According to a research done by Linkflow Capital, up to 81% of SMEs do not qualify for business financing. Linkflow Capital is an online website portal where SMEs can compare different loan options available. They have collected data from 1065 users that utilised the online business loan assessment platform and found that 81% or 863 of them were not qualified for business financing. Though the numbers may not speak for the whole SME industry of Singapore, it is still alarming to know that most SMEs can’t get funding given one of the ways to grow a business is through money.
This scenario makes it hard for us to believe that even in a place like Singapore where the government and banking industry provides SMEs with extensive support, it is still a challenge for SMEs to get their first approved loan. Nav’s insights state that out of those who got their financing rejected, 45% of small business owners get turned down more than once, and 23% don’t know why their applications were denied.
Here we will explore in depth the most common reasons why SMEs are rejected from business financing and also what you as a business owner, can do to improve your chances of securing a loan.
- Losses reported in the SME’s business financial report
This is the most common reason for potential rejection of a loan application. Based on Linkflow Capital’s data, 55% of their users indicated that they are loss-making.
A company’s profitability is a reliable indicator to assess whether a business can pay back the monthly loan repayment amount. Therefore it is highly unlikely that you might score a loan if your business is not making profits yet.
Most banks and financial institutions rely on the use of computerised and automated credit assessments to assess a company. Most of the time, one of the many “immediate failures” is a loss-making company.
- The age of the company is less than two years
Most bank or financial institution requires a minimum of 2 years business operational history as their business loan requirement to be eligible for funding. Ironically, according to Linkflow Capital’s research, 21% of their users are new startups incorporated for less than a year. This shows a pool of SMEs in Singapore not being more than two years old.
The reasoning behind such requirement from banks and other financial institutes could be that businesses less than two years are still unstable coupled with high volatility in financial results (massive loss, then massive profit).
- The business’ annual revenue is below S$300,000 and consists of low operating cash flow
52% of SME users indicated annual revenue of below S$300,000 and low operating cash flow which can also be a cause of not getting loans approved. Typically banks would ask for the latest six months’ bank statements to assess whether a business can pay back the loan.
- Bad credit score of owner/CEO
A lot of business owners pay a lot of attention to their business’ credit record or company’s Debt-Servicing Coverage (DSC) Ratio. Sure these two things also affect the business’s success in getting a loan, but a lot of business owners often neglect or ignore their credit rating.
A company director’s bad credit record such as late payments or default on credit card bills will negatively impact the credit assessment of the company. Besides this, business owners who declare low annual income figures (found in IRAS’ Notice of Assessment) will also impact the credit assessment of their companies. This is because of most of the time, the company’s directors or business owners are the personal guarantees for most business loans.
When the company defaults a loan, banks and financial institutes will look for the guarantors to demand payment. Hence, when the company’s director or business owner do not have income in the first place, they won’t be able to pay back the loan.
What can you do to improve your chances of securing financing?
- Know which loan to apply for
There are a plethora of SME loans offered from banks and other financial institutes in Singapore that cater to the different needs of SMEs.
The lender that you approach will conduct its credit appraisal process by the type of loan that you have requested and its understanding of your ability to pay it back. Even if you have strong financials and an established business, you are liable to be turned down for a loan if you apply for the incorrect facility.
Here’s an overview from Linkflow Capital of the types of loans businesses can apply for:
- Ensure your other debt obligations are under control
If your business or you as a business owner take out too many credit lines despite your business making millions in profit, banks will still deem you as a high-risk lender as your company’s Debt-Servicing Coverage (DSC) Ratio is too low – A company’s DSC ratio shows how much profit it generates annually compared to their loan repayment obligations.
You can ask your accountant to prepare a balance sheet inclusive of all the current and long-term debts your company have and then, from there, discuss strategies to optimise your borrowings. All in all, you have to watch your cash flow closely, keep loan balances low, and pay them down on time to avoid interest penalties.
Do not forget your own credit score as a business owner or company director as well! Do not default on your own credit card payments or bill payments as this will adversely affect your business’s opportunity in securing a loan.
- Know when to apply for a loan
It is highly not recommended that your business applies for a loan when your business is going through tough financial times, as ironic as it sounds because that is when your business needs a loan the most. Most banks require the latest six months’ bank statements, which are used to assign your business’ credit rating, therefore, providing such documents after a period of strong sales would help.
Prepare your loan documents even when your business does not need a loan as it is better to save some for the rainy days later.
- Ensure a smooth cash flow
Banks and financial institutes often look at the business’ financial records to assess whether a business can successfully pay back the loan repayment amounts.
Therefore, it is imperative to keep your business’ accounts and financial records up to date. It not only helps in strategic business planning, but it also shows you as the business owner the big picture on whether you are borrowing too much or where you can cut unnecessary spendings to ensure better cash flow.
There is an alternative loan option also known as FS Bolt if a business doesn’t fulfil the requirements of a bank loan such as the years of operation, cash flow issues, having a business that has yet to profit, and so on. Created with SMEs in mind, FS Bolt is an app whereby business owners can apply for a quantum of up to SGD 50k within 2 minutes! It is understandable that a business may need an injection of cash from time to time and an SME may not qualify for a bank loan yet. Hence, FS Bolt helps business owners in their financial standing even though a business may be loss-making!
Always remember, it is good to apply for funding or a loan even when your business does not need it. Go here to find out why.
Funding Societies – Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)