We talk to Mr Joe Low, the Director of private lending company Affinity Financial Services, to get some tips on what SME owners can do to increase the odds of applying for a business loan successfully.

In your experience, why do SME owners get rejected when they apply for a business loan?

Our credit assessment team rejects business loan applicants mainly due to low business volume, high borrowings, an unsatisfactory company credit history, and personal basis.

If a business is not generating enough sales, it will not have a good chance of paying back the loan. Or if the business has high borrowings, the loan application is likely to be unsuccessful because the risk to a private lender is too high.

Lastly, if the business owners themselves have a history of unsatisfactory credit history (i.e. late in or not making loan repayments), this would also affect the loan application.

‍What should they do to get around these pitfalls?

To be better presented for a business loan, business owners should:

‍1. Have an active and revenue-generating business

New and inactive businesses are a no-no.

2. Be realistic about how much you can afford for loan repayments

It is a good practice to not overstretch your business cashflow.

3. Only borrow what your business needs

Since loans need to be paid back with interest, high borrowings pose a big risk to your company.

4. Ensure that your loan repayments are prompt and regular

Active cashflow management means maintaining a strong and healthy credit rating for the company and yourself.

5. Keep important documents on hand

If you ever get into a lawsuit due to money matters, always keep the documentation as proof to show that the case is resolved and closed.

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‍What do SME owners tend to overlook when applying for loans?

Most SME owners are simply too busy to keep good documentation records. They also often do not see the importance of a good credit standing and tend to feel that they will not need a business loan, until a crisis hits.‍

‍What are some pros and cons of securing a loan from a private lender?

The pros of lending from a private lender are speed and flexibility. This is what banks lack.

Being larger organizations, banks have more stringent credit parameters and protocols to determine if they should lend to SMEs. It is not easy for them to be flexible and listen to the needs of every SME.

Alternative lenders fill in gaps that banks are not able to fulfil. But the key disadvantage of borrowing from an alternative lender is the higher cost of borrowings.

This is because the cost of funding for banks is very much lower than that of private lenders, and the risk appetite of private lenders is generally higher than banks.

Hence, private lenders tend to charge higher interest rates than banks.

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Small and Medium-sized Enterprises (SMEs) play a crucial role in Singapore’s economy, contributing to over two-thirds of employment and half of the country’s GDP. However, these businesses often face challenges when it comes to securing financing to sustain their operations and fuel growth. In this article, we will explore the steps SMEs can take to improve their chances of getting approved for loans in Singapore.

 

1.      Understand the different types of SME loans Before applying for a loan, it’s crucial to understand the various options available in Singapore. The most common types of SME loans include term loans, working capital loans, trade financing, equipment financing, and invoice financing. Most banks in Singapore will offer one of more of these financing options to businesses. Each loan type has its own eligibility criteria, repayment terms, and interest rates. SMEs must assess their financial needs and determine which type of loan is most suitable for their business.

 

2.      Prepare a comprehensive business plan Lenders want to see that SMEs have a clear and realistic business plan that outlines their financial projections, marketing strategies, and operational plans. A well-written business plan demonstrates to lenders that the SME has a clear understanding of their business, target market, and competitive landscape. SMEs should also ensure that their business plan highlights how the loan will help them achieve their goals and improve their financial standing.

 

3.      Maintain a good credit score Lenders use credit scores to assess the creditworthiness of SMEs. A good credit score shows that the SME has a strong history of repaying debts on time and is less likely to default on the loan. SMEs should ensure that they maintain a good credit score by paying their bills and debts on time, keeping their credit utilization ratio low, and monitoring their credit reports regularly. In Singapore, lenders usually refer to Credit Bureau Singapore (CBS) and Singapore Commercial Credit Bureau (SCCB) for credit checks.

 

4.      Prepare accurate financial statements Lenders use financial statements such as income statements, balance sheets, and cash flow statements to evaluate the financial health of an SME. SMEs must ensure that their financial statements are accurate, up-to-date, and in line with Singapore Financial Reporting Standards (SFRS) and Generally Accepted Accounting Principles (GAAP). They should also provide detailed explanations for any unusual expenses or revenue fluctuations.

 

5.      Provide collateral Collateral is an asset that the SME pledges to the lender to secure the loan. Collateral can be in the form of property, equipment, inventory, or accounts receivables. Providing collateral reduces the lender’s risk and increases the SME’s chances of getting approved for a loan. SMEs must ensure that the collateral they provide is sufficient to cover the loan amount and that they have legal ownership and control over the assets. Lenders would also ask the director of the company to be a personal guarantor for the business loan.

6.      Choose the right lender SMEs must research and choose the right lender that meets their specific needs. Factors to consider when choosing a lender include interest rates, repayment terms, loan amounts, and eligibility criteria. SMEs should also check the lender’s reputation, customer service, and experience in lending to SMEs Affinity Financial Services is a one of the most trusted non-bank lenders in Singapore.

 

7.      Seek professional advice SMEs can seek professional advice from accountants, financial advisors, or business consultants to improve their chances of getting approved for a loan. These professionals can provide valuable insights on how to improve the SME’s financial statements, business plan, and credit score. They can also help SMEs navigate the loan application process and negotiate with lenders to get better loan terms.

 

In conclusion, securing financing for SMEs in Singapore can be challenging, but with careful planning, preparation, and professional advice, SMEs can improve their chances of getting approved for loans. SMEs must understand the different types of loans, maintain a good credit score, prepare accurate financial statements, provide collateral, choose the right lender, and seek professional advice to ensure a successful loan application.