Every business should all aim to get some level of debt in their business as it vastly improves your return on equity given that the interest required to service the business loan is usually lesser than your business margins. That is most likely true if you take a loan from the bank as interest rates especially in the past two years have been unusually low. Therefore, if you have not been successful in taking a bank loan, it is important to understand what banks look at and work towards ticking off those check boxes.
Before we go into the list of criteria, it is good for you to understand what program lending is. Program lending is when banks determine credit simply based on certain company parameters. These are usually hard data such as revenue, years in incorporation, number of directors, bank balances, etc. Just by simply providing these inputs, the program can determine if a loan is approved and for what amount without any human inputs. Therefore, even if your business is a viable one, if you simply do not the meet program criteria, you would not be eligible for a loan.
Thus, in this article we will address 3 key areas that you can actively change in your business to help improve your chances of obtaining a bank loan.
Please note that this is by no means getting you to falsely credit your account even when there is no actual revenue. Instead, it is making sure that if you are a cash heavy business, these cash receipts are deposited into your bank account promptly with no leakages. Many times, businesses who collect cash, use the cash to make payment for expenses which result in a lack of record in their bank statements. This is extremely important as banks value these statements more than financial statements as it is a true record of the cash flow of the company, plus financials statements for SMEs are typically unaudited. Remember, in credit assessment, cash is king.
To help you with proper recording, you may also opt to adopt more cashless forms of payments for your business such as PayNow, Nets or Credit Card. Speak to your bank today and ask for a PayNow QR code that you can display on your shop front. It’s cheaper than setting up a Nets or POS machine for credit card payment.
One other top tip is to ensure that you consolidate your revenues into a single account. Refrain from using your personal account to receive revenues but instead be disciplined to get your customer to pay to the right account.
At the end of the day, a quick rule of thumb for the maximum loan approved is about 30-50% of the total annualized crediting minus any existing loan. So, the more revenue you credit, the higher the loan quantum eligible.
The magic number seems to be at $10,000 when it comes to account balances. This is an average balance over the past 6 months and so if you want to expedite your averaging process you must ensure that your balances are above $10,000 for the current months if the previous few months were under. Please see your required bank balance for the next 3 months, assuming month zero is your current balance:
As you can see, as the average bank balance over the last 3 months has only been $6,000, you will need a $14,000 forward bank balance for the next 3 months to build achieve a $10,000 average bank balance.
One way to get that additional cashflow is to use a business credit card or even your personal credit card. If you time your expenses on your card correctly you can permanently delay your payments and build free working capital. You can learn more in the article as linked. Another way is to get a personal loan of $5,000- $10,000 first to add additional capital to your business so that you can get a larger quantum later.
When referring to your credit record, banks are primarily looking at the Credit Bureau Singapore (CBS) Report which can be bought here: https://www.creditbureau.com.sg/buy-my-credit-report.html
The only challenge with cleaning up your track record is that it is a 12-month record and thus could take some time. However, if your recent record has been relatively healthy, it might only take much lesser than the full 12 months. Here’s how it works:
1. Your repayment behavior over 12 months
2. Your number of enquiries in each period
Every time you submit a loan application, an enquiry is lodged with CBS. As a result, a high volume of enquiry can lower your credit score since it will appear as though you are taking on more debt. Reduce the quantity of credit facilities you sign up for to avoid this or engage a broker to consolidate your enquiries. Your number of enquiries is stored for a period of 2 years and therefore it can be difficult to expunge from your record. Nonetheless, you should at least space out your applications with 3-6 months intervals.
These are small tips in which you can adopt as you prepare to get a bank loan. Remember that there still remains a small window for you to apply for your temporary bridging loan or other working capital loans after 30 Sep 22. If the above tips still leave you clueless, you can always choose to arrange a session with our broker for a free consultation. As mentioned, engaging a broker almost always increases your chances of obtaining a bank loan given the level of volume they handle daily.
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.