6 Ways To Improve Your SME Loan Approval Chances

6 Ways To Improve Your SME Loan Approval Chances

Obtaining a business loan in Singapore is akin to cracking the code of a puzzle game. Making the score is easier when you understand what the banks are looking at and you have good playing strategies.  Here are 6 strategies that could up your score and win a bank loan.

Establish trust and rapport

You may not realize it, but getting to know your potential creditor on a deeper level and establishing a relationship of trust is as important as having the right financial figures.

Always ensure that you communicate with your potential creditor on a regular basis.  Set an appointment with your bank loan officer, probably over lunch or a cup of coffee.  Take him to a tour of your business facility. Brief and update your banker with what’s going on with your business.

Don’t mince on information that you think is important to your banker. Many business owners tend to cover up business issues and problems, not knowing that these “secrets” may soon surface. There are certain things you should not tell your banker and these are usually conversations that might reflect your lack of preparation.

In short, be transparent. Your banker will appreciate your honesty and might even give you valuable advice.

Prepare for risks

Start up businesses especially those categorized as small scale have a higher probability of failing. In fact, there’s a study which reveals that one out of three start-up businesses will be in the red within two years of operation.  While no business owner would venture into business with the thought of failing, it pays to be prepared.

Having a well thought out plan of action and presenting this to your creditor is a smart way of revealing to them how you are as a business owner – a proactive business owner.  You know the inherent risks of your business and you are prepared to handle challenges as they arise.

As a business owner, you must be prepared in case something happens to you. Some execute a buy-sell agreement. Essentially, this arrangement allows the business to continue to operate smoothly despite the death, incapacity, or retirement of any one of the owners.

Under this agreement, remaining business owners have the option to buy the interest of the owner who has ceased to be a business owner for reasons including those mentioned above.  A buyout price is also predetermined and agreed upon.  When your potential creditor sees that you have taken steps to cover such risks, you might convince them to grant you that loan.

Plan for the best and the worst

There are many factors that affect working capital loan assessment. Aside from the usual credit assessment criteria, banks are also interested to know how your business will fare in the future. Provide your creditor with financial forecasts including how you would utilize the SME loan to grow your business and eventually, to fully settle the outstanding loans they have extended to your business.

However, not all plans and forecasts will be realized.  There will be delays or glitches that will cause you to deviate from your initial plans. Your plans and budget will be affected. Make sure you have on hand documents and proofs that will support changes in purchases as well as expenditures. This will help you convince potential creditors that such changes are critical for the business.

There’s one additional advice when drawing out your business plans. Try to assume a best and worst case scenario.  Show how you would “weather the storm” and stay afloat when the worst case happens. Pay attention to future sales. Don’t over estimate.

Look at your costs and research on possible price increases that will have an impact on your future expenses. You don’t have a crystal ball to rely on but you have past performance records, industry studies, and other resources that could help you map out a “realistic” plans for your business.

Measure up to creditor standards

Banks employ both objective and subjective assessment of your financial position and creditors will be comparing your business with those of other companies in the same industry. Your industry nature affects your financing chances as well.

To objectively measure how well your business is doing, a loan officer will ask you to present your balance sheets and income statements for the last two or three years.  He might also require you to submit a cash flow projection for the duration of the loan you are requesting if you are requesting for a sizable loan quantum or more complex business facilities such as project financing. There are many issues that could stall your business loan application process. Your financial figures are one of them.

When looking at your income statement bank officers will check your income figures.  He’ll review your earnings before income tax (EBIT), assessing if you have more than enough income from operations to service your amortizations. In short, he is interested if your profit margins are comfortably high enough to service all your loans.

Banks will also review your balance sheet and check on the quality of your assets. If in the event you can’t settle amortizations due to insufficient earnings, banks will want assurance that you have enough quality assets that can be a second source of repayment.  On the other hand, your liabilities are also a concern.  Your loan officer will check the level of your existing debts and assess if you can comfortably service new loans on top of existing ones.

Among a long list of metrics loan officers use to evaluate your loan proposal, the three widely used ones include your debt-to-equity ratio, loan-to-value ratio, and debt service coverage.  When you go to your bank, make sure your business is up to par as regards these metrics, among others.

Negotiate for better deals

If banks have mastered the art of negotiation, so must you. Don’t get intimidated. Be candid about why certain assets such as your home, can’t be offered as collateral.

Lay down what is important and critical for your business. Negotiate for loan repayment terms that will work best for your business and eventually allow you to settle loans without delay. Look out for financing facilities such as the Temporary Bridging Loan Programme where borrower can elect to opt for a principal deferment option during first year of loan.

Read the loan provisions and appeal for waivers if you think they will hurt your business or your ability to repay the loan.  While banks will tell you that they are standard covenants, there is no harm in pushing for their elimination.  Sometimes dropping a loan covenant is non-negotiable but relaxing it may be negotiated.  Just be prepared to present your justifications and offer some trade offs.

Approach banks where you maintain deposits

If planning to apply for a loan, it is good to approach banks where you have existing deposits.  By doing so, you somehow up your chances of bagging that loan because you already have a banking relationship with that creditor for years.  You may also be a valued customer and this is a plus point in the “trust” rating department. Most SMEs usually maintain their current account with the 3 local banking giants and all 3 are active in supporting SME financing. Compare DBS, UOB and OCBC business loan to ensure you get the best financing offer.

Scoring a SME Working Capital Loan is possible if you know how to play the game. Know the rules laid out by banks, learn the strategies, and follow them to the hilt.