Loans are a part and parcel of businesses. Many companies want one, but some do not take on loans for their business simply because they do not know if they can qualify for a business loan. It would be a great business advantage if business owners understood how loans are evaluated in Singapore.
All too often, I find a company goes under or fails to seize an opportunity to advance further simply because they didn’t get a loan of some sort for their much-needed injection of funds into the business. And an unfortunate common reason why they don’t take on a loan is that they were simply not sure if they were eligible for one. So, it is important for companies to find out whether they:
- Qualify for a loan,
- How to improve their chances of getting one if initially, they found they were not eligible for a loan,
- And also how banks, credit companies, government assisted SME loan bodies, investment loan platforms, and other financial institutions evaluate loan applications by businesses in Singapore.
The commercial banks, to peer-to-peer (P2P) platforms or the ‘Ah Longs’ or Loan Sharks share some common denominators in their evaluation process for loan approval. However, they can also have very different criteria, eligibility screening, tests and approaches to determining the qualification of an entity getting a loan approved.
Whatever be the case, the gist of the whole matter is, lenders can be said to want to determine the payment capacity of a borrower to safeguard the money of their organisation, shareholders, clients, and investors apart from growing it. So I’ve listed out below the following points that determine, or are related to, whether your business qualifies for a loan, what type of loan for different kinds of companies and scenarios as well as the appraisal or evaluation processes involved.
Different types of lenders give various kinds of loans to various kinds of borrowers using different sets of initial criteria for eligibility.
Before we delve deeper, it is important to note that usually, a basic set of criteria is established by the lenders, which must be met first before a loan application is considered eligible to be disbursed. Once categorised as eligible, then the loan will usually be evaluated using some form of credit appraisal which comprises a set of sub assessments. Different types of lenders as well as within the same genre, e.g. among various banks, usually have varying types of criteria for eligibility of the application to be evaluated.
As you already know, in Singapore there are banks, licensed money lenders, investment firms, Spring Singapore, government agencies, NGOs, societies, associations, financial houses, foundations, and in more recent times P2P platforms that disburse loans, etc.
The myriad choices of loans available include:
- Working loans,
- Secured and unsecured loans,
- Start-up loans,
- SME Working Capital loans,
- Spring SME Micro Loan,
- Enhanced Micro Loan,
- BizMoney Loan,
- Accounts Receivables Purchase Loan,
- Factoring Loans, Government Assisted Loan,
- Personal loans,
- Payday loans,
- Collateral Free Loan,
- Business Purchase Financing Loan,
- P2P Loan/Investment,
- Crowdfunding Business Loan,
- ‘Ah Long’s (illegal moneylenders)
Realistically, there are numerous types of businesses and entities that might require loans anytime throughout the year and for any range of reasons in Singapore. The basic categories of business entities may be Sole Proprietorships, Partnerships, Private Limited Companies, Limited Companies, and Public Listed Companies, while non-business entities may be societies, associations, and other types of organisations. They can also be categorised with a different perspective as small or medium or large businesses and companies or even corporations, holdings, and groups, where the term SME which stands for Small and Medium Sized Enterprises is a commonly used term too.
Basically, for most bank loans that are smaller, for a business to be eligible for them initially before evaluation, it needs, firstly, to be specifically a business entity as those mentioned above. Secondly, it needs to have been in business a minimum of 2 or 3 years (different banks have different requirements) with financial records to support the application. Thirdly, most loans require that 30 percent minimal of the business be owned by a Singaporean or Singapore PR. Fourthly, some loans require collateral (for a secured loan), and some don’t (for an unsecured loan), but this depends on which bank, the quantum of the loan applied for, the term of repayment, and the credit score, etc., of the business. Lastly, usually, loans require a guarantor, especially the unsecured loans. Frequently business loans require the owner to act as guarantor for his own company’s loan which of course means that the owner must prove to the bank his credit strength and integrity.
Peer to Peer (P2P) Crowdfunding Platforms
Take Funding Societies, a popular and growing Singapore, Malaysia and Indonesian P2P crowdfunding platform that offer loans that are quick, fair, and secure which affords a win-win situation for all parties involved. They offer borrowers a chance to obtain loans by bringing them together with investors on their internet platform, where the borrowers would under normal circumstances have had poor or no chance of connecting and dealing with these investors. Funding Societies now also through their mobile app (click here for more information) has made the whole loan application and approval process even more streamlined and easier.
I find their approach, like most other crowdfunding P2P platforms throughout the world, to determine the eligibility or the core requirements of a business or an entity of getting considered or evaluated for a loan is quite similar to although a bit less stringent than banks. They only require the company to be one year or more in existence, registered and operating in Singapore with an annual turnover minimum of only $300,000. The entity has to be a Private Limited Company (Pte Ltd) or a Limited liability Partnership (LLP) with Singaporean or Permanent Resident Director(s) of at least 30% shareholding. Interestingly all the above conditions are not absolute as each loan application is reviewed on a case-by-case basis which highlights this P2P loan platform’s flexibility and ease of application. In fact, any business should consider applying for a crowdfunding loan if they believe in the viability of their business and feel they need a loan.
Therefore, based on the above information you should know quickly whether your business meets the basic requirements of eligibility for the evaluation of the loan application. And in the case of P2P loans, there is still hope even if it doesn’t.
How loans are evaluated
The evaluation process of a loan is a lot more complex and involves an extensive process of credit appraisal before the loan can be approved or rejected. Fundamentally the credit appraisal procedure usually can be broken down into four parts as follows:-
- Market Appraisal – primarily this appraisal seeks to see whether the demand for the product and services of the business exceed the supply convincingly, where the higher the demand-supply ratio, the better. The strength of the marketing plan of the firm must also prove to be encouraging and realistic.
- Borrower Appraisal – the real objective of the borrower must be determined, and they must be proven to be knowledgeable of and dedicated to the project while at the same time displaying good intentions of wanting to repay the loan.
- Technical Appraisal – it is subject to the type of business and industry of the borrower. If it is a food and beverage outlet, e.g. restaurant or fast-food chain, all parameters like the 7 Ps – product, price, promotions, place (vicinity to selling market and logistics involved), package, productivity, and people (workers and type of customers) will have to be scrutinised. A project needs to be very sound to be able to withstand and sustain through all business cycles and eventualities.
- Financial Appraisal – It is the primary evaluation, and the three other appraisals above do not mean a thing without it. Everything in this appraisal is expressed in dollars and cents, and it is very subjective while at the same thing trying to be objective. It attempts to forecast the future financial position of the business, at least till the loan matures, by estimating costs and expenses, projected revenues, and comparing cash flows with the repayment schedule (maybe using charts) using previous financial statements as projections and other information. The main aim here is to evaluate the feasibility of the project regarding the debt servicing capability of the business.
Banks and most lenders use this type of credit appraisal of loans method, or variations of it, to ascertain the repayment capacity or creditworthiness of the borrower or company. The risks factors attached to the future streams of income will also be calculated. Banks tend to have higher requirements for their application of loans process because they offer long-term payment schemes to borrowers.
A simple breakdown of the factors determining your business getting the business loan in the evaluation process is shown below:-
– Time in Business – the length of time the company has been operating
– Type of business
– Credit Score
– Revenue – a steady stream of income to make loan payment each month
– Collateral – with it involved, a loan is more likely to be approved while also getting better terms
– Economic climate & cycles – these factors can affect the business of a firm and thus the loan itself
Crowdfunding P2P platforms use a different approach, compared to banks, to evaluate loan applications although the goal of wanting to determine the payment capacity of a borrower to protect the money and interest of their organisation, shareholders, and investor clients apart from growing their platform, is the same. Once the eligibility for evaluation is confirmed, then they start evaluating the loan application where the 1 or more years of accounts and history is analysed for whether the trends of the business are positive or negative. All current obligations of the business are also assessed together with other sources of information for possible projections of the business in the future. Credit checks are usually carried out by an independent third party followed by physical inspection(s) of the business site(s). When calculating the credit risks involved, the management of the business is check for how experienced, knowledgeable, and capable they are in carrying out their business plans and operations as well as for growing the firm. Further checks such as identification checks, character assessment, and credit history checks of the owner (who usually acts as the guarantor also) are all part of ensuring the security of the loan.
FSBolt mobile application‘s evaluation of loans tends to lean more towards ascertaining, through cash-flow analysis of the business, the willingness of the borrower to repay the loan as opposed to the banks approach to determine the borrower’s ability to repay based on his assets available. They frequently target two segments of clients, firstly, those non-bankable SMEs with younger credit history, imperfect record or little collateral and, secondly, the bankable SMEs with existing bank loans, but are looking for more loans. Which of course, gives hope to those who under normal circumstances do not qualify for loans and want one and offers extra options to those who are already having a loan but looking for additional loans.
As for ‘Ah Longs’, jokes aside, they do also evaluate potential borrowers but maybe more crudely. However, they don’t use the same criteria for eligibility or the types of evaluation processes as banks or P2P platforms or any other legal money lending entity. Theirs is a game of looking for and preying on victims who have assets like houses, cars, businesses and other tangibles but who at the same time are going through financial difficulties and cannot get a loan form legal lenders or platforms. They know as long as you have assets and that you are vulnerable to their bullying and scare tactics you will eventually pay up fully whatever loan you take from them at unthinkable interest rates. They will even go to the extent of harassing your loved ones, to get them to pay for your loan. So you wouldn’t want to be the ‘lucky person’ to be eligible, get evaluated, and be chosen to receive a loan from an “Ah Long’.
I believe even though the economy and businesses of Singapore, and the world as a whole, are going through tough times, there are still opportunities for business while the chances of getting loans are also still very feasible. So it is certainly sensible if not wise to at least check whether one’s business is eligible or qualifies for a loan first. And then if a loan is needed, to follow through on the loan application process with the hope that the loan application is evaluated in your favour. Knowing or understanding the way banks or P2P platforms (click here for more info) or other types of lenders evaluate loan applications will help you prepare better your loan application so that it stands a better chance of being successfully approved.
Funding Societies has a Capital Market Services License issued by the Monetary Authority of Singapore. Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)