendations, such as improving your cash flow and bank account statement, may take up to 6 months.
Be sure to ask your loan consultant/broker these questions pertaining to their scope of service and payment before engaging them!
Related: What are the five questions you should be asking your business loan broker?
(Updated in 2024)
Due to the economic challenges caused by the COVID-19 pandemic, the Singapore government has offered various support measures to assist SMEs, including credit support in the form of government-backed business loans.
The local banks, DBS, OCBC and UOB have temporarily suspended the offering of these unsecured business term loans and have replaced them with the government-backed SME Working Capital Loan (EFS-WCL).
The Business Times recently published an interesting article “Coming soon: a central platform for SME loans?”, which states that PwC is creating a digital platform where SMEs can apply for business loan from multiple financial institutions.
This is a topic close to our hearts as we have long recognised the problem that SMEs face significant barriers in obtaining business loans in Singapore, even before the onset of COVID-19.
That is the main reason for the creation of Lendingpot, a Business Loan Marketplace (or Central Lending Platform if you prefer) in Singapore.
The Lendingpot platform allows SMEs to make one business financing request and reach up to 47 financial institutions that include banks, non-bank financial institutions, peer-to-peer (or fintech) lenders, private lenders and some selected family offices.
Our mission is to improve the financing ecosystem for SMEs in Singapore from the ground-up, and this article will explain how we are doing it.
Before deep diving into the problems and solutions, it’s important to acknowledge some key observations about business financing today.
Key Observation 1: More Than 2% Of SMEs In Singapore Have Applied For Government-assisted Business Loan Schemes.
In June this year, The Straits Times announced that over 5,000 firms have borrowed about $4.5 billion from the government-assisted schemes.
That works out to be around 2% of the 271,900 Singapore SMEs.
However, we should note that these are not the number of applications for the scheme, but rather the number of applicants that are approved.
The low percentage does not indicate that SMEs are deterred from applying due to the lengthy process (if any) but that many SMEs’ applications are simply not approved. We know that for a fact, as many of these SMEs also applied through Lendingpot’s platform.
Key Observation 2: The Process Of Business Loan Applications Is No Longer Lengthy And Tedious With Banks In Singapore.
All three local banks, DBS, OCBC and UOB, now feature a fully online business loan application, with MyInfo and CorpPass integration, that takes only 5 minutes to complete.
Other financial institutions are likely to follow suit and introduce digital features as they continue to pursue their digitalization plans.
When we analysed deeper, we realised that these problems are subtle yet deeply ingrained into the system and are hard to solve without a deep understanding of the ecosystem and some human-centric design thinking skills.
Problem 1: Asymmetric Information
This is by far the single biggest factor and the main barrier that prevents SMEs from getting business loans.
Due to the lack of access to financing-related information, SMEs are (a) generally unsure if they qualify for a business loan, (b) not able to to improve their credit rating if poor business decisions made previously had affected their loan eligibility, and (c) are unaware of their financing options.
Related: Read more about information asymmetry here.
(a) Not Sure If They Qualify
An SME’s credit evaluation is an immensely complicated process, which takes into account many factors such as the age of business, revenue, profitability, ending bank balances, bounced cheques (if any), past repayment history, number of directors, directors’ declared income, directors’ personal credit and repayment history, bankruptcy records, etc.
Due to fraud risk and fear of negative selection, most financial institutions will never reveal their true eligibility criteria as financial institutions always want to lend to the best borrowers.
The institutions are afraid to find themselves with only one type of applicants, if they let SMEs know that they are able to accept certain group of applicants (i.e. not profitable companies).
Thus, most would only display a basic eligibility list, which convinces SMEs that they are eligible but yet rejects them after application. This causes a bad experience for SMEs.
Related: What are the five factors that affect your loan eligibility?
Image: OCBC’s SME Working Capital Loan Eligibility Criteria
(b) Not Sure How To Improve Their Credit Rating
For the same reasons given above, financial institutions will never reveal the true reasons for rejecting an SME’s loan application.
They prefer to understand the “true situation” of their borrower.
This is good for preventing fraud and “coached” applicants, who may present an inaccurate version of their financial situation.
However, it can lead to unintended consequences for these uninformed SMEs, as they will not be able to improve their credit rating by implementing the correct financial processes.
An example: A business that deals primarily in cash such as a vegetable and fruit retail store, which keeps their cash for easy transactions rather than banking into their business bank account, will not be able to justify their annual revenue by only presenting their bank statements. Thus, their credit rating is penalised.
(c) Not Sure Who To Apply To And What To Apply For
Singapore is a regional finance hub and is rich with alternative lenders that present different financing options to SMEs.
Other than the basic business loan, options such as contract financing, merchant cash advance, invoice factoring and purchase financing may be more suitable and cheaper for an SME.
However, SMEs are generally unfamiliar with the ever-changing and multiple types of business financing available as most only look for financing when they have a large contract or an opportunity to expand every few years.
When the SME is rejected by local banks, most would not be aware of where else to apply for financing.
Problem 2: Business Financing Is Not A One-Size-Fits-All Solution
Due to the complexity of SME credit evaluation and the multitude of business financing solutions available as stated above, SMEs may also encounter rejections if they apply for loans that do not suit their business purposes or request for an business loan amount that they may not be qualified for.
An example is that an SME may get rejected if they were to apply for a S$500,000 Business Term Loan but based on their business model and credit rating, they may qualify for a S$500,000 Invoice Factoring credit line instead.
The Invoice Factoring facility may even have a lower interest rate than the Business Term Loan.
Problem 3: Human Factors In Credit Evaluation And Loan Processing
Sometimes, inevitably, the negative or positive experience of a loan application and even the success and failure of that application can be affected by the relationship manager that your case is assigned to.
Let me explain.
An experienced and effective relationship manager will analyse an SME’s request carefully. They may recommend alternative products or realistic loan amounts if they feel that this is the best for an SME. They will reply promptly upon receiving the application regardless if the SME can qualify for the loan facility.
An inexperienced and ineffective relationship manager will simply reject the application if the SME does not qualify. That relationship manager may even ignore the application for weeks in favour of processing cases that are more likely to be approved. As relationship managers are commission-based, many may not be incentivised to respond to cases that are likely to be rejected.
Related: Find out how Lendingpot works; as well as eight reasons why you should use our digital loan marketplace.
Our Business Loan Marketplace leverages both technology and human expertise to simplify the current business loan application process.
We take into account how things are actually done and use technology to simplify that, without forcing our stakeholders (SMEs, relationship managers and financial institutions) to adapt to a new way of conducting business.
Solution 1: Asymmetric Information
We acknowledge that large banks and financial institutions will almost certainly never reveal their credit matrix and allow third parties to make credit decisions for them.
Thus, a purely tech solution may not work well in this case.
(a) In Lendingpot, SMEs Apply With A Loan Amount Without Specifying Loan Products
Lendingpot flips the application process around.
As stated above, SMEs may not know what the best financing solution is. However, what they are clear about is how much they require, and what these funds will be used for.
Lendingpot will then create a profile of the SME (company name redacted to protect privacy) and their loan request, publishing it on our Business Loan Marketplace.
Image: Lendingpot’s Business Loan Marketplace.
(b) Lendingpot Leverages On Human Expertise To Screen SME Applicants
Lendingpot’s primary points of contact are the relationship managers of partner financial institutions.
Currently, we have over 100 relationship managers from 47 financial institutions in our network.
These relationship managers will look through the requests and financial profiles of SME applicants, and think about solutions for them.
Since financial institutions are not willing to reveal their credit matrix, the next best option would be for the relationship managers to decide if their institution will be able to provide financing solutions for the SME as they would have the experience and expertise to know.
(c) SME Applicants Will Only Receive Business Loan Offers From Lenders That Are Able To Support Their Requests
Not every financial institution will be able to support an SME’s business loan application and there is no reason why the stakeholders, both SMEs and relationship managers, should waste their time if it doesn’t work.
Through Lendingpot’s platform, an SME may receive multiple loan offers for them to choose from. They may even be presented with entirely different financing solutions that fulfill their needs.
Here’s an example: An SME looking for a S$200,000 business loan for working capital requirements, as his customers are starting to pay him later, may receive (i) an offer of a S$200,000 term loan and (ii) another offer of a S$200,000 invoice financing facility so that he can receive early payments.
Both facilities will fulfill his business purposes.
Solution 2: Business Financing Is Not A One-Size-Fits-All Solution
As explained above, Lendingpot leverages on the experience of our network of relationship managers to create suitable loan solutions for SMEs.
With our wide network of partners, Lendingpot tries to ensure that there are suitable lenders for almost any SME business and loan purpose.
Solution 3: Human Factors In Credit Evaluation And Loan Processing
We stated earlier that we have over 100 relationship managers from over 45 financial institutions. We onboard multiple representatives from each financial institution.
This is done to minimise the impact of human factors on an SME’s business loan application.
Multiple relationship managers and multiple financial institutions drive competition. This can lead to not only more competitive pricing for business loan products, but also better service even within the same financial institution.
If one relationship manager doesn’t respond to you, an SME would have other alternatives to choose from.
Related: Here are five reasons why you should give Lendingpot a try.
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. 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.
