Issues That Could Stall Your Business Loan Application Process

Issues That Could Stall Your Business Loan Application Process

Many small business owners in Singapore give up on their SME loan application process when challenged with too much requirements.  While there are issues beyond your control, the truth is, a lot has also got to do with how you approach the application process.

Take a look at four pitfalls that could delay or even block your business loan Singapore application.

Indecision regarding loan amount

Just how much is too much?

Are you still struggling with the issue of how much money you need to finance your business needs?  You might be wary of asking for a bigger loan amount even if that is exactly what you need.  You may have been cautioned not to request for too high a financing amount or your loan application might get declined.

In fact, banks are more inclined to lend you bigger amounts within their risk and credit assessment parameters, provided of course that you are a creditworthy borrower.  The time and resource invested in evaluating a small business loan are practically the same, whether the loan value is $50k or $150k.  Based on economies of scale, they’ll profit more from lending a higher amount because interest returns are higher.

To put the issue to rest, there are critical questions you should be asking yourself.  One of the important ones (which banks also ask themselves) is how much of borrowed funds can you service given the volume and timing of your cash flows.

You can use commercial loan ratios to gauge how much of a loan you can pay off comfortably until maturity.  The debt service coverage (DSCR) ratio is a good test of your business’ ability to repay loans.  Take note however that different banks will have different acceptable DSCR.

Don’t feel too pressured.  It is quite easy to calculate debt service ratios.  What you need to do is can be summarized in three simple steps.

First, determine your business’ yearly net operating income.  Second, determine your total debt for the year.  Finally, divide the net operating income by the total debt.  This will give you your DSCR.

When computing for total debt for the year, remember to include amortizations due from the new loan you are applying for.  Try to assign realistic interest rates and terms when computing for the “assumed” monthly amortization.  You can also come up with yearly cash flow estimates and check if resulting DSCR remain at consistently acceptable levels.

Choosing the wrong bank

When you are getting ready to apply for a loan, you aren’t just applying for one with the intention of getting approved, availing the loan, and consequently paying it off in full.  While this is a typical cycle that you want to achieve till the end, it should begin with choosing the right bank using your good judgment.

A bank is also an important stakeholder in your business.  You will want to establish a relationship with the bank where both of you will prosper.  While most lenders are wired to listen to your financing needs they are also quite interested to hear what you have to say about your business goals.

Choosing a right banking partner is an important strategic decision. Different banks have varying credit criteria and culture. Your business industry affect financing as well because some banks might shun certain industries while other banks are more forthcoming to the same industries.

A good banker will ask questions and make clarifications that would enable him to better appreciate your industry, your business, and your financing needs.

As your discussion progresses and a level of understanding is reached, he may give you advice as regards which type of loan will best suit your business requirements.

Negative mindset and poor image

Yes, you’ve read it right.  Having the wrong mindset or attitude will have an impact on the success of your loan application.  If you don’t exude positivity and confidence, you might be sending the wrong signals to a potential funder.  A negative vibe could influence a creditor’s image of you as a borrower. Many SME owners especially those whom are applying for their first business loan might have some misconceptions about financing. To dispel them, you need to know the truth on SME financing.

During a meeting with a potential lender, present yourself with confidence.  Answer questions with conviction, giving him the impression that you’ve come prepared.  Show that you are a mature and responsible business owner who can and will service loans as they come due.

Lack of preparation

Preparation is key to success.  This is quite true for almost any type of endeavour.  Have you executed a project with very little preparation because you were pressed for time?  If so, the outcome could have been below expectation, leaving you frustrated.

Applying for a loan requires a great deal of preparation.  You will be discussing a potential loan with a banker, which means you must be ready to answer questions about your business as well as the purpose of your loan application.  You can do this effectively if you’ve come armed and prepared.

Before meeting your business loan officer, you must have done some due diligence.  You can do some basic research about their criteria for lending and check your basic eligibility.  You should also find out beforehand which documents they would need from you.

Each bank has a set of required documents checklist for every type of business offered, however, the mandatory requirements are almost the same across banks and lenders.

The basic requisites usually include a duly completed application form, personal information, bank statements, financial reports, notice of assessments, and legal documents relevant to collateral offered (if any).

All these documents help credit approvers assess your business’ financial viability, your capacity to service your loan, and quality of collateral.  Knowing that these are critical to the processing of your loan, wouldn’t you pull out all the stops to complete these?

There will be instances though when you accidentally leave out some requirements.  To lessen the chances of missing out on so many documents, be more detailed when asking for checklists.  Sometimes apart from the basic requisites mentioned above, lenders impose additional requirements related to your loan purpose.

For instance, you need a loan to acquire a new equipment for your business.  Creditors will usually ask you to submit additional documents like a quotation of the equipment you are purchasing.

Taking care to prepare and complete the requirements cuts the loan processing time. This also saves you a great deal of time shuffling to and from the bank.

Applying for business financing isn’t that difficult.  If you’ve learned to filter out some of the stumbling blocks mentioned above, your SME loan application process should be straight forward and smooth.