On the 18th of February, Minister Heng Swee Keat announced an enhancement to the government-backed SME Working Capital Loan (EFS-WCL) from a maximum quantum of $300,000 to $600,000 and introduced a $1,000,000 Temporary Bridging Loan (TBLP) for the tourism industry during the first budget speech.
These two schemes were later further enhanced; EFS-WCL’s maximum quantum was increased to $1 million and 90% government risk-sharing, while TBLP’s maximum quantum was increased to $5 million, 90% government risk-sharing and eligible for all companies.
Since then, we understand that there were a large number of applications to the participating financial institutions for these two government-backed business loans, but unfortunately many SMEs did not qualify for it.
From the feedback gathered, these are the 10 most common reasons of rejection.
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 it is not likely to possess accurate or complete financial statements for analysis.
According to OCBC, 30% of SMEs fails 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 operating for at least 1 year, 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 SME businesses have probably not been doing well during 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 utilized 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 greater range of SMEs borrowers.
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 companies and entertainment outlets have stringent evaluation criteria regardless of the economic climate, while others such as construction, marine, oil & gas may be considered high-risk industries during certain economic conditions.
There is no way to know for sure if your industry is currently being categorized as high-risk because financial institutions do not publicize this information. However, you can usually find out informally from relationship managers.
This happens often 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), such SME owners 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, financial institutions lose a key data point, hobbling the credit evaluation process.
Ideally, within a 6-month period, there should not be more than 2 bounced cheques in a 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 creditworthiness.
In Singapore, most SME loans are secured by personal guarantees from the directors or 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 creditworthiness 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 incomes (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 business loans.
Bad credit records include behaviours such as having a history of late payments, bankruptcy, negotiated settlements, 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.
Balance-to-Income (BTI) ratio rules, where an individual may not borrow more than 12 times of his or her monthly income, was introduced by MAS to reduce the indebtedness of Singaporeans.
While it does not directly affect the business loan application, company directors can be negatively assessed as they are required to be guarantors of the loan for the above reasons.
Directors will exceed the BTI ratio if they possess more unsecured interest-bearing debts (i.e. outstanding personal loans, credit card bills, overdraft facilities) than their declared annual income.
Financial institutions will not reveal the full reasons why an SME’s business loan application is rejected.
We will never know for sure as well because each institution’s credit evaluation engine is different.
However, we know that these are the parameters that most financial institutions work with, and if you work to improve in each of these areas, there is a strong chance that you will be eligible for your next business loan.
Lendingpot.sg 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 are and the rates that they offer, in a very short time.
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.