5 things to watch before applying your business loan
It may be frustrated to see your business loan application get rejected, but when you see it from the banker’s perspective, you may know why.
Ask any first-time business loan applicants – They would have a long story about how they struggle with the preparation of financials, compiling a detailed business plan, disclosing detailed information about their business, and still getting poked by the banker for more. Often times, the loan gets rejected, especially for first-timers who don’t know the ropes.
Even with a place like Singapore where financing options are vast and government support to SMEs are extensive, it’s still often an uphill battle to acquire your first loan. Recent survey by Nav suggests despite an increase financing options, SME owners still struggle to access capital. 45% typically get their applications rejected more than once, and 23% don’t even know why they’re turned down.
In this piece, we share five common insights on how to get your business loan approved more easily.
1. Timing of your application.
Your new business venture could be great – Good team, nice product, top-class service, and growth has been fantastic. You need that capital to expand! But if you are an early stage startup (in operation for less than 12 months), it’s normally too early to ask the banker for a loan. Lenders need to see some track record, stable revenues and good experience in the leadership team to grant a loan.
From our experience here in Singapore, banks could entertain companies 12-18 months into operations at the earliest. If not bankers, you may have to look for crowd-funding, government grants or other sources. Another great tip would be to speak to your accountant as they often have connections with multiple local banks that could point to you the right direction.
2. Ensure smooth cash flow of your business.
Have you ever thought about why the mortgage lender would like to see your payslip showing a fixed salary? The same goes for business lending. Bankers like to see a stable cash flow so they could reasonably assure you would pay back the loan.
We can’t stress it enough with our clients the importance of keeping a clean and clear financial record when it comes to financing. Maintaining a regular management account not only help with strategy, budgeting and operations, it pays off big time when you need to access bank loans, investor capital, or looking for a sale. Your account could often point out to you things like who owes you money and for how long (account receivable schedule), and remind you to cut unnecessary expenses to improve your cashflow.
3. Keep your other debt obligations thin
Unless you earn a million-dollar salary, you would struggle to get 100 credit cards because banks share credit information and would assess you as high-risk lender while you take out too many credit lines or loans from various lenders.
The same goes with businesses: Bankers would normally access how much short, medium and long-term debt obligations you have that are due. Ask your accountant to prepare the full balance sheet that shows all current and long-term debts you have and discuss strategies to optimize your borrowings. For instance, you may selectively re-negotiate terms with a lender for longer tenure, so you could take out another short-term loan with a new bank more easily.
Watch your cashflow closely, keep loan balances low, and pay them down on time to avoid interest penalties. All of those help.
4. Consider pledging a collateral
Lenders typically demand some sort of reassurance or promise of a repayment for the loan they disburse. This is particularly true for bank loans where credit and loan officers would access your balance sheet, cash flow consistency (knowing your financial strength), and evaluate if the collateral you put up is enough to cover partial risk for the loan in case of a default.
A collateral document would come in handy in most case – This document lists every personal and business assets, property, car, receivables, or cash you could put up as collateral.
5. Prepare a convincing business plan & good reason
Lastly, a thorough and updated business plan is certainly not to be missed. You need to show the lender how well you know your industry, customers, costing and future plans just as the way the bank would like to know about your business as they evaluate your loan application.
The SME portal of Singapore provides comprehensive guides on how to make a business plan, get financing, grants, or credits. Besides information related to your business like financial statements, corporate tax profile, certificate of incorporation, Bizfile and other corporate secretarial related matters (where your accountant could help), be prepared to gather your personal details such as resume, personal tax records, personal lendings, bank statements etc.