Business Loans

5 things banks consider when reviewing your business loan application

Belinda Wan
March 26, 2021

It’s important to know why your business loan application was rejected by a bank so you can avoid making the same mistake next time. Photo credit: Pexels

In a flash, almost faster than you can say “Pfizer-BioNTech”, the first quarter of the year is nearing its end.

Despite some cautiously optimistic reports in the overall business outlook for the first half of the year, there is still much uncertainty in the business environment.

As a SME owner, you may be wondering how you can achieve your immediate business objectives – especially when your business is just getting by.

If you previously applied for a bank loan in order to purchase materials or equipment for your company but don’t understand why you were not successful, you might want to think about why from the bank’s point of view.

Banks are operating from the vantage point of: How can we ensure we earn something by granting this loan?

When you think about it this way, it should not be hard to gauge whether they will approve your loan.

Here’s a quick guide of the various considerations that banks (and relationship managers) run through before they approve or reject your business loan.

1. The type of loan you are applying for

In general, loans fall into two broad categories – secured business term loans and unsecured business term loans.

The former refers to loans that involve the pledging of a tangible asset that the bank can take back should you default on the loan. These are called collaterals (more on that later).

Conversely, unsecured business term loans do not involve such forms of collateral, but instead require a personal guarantor. This is someone from which payment can be obtained when you are unable to repay the loan.  It is how a bank protects its interests.

Note that because of the considerable risk involved in approving unsecured business term loans, the bank is likely to charge a higher interest rate.

2. The collaterals you have

As mentioned above, banks will only consider giving you a secured business term loan if you have something tangible to offer them in the event you are unable to pay off your loan.

Examples of collaterals include vehicles, equipment, invoices, or a residential (non-HDB), commercial or industrial property.

3. The credit health of your company and its directors

There are typically five types of documents you need to submit when requesting for a business term loan from a bank.

These are: your company profile information from the Accounting and Corporate Regulatory Authority; latest credit scores of all company directors from Credit Bureau Singapore (CBS); the last two years of your company’s financial statements; the last six months of bank statements; and the last two years of your company directors’ Notice of Assessments (NOAs).

From these documents, the bank will have a clearer picture of your company directors’ credit scores, the amount of debt owed by your company and each of its directors, and how well your company has been doing.

4. How old your business is

Banks are not likely to approve your application if they feel there is the slightest chance you may not be able to repay the loan.

This is why they are likely to reject your business loan if your company has been incorporated for less than a year as you will not have a track record to show it is a successful business.

Remember that the potential of your company does not matter to the bank – only its past performance.

Different banks have different requirements as to how long your company needs to be in operation, but in general, your company needs to be at least a year old to have something to show for.

This means that if the directors owe more than they earn, the chance of securing a loan will be lower as the bank is likely to feel that they may not be able to repay the loan.

5. The directors’ Balance-to-Income (BTI) ratios

The BTI ratio shows the amount of debt that company directors have against their incomes.

This ratio stipulates that individuals cannot borrow more than 12 times of their monthly incomes. This prevents individuals from overleveraging, or accumulating too much debt that they are not able to repay.

The NOAs we spoke about earlier, along with the CBS reports, will help the bank to calculate the total debt-to-income ratio, also known as the debt servicing ratio.

While the BTI ratio is not a compulsory criteria for loans, banks use it as a gauge to determine if a loan should be granted.

If your company directors have very high BTIs, it means that they owe more than they earn.

If they are also personal guarantors of the unsecured business term loan, your chances of the chance of securing a loan will be lower as the bank is likely to feel that they may not be able to repay the loan.

Also, find out what the bank really means when it rejects your loan application.

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.

About the author

Belinda loves thinking about random stuff, and collecting useless bits of facts and trivia. She often roots for the underdog, and believes the world needs more happy endings.

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