Everything counts: Not having too many credit cards and paying your bills on time can help you get a better credit rating. Photo credit: Pexels
Nothing is for certain these days, not with a pandemic that refuses to abate and an economy that is showing slow but uneven recovery.
With everything in a constant state of flux and uncertainty, businesses can be here today and gone tomorrow – not exactly a recipe for success if you need to get a loan for your business.
Even before the pandemic, financiers were already prudent – i.e. they will not grant a loan to a company that seems as if it may have difficulty repaying the loan, as discussed in this article.
It’s not just banks, too – private lenders have their own set of criteria and considerations too.
So what can you – as an SME owner – do? The good news is, not everything is doom and gloom.
You can take active steps to increase your chances of getting a loan – by improving your credit rating and credit report.
These two terms are used interchangeably by borrowers and financiers alike, but actually mean different (but related) things.
Your credit report shows your previous credit history, including any loan requests that you have made. It also details your credit repayments, including whether you made repayment on time.
On the other hand, your credit rating or score is used by financiers to determine your creditworthiness.
By looking through said records, Credit Bureau Singapore (CBS) generates your credit rating after taking into account other factors such as the stability of your job and repayment history, along with other considerations.
This rating represents the level of risk you pose to a financier. So the poorer your credit rating is, the less likely you are to get a loan. Your credit rating will fall somewhere between the worst score of 1,000, and the best score of 2,000.
From this credit rating, a credit grade is generated – AA being the best; and HH, the worst. In general, banks look at your credit grade instead of your exact rating or score.
You can get a copy of your credit report from CBS or Experian.
Follow these tips to improve your credit rating and chances of getting a loan:
The more credit cards you have, the higher the risk of you missing out on payments or getting into credit card debt.
Any late or defaulted payments will affect your credit rating, making it harder for you to obtain a loan.
Realistically speaking, you only need one – or at most two – credit cards. Choose those with the lowest interest rates. Be sure to pay the full amount every month – and on time.
Perhaps there was a point in time when you made multiple requests in order to land a loan, but from a financier’s point of view, someone who makes five or six loan requests within a month sounds… desperate.
To a financier, most desperate people lack funds, yet need loans urgently. And quite often, they do not have the means to repay their debts. In view of that, there is a high chance the financier will reject your loan application.
Every loan request you make is recorded in your credit report, so go about this carefully so as not to affect your credit rating.
Do all the research you want; but only make a formal loan request when you are reasonably sure you have found a loan that offers the best interest rates – and more importantly, is one that you can pay back within the tenor.
As we explained in this article, you may run into difficulty getting a loan if your company is already paying off existing debts.
The amount of existing liabilities your company has will affect your Debt Servicing Ratio (DSR), which denotes your company’s cash in-flow versus the amount of debt it is paying off.
Most financiers have their own way of calculating the DSR, but basically if your company’s DSR is more than 1.0, this means that your company has more cashflow on hand than it is paying out in terms of loan repayments, which is a good thing.
If the reverse is true, then your company is overleveraged – that is, its debt outweighs the amount of cashflow it needs to operate.
Unsure how that will affect your company’s chances of getting a new loan? Try the SME Business Loan Eligibility Check to gauge your chances.
On the personal front, the same applies. Too much personal debt may affect your chances of getting a loan, especially if you are the director of your company – since company directors often act as guarantors for unsecured loans.
Financiers measure this through the Balance-To-Income (BTI) ratio, which serves to prevent borrowers from taking on more debt than they can handle.
This ratio is calculated by adding the sum total of an individual’s unsecured interest-bearing debts from various financiers and dividing that amount by his or her monthly salary.
The rule is that an individual cannot get additional unsecured credit if his or her BTI ratio has been exceeded 12 times for three consecutive months. This is because it would mean that the individual’s total unsecured interest-bearing debt has exceeded the BTI limit.
All these factors affect your personal – as well as that of your company’s – credit ratings, and your chances of getting another loan.
It goes without saying then, that the golden rule is to – whether it be credit card bills or loan repayments – always make payment on time.
Try as far as possible not to be late with your payments; or worse, default, as both will affect your credit rating adversely.
Since company directors often act as personal guarantors of unsecured business loans, those who have bad or poor credit ratings are at a distinct disadvantage.
Any type of money-related legal spat linked to your company is a tell-tale sign to financiers that your company directors’ financial health may not be sound… and consequently, could mean that your company’s finances are in trouble too.
If you do get involved in a lawsuit, keep records of all legal documentation and try to resolve the issue as soon as possible so it will not affect the creditworthiness of your company.
Bounced cheques can occur from time to time due to mistakes, but in general, your company should have no more than two bounced cheques within a six-month period.
Multiple bounced cheques within a short time span may mean your company has poor repayment behaviour, cashflow problems, or both – all of which are bad news to a financier.
If you have tried the SME Business Loan Eligibility Check, why not take the next step?
Create an account with us and submit a loan request via our Business Loan Marketplace now to receive multiple loan offers from our network of 45 lender partners at no charge.
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.