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.
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.
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.
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.
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.
This article was written by Belinda Wan from Lendingpot and posted on 8 April 2021.
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