A lot of business owners who are applying for a SME loan in Singapore get rejected simply because they’re in an industry tagged as a “high risk” by the banks.
Even if your business is doing great and has a steady cash flow to boot, the high volatility of the industry which you are operating in can be enough reason for banks to decline your financing applications.
Banks and lenders classify industries as high-risk due to their internal economic forecasts of these industries with a negative future-term outlook. Another reason why certain sectors are categorized as high risk is because of high default rate in the banks’ lending data.
Industries with high-risk rating
Are you in an industry considered high-risk industry? Check out the list below and find out why banks are overly cautious about funding your business.
Due to a slowdown in domestic residential property market and the foreign manpower constraints, the construction sector faces tough times ahead. Project mobilization will always require huge cash outlay and the payment structure remains complex. Issues like delayed payments from main-contractors and unforeseen project extensions can be costly and could lead to default. Construction is a failure-prone business and loans to this sector are viewed as high risk.
The construction industry has been through rough patches and experts think it is hard to foresee how the sector will fare in the next couple of years. But apart from this air of uncertainty on which market sentiment has a huge impact, contractors also lay the blame on stringent regulations as one of the pressing reasons why they can’t get a loan.
The good thing is, most banks do not classify construction industry as a perpetually high-risk industry and they do extend aggressive lending to the sector during boom time as can be seen during the residential property market bull run from 2009-2013.
Pubs and nightclubs
If you are a pub or club owner applying for a loan, you may have experienced getting turned down by banks. No matter how profitable your business is and despite having weathered numerous recessions, your bank might not be able to approve your business loan application.
What adds to the confusion is that many banks deny embracing policies that restrict loans to pub and nightclub establishments. Yet, they’ll drop you a note saying that policy constraints keep them from funding your business’ requirements.
One reason why banks might not be able to finance pubs and nightclubs could be because of reputational risk and not so much on credit risk.
Food and beverage
The food and beverage (F&B) industry is another highly competitive sector some banks are averse to. Many F&B start-ups usually fail to stay afloat after two years of operation. There’s a perception that F&B revenues are highly dependent on loyal patrons whose tastes may change sooner or later when a new dining fad comes along.
It’s obvious too that the local restaurant scene is already overcrowded. With competition from meal deliveries and convenience stores offering food that’s “hot and fast”, the industry is in for another rough ride.
If you’re in the F&B business, banks may decline your loan application outright and accept only those from highly established ones.
The retail industry is one of the hardest hit during and after the recession. Many, including retail giants, were forced to retrench employees to cut on costs. They’ve managed to stay in business but had to close branches to push productivity.
Meanwhile, smaller retailers carry the added burden of paying for high lease rentals which landlords continue to jack up every year.
The supply of brick and mortar retailers exceeds demand and the popularity of online shopping has made it even more difficult for physical retailers to move inventory. Also, consumer spending on e-commerce does not seem to abide. These may lead to further industry contraction.
Oil and gas
The oil and gas industry has been affected by severe drops in oil prices. Before the big plunge in 2014, oil prices were pegged at $90 to $100 a barrel. Nowadays, the norm is around $45 per barrel. One reason for the sharp decline is China’s declining oil consumption triggered by a faltering economy.
Some banks respond by cutting credit lines to oil companies by as much as 20 percent.
In truth, the oil sector comprises about 2 percent of a bank’s aggregate loan portfolio but because it’s a high-risk one, lenders won’t go beyond this mark for fear of exposing itself to more bad debts.
Offshore and Marine
The offshore and marine industry also suffered a blow when oil prices plunged to almost rock-bottom prices. According to rig builders, new orders have tapered off, affecting the sector’s earnings. Other business owners within the sector have kept themselves afloat thanks to long-term contracts clinched a few years back. Some banks agree to extend help if only to fulfil long-term deals with proven returns.
The shipping industry is also sailing in deep water. Slowing global trade and lingering overcapacity have forced business owners to lower freight rates. While players hope to bounce back and improve efficiencies through mergers and acquisitions, a strong recovery isn’t expected to happen soon. From a lender’s point of view, this carries significant risk.
Getting a loan has gotten more difficult especially among small to medium-sized businesses partly because banks are more risk-averse than ever. Having learned their lesson post-crisis, banks have instituted stricter parameters for borrowers in high-risk sectors. It’s a bitter pill to swallow for those who may have a proven credit history but are nonetheless side-lined due to this road block.
While there are banks willing to look beyond industry and evaluate high-risk borrowers via traditional credit assessment fundamentals such as the 5c of lending, financiers might impose higher than market rates in exchange for the risk they’re taking.
What you ought to do
If you are a business owner seeking for bank funding, it’s noteworthy to check whether if the industry you belong to made it to the’ “high-risk” list. But take note that each lender may have different views and risk tolerance.
An industry classified as high risk to Bank A does not necessarily mean it’s also deemed aversely by Bank B. Always compare and check your financing options.
Do not be discouraged by a few rejections. It is possible that you haven’t found yet the right financier who’ll fund you the capital you need. Always make the bank officer’s job easier and prepare the necessary information and documents during application process. Do not apply unprepared and communicate wrong information to your banker.
Ask yourself if you’ll be able to pay your instalments on time and stay viable despite the slightly higher-interest rate and stringent requirements you might be subject to. Do a cost-benefit analysis.
Ultimately, if you decide to avail of the loan, your next step is to prove that you’re a creditworthy borrower. Make sure repayments are on time to build a strong credit history for your company.
Disclaimer: The foregoing list of high-risk industries does not necessarily apply to all banks as each one has different sets of policies and priorities that could change over time. Moreover, the list merely serves as a general guide, a valuable input for potential borrowers seeking loans to fund their business.