Most SMEs would need some form of small business loan financing throughout its lifetime. Asset acquisition, expansion, and working capital requirements are some of the typical reasons why small businesses need financing.
There are a lot of loan scheme for small businesses in the market and many banks that offer small business loans. If you are thinking to apply small business loan, make sure you know the basics.
What are the banks that offer small business loans?
A lot of banks offer business loans. Banks, financial institutions, and alternative lenders are classic examples of institutions that lend to start-ups or existing SME business owners. In the recent years, P2P crowdfunding platforms that cater to small business owners have also emerged.
There are many options today in funding a small business. A savvy SME owner should compare small business loans in Singapore including the use of small business funding websites to see available financing options.
When is the best time to scout for lenders?
Scouting for a lender is like looking for a potential partner. You have to build ties and this starts with a getting-to-know-you stage. Know your potential lender, establish trust in your banker relationship and let them know who you are. It is a two-way process.
Lenders, after all, would like to do business with people whom they trust. Do this even if you don’t have a pressing need for funding yet. In short, the best time to hunt is now.
What is the requirement for small business loans?
When approaching potential lenders, ask for basic information including loan-able amounts, interest rates and repayment schemes. Check with the banks the minimum requirement they are looking at as the credit criteria will differ. Check what are the factors affecting working capital loan assessment and whether you meet them.
Banks and lending institutions offer different rates and repayment programs so study each offer carefully and compare.
How do lenders determine small business loan criteria & interest rates?
Business loans are usually amortized or repaid on a monthly basis, although some lenders do allow quarterly, or even balloon payments, depending on your cash flow needs and lender policies, among others.
Lenders also consider the prevailing market rates when making an initial rate quotation. The actual rate, however, could be a little higher or lower, depending on certain considerations.
A long-term loan will carry higher interest rates than that of a short-term or medium-term loan. There are also other considerations such as collateral.
A business loan that is unsecured will be slapped with a higher rate versus a loan that is secured by acceptable collateral. For instance, a real estate mortgage on a valuable piece of land could increase your chances of availing lower interest rate.
Credit risk assessment and profile of your company will also affect the small business loan interest rates that you’ll be quoted.
How to get small business loan?
Applying for a small business loan does require time and effort. Understand that a lender will be gathering information to help him establish your credibility as a borrower. He will ask for a business plan, credit information, and personal data as well.
A good business plan
A lender will inquire about your business and your growth plans. He’ll ask you where you’ll use the money you intend to borrow and how you plan to repay it. You can confidently discuss this with a potential lender if you have prepared beforehand a well thought out business plan. A business plan includes a statement of your business goals, strategies to get there, timetable, and financial projections.
Healthy cash flow position
You may need funding to purchase equipment, acquire a commercial space, fund working capital loans for your small business, or refinance an existing loan. Whatever your reason for borrowing money, discuss it in detail with your lender.
A lender will typically examine your cash flow projections. He will want to see whether the profit assumptions you’ve made are realistic based on industry standards and your actual profits, both current and historical. He will also check if you will be able to pay your amortizations on time and still sustain a healthy cash flow position.
Additionally, he will request for other relevant information such as tax returns, credit reports, and personal data.
How is small business loan from banks assessed?
A lender is going to assess you based on a set of parameters so it’s good to know where you and your business stand.
What should you watch out for? One of his concerns as a lender is your outstanding debts. Nothing is wrong with incurring debts but you have to prove that these don’t eat up a large chunk of your gross income. Some lenders are comfortable with debt levels of up to 30% (or less) of gross monthly incomes. You also have to show that you are able to pay your debts on time as they mature. He will also look at your receivables – how much is current and past due. An aging of receivables is a handy report to have on hand just in case he asks for it.
Is your operating cash margin high enough to sustain your business even on lean seasons? A lender gives importance to operating cash margins because having a healthy one despite the challenges of seasonal highs and lows is a good indicator that the business will remain robust. It also suggests that the business will have more than enough cash to sustain profitable operations and eventually, to settle loans as they fall due.
A lender will also evaluate the industry in which you are a player. In the recent years, technological advancements have disrupted or threatened once-thriving businesses. He will look at trends and current statistics on which businesses are booming and will remain so in the coming years.
The bottom line is, he’ll want to ascertain that you are a potentially good borrower so make sure that he’ll arrive at this conclusion after he has thoroughly reviewed your business plan, loan ratios, industry nature, credit info, and personal data.
How hard is it to get a small business loan how to improve approval chances?
Your business loan proposal which includes your business plan and other required info must be well-packaged. Remember, a well-packaged business loan proposal raises your chances of clinching a loan deal at the best possible terms. It mirrors who you are – your professionalism as a business owner and reliability as a potential borrower.